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Importance of the Implementation of Eco-efficiency in Small and Medium Enterprises (SME)

3994 words (16 pages) Business Assignment

6th Oct 2020 Business Assignment Reference this

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Literature Review

This literature review has the purpose of contextualizing and arguing the importance of the implementation of eco-efficiency in Small and Medium Enterprises (SME) in New Zealand to ensure its sustainable development. Following the above objective, the concept of sustainable development will be explained first. Secondly, the concept of eco-efficiency will be developed as an administrative strategy to achieve sustainability. Thirdly, the most used methodologies to measure eco-efficiency at a global level (country, industry, organizations) and a specific level (business, product, process) will be presented. Finally, the concept of environmental planning will be introduced as a strategic tool to improve the eco-efficiency of the processes and organisations.

Sustainable development

Sustainability is a concept originated in the science of ecology to express the optimal conditions that must be present in an ecosystem to sustain itself in the long term (Holden, Linnerud, & Banister, 2014, p.131). However, the concept of sustainable development as the “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” was introduced for the first time through the publication of Our Common Future report from the Brundtland commission in 1987 (Hurlem,1987, p. 16). The Brundtland commission established four pillars of sustainable development: 1. long-term ecological sustainability; 2. satisfaction of basic human needs; 3. promotion of intragenerational development; and 4. intragenerational equity term (Holden, Linnerud, & Banister, 2014, p.131). Due to its importance and impact on the global community, this concept has been analysed by World Business Council for Sustainable Development (WBCSD) in 1992 and by United Nations (UN) in the Conference on Sustainable Development in Rio de Janeiro in June 2012. One of the main results of this conference was the agreement of the member states of the UN to establish clear and practical objectives for the implementation of sustainable development in areas such as energy, food security, oceans and cities (United Nations, 2012, pp. 2-50). However, sustainability objectives cannot be unique or defined only once, since sustainability must be conceived as a dynamic process that must be continually reviewed and improved as it is explained by Callens & Tyteca (1999, p. 42).

In that sense, the industry must address sustainable development through two connected issues. Firstly, the environment should be valued as part of the economic process and not as a free product, thus it is necessary to protect all ecosystems to use a minimal amount of non-renewable resources with minimal emission of pollutants. Finally, it is necessary to apply the equity concept to all relationships between developed and developing countries contributing to the unemployment reduction (Callens & Tyteca, 1999, p. 42). Additionally, authors such as Vásquez, Bruno, Settineri, & Aguirre (2018, p. 348) emphasize that “sustainable development has been integrated with macroeconomic context. Therefore, environmental and international legislation has reinforced the idea of the sustainable development that contributes to the economic growth of any nation”.

However, the most viable way to achieve sustainable development is from companies and organizations as basic units of the global economy. Thus, according to authors such as Passetti & Tenucci (2016, p. 237) who suggest that organizations are under an obligation to formulate quantitative and qualitative objectives, and social, economic and environmental techniques in favour of sustainable development. These objectives should be aimed at promoting the use of alternative energy sources, avoiding an increase in the carrying capacity of the planet through factors such as population, and consumption and use of products (Vásquez, Bruno, Settineri, & Aguirre, 2018, p. 348).

Eco-efficiency

One of the management strategies proposed by the WBCSD that allows achieving sustainability is eco-efficiency. This strategy is based on the delivery of goods and services at competitive prices that meet human needs, progressively reducing ecological impacts that means generating more value using fewer materials and energy (Madden, Young, Brady, & Hall, 2005, p. 3). The result is an increase of the competitiveness, in particular for SME that previously considered the environment as a risk factor who produced additional costs but which are currently beginning to see it as an opportunity to increase their efficiency and goodwill into the market (Henriques, & Catarino, 2015, p. 380). Once ecological sustainability is achieved, it is possible to achieve economic growth and if these conditions are maintained, then it will be possible to achieve social stability, the final goal of sustainable development.

According to WBCSD, an eco-efficient company must develop characteristics such as 1. Reduce material intensity; 2. Reduce energy intensity; 3. Reduce the dispersion of toxic substances; 4. Enhance recyclability; 5. Maximise use of renewable resources; 6. Extend product durability; and 7. Increase service intensity (Côté, Booth, & Louis, 2006, p. 543). Eco-efficiency systems are commonly implemented by large companies of developed countries, but as the Organisation for Economic Co-operation and Development (OECD) reported in 2002, SMEs are not enough engaged with environmental issues due to they do not implement environmental management systems (Côté et al., 2006, p. 543). The most worrying thing is that these companies produce approximately 64% of the pollution in Europe (Ferenhof, Vignochi, Selig, Lezana, & Campos, 2014, p. 44) and it is possible that in continents with developing countries the percentage of contamination would be greater.

The main reasons to not adopt environmental management systems in SMEs are lack of awareness of regulations or environmental technologies that apply to them, lack of managerial expertise and resources to implement environmental programs, as well as difficulty in obtaining supporting, and time-consuming regulatory requirements (Côté et al., 2006, p. 545). But according to Fernández-Viñé, Gómez-Navarro, & Capuz-Rizo, (2013, p. 266), public administration is the most interested to promote eco-efficiency among SMEs, because the implementation of this concept into the SMEs would contribute to the growing economy and healthy environment decreasing the public administration´s budget related to environmental programs.

Measuring of Eco-efficiency

The measurement of eco-efficiency in a company includes taking into consideration some areas such as environmental management, operational and production, and accounting. Eco-efficiency could be measure through three types of methods (Gancone, Pubule, Rosa, & Blumberga, 2017, p. 310): Firstly, the single-ratio model of environmental impact/economic output in which Environmental Management Accounting (EMA) is classified. This approach combines environmental impacts in one account through life cycle analysis. Secondly, efficiency measured by models that explain sensible and undesirable outputs in the process. Examples of this kind of method are Data Envelopment Analysis (DEA) and Principle Components Analysis (PCA). Thirdly, including social aspects into the efficiency measurement. A good example of this approach is Sustainable Value (SV).

Picazo-Tadeo, Beltrán-Esteve, & Gómez-Limón (2012) argue that the relationship between economic and ecologic aspects are not enough to determine if a company is sustainable or not. They consider that it is necessary to include in the assessment of the social aspect. In response to this argument, it was developed the SV that integrates the three aspects of sustainability (economic, social and environmental).

The objective of these approaches is to measure the reduction of environmental impacts, the growth in the economic return, and the relationship between the estimation of the environmental impact related with value creation and the costs of the environmental developments (Passetti & Tenucci, 2016, p.p. 228-229).

Environmental Management Accounting (EMA)

EMA is the methodology that comprises financial accounting (tool that provides the data needed for external stakeholders and financial authorities shown the economic performance of the company), cost accounting (tool that helps companies to take management decisions related with marketing plans) and material flow balances (water and energy) to contribute efficiency to the company, mitigating environmental impacts and cuts costs for prevention, disposal, development, control, and damage reparations. This methodology analyses the performance of the product or process using concepts such as lifecycle costing, full -cost accounting, benefits assessment, and strategic planning (Henri & Journeault, 2008, p. 166). Additionally, it is based on a single-ratio model that is used to analyse the proficiency of products and technologies (Gancone et al., 2017, p. 310).

EMA takes into consideration the waste meaning to calculate the cost and compare it with the profits of the company. Waste is the material that has been acquired to transform into the final product, thus this concept may be used as an indicator of production inefficiency and add to the environmental cost of the company. This is one of the advantages of this methodology because every cost is relevant to make corporate decisions. On the other hand, one of its disadvantages is the no inclusion of externalities (social factors, image, credibility, and ethics) into the estimated costs, whence, the sustainability concept is partial because it does not include social development (Jasch, 2003, p. 669-671).

By recognizing, measuring and distributing internal and external costs related to environmental damage and protection, EMA lets managers recognize opportunities for cost savings and run new projects (Jasch, 2003, p. 668).

Sustainable Value (SV)

SV methodology was developed to integrate the social concept into the eco-efficiency measurement. It uses Value Management (VM) and Value Analysis (VA) to integrate the three aspects of sustainability (economic, environmental and social). The methodology starts from the environmental, economic and social characterization using indicators that determines the level of satisfaction and production efficiency. By using this approach, companies can use value techniques to improve sustainability (Henriques, & Catarino, 2015, p. 380).

This approach is comprised of eight phases and it may be led by internal workers with a leader responsible for the implementation of the methodology. Phase 1. Collection of data about the organisation such as identification, labour conditions, staff flowchart and relationship with stakeholders. Phase 2. Collection of specific data about the process or product that the company is interested to improve under eco-efficiency concept. Phase 3. Global inventory considering all the unitary operations into the process. It is necessary to identify the inputs and outputs, the costs for each operation related to the environmental, economic and social aspects. Phase 4. Functional analysis is based on identification, characterisation, classification and evaluation of each stakeholder involved in the process. The analysis is not only about social and economic concerns, but also the environmental aspects. The cost of each function and its effects on the other functions are also linked during this phase. Phase 5. The problems noticed during the previous phases must be synthesized: the relationship with stakeholders, the environmental impacts and legal non-conformities, and functions with high costs. Phase 6. Generation of creative ideas to improve and solve the problems. Phase 7. Viability analysis of the previous ideas, considering technical, environmental and social aspects. Phase 8. Action plans supported by managers (Henriques & Catarino, 2015, p. 381).

Data Envelopment Analysis (DEA)

DEA was developed to summarise the indicators that a company would have in a single eco-efficiency score which integrates both economic and environmental aspects. This approach has been used in companies to evaluate the decision-making skill of their units and managers. De Koeijer, Wossink, Struik, & Renkema, (2002) and Reig-Martı́nez, & Picazo-Tadeo, (2004) were the first authors to use this approach to evaluate the eco-efficiency level in sugar and citrus farming in Dutch and Spain respectively, through these researches was possible to handle environmentally unwanted outputs that other methodologies can visualise. “Low eco-efficiency score means a low income and/or high environmental impacts” as Ullah, Perret, Gheewala, & Soni, (2016, p. 624) explained in their research using DEA to assess eco-efficiency in cotton-cropping systems.

Principle Components Analysis (PCA)

PCA is a multivariate statistical approach, it has been used to weight and aggregate eco-efficiency indicators, especially in general studies when it is necessary to evaluate more than one economic sector or industry. The main advantage that this analysis offers is its objectivity because it reduces the number of data dimensions without loss of information improving the efficiency of indicators (Jollands, 2003, p. 295).

Environmental performance indicators

Environmental performance indicators are numerical measures that provide key information related to environmental issues, regulatory compliance, organisational systems and regulatory compliance. Every organisation can measure its progress using indicators such as Economic value: Mass of products sold, net sales, and gross margin; Environmental profile: Energy consumed, material used, water used, GHG emissions, ODS emissions, and waste to landfill; and Eco-efficiency ratios: Mass of product sold per energy consumed, material consumed, GHG emissions, and net sales per energy consumed, material consumed and GHG emissions (Côté et al., 2006, p. 543).

Those indicators are divided into generally applicable indicators and business-specific indicators. The first category could be used by all companies in all industries. The second category is defined by each company individually because the relevance varies from one company to another. Both kinds of indicators are necessary to measure the eco-efficiency performance of every company (Passetti & Tenucci, 2016, p. 229).

There are two kinds of standards that established requirements for an Environmental Management System: the international standard ISO 14001 regulated by International Organization for Standardization (ISO), and the Eco-Management and Audit Scheme (EMAS) regulated by the European Regulation EC 1221/2009 (Testa, Rizzi, Daddi, Gusmerotti, Frey, & Iraldo, 2014, p. 165). Companies implementing these standards could have an effective organizational structure to collect and report environmental data. However, the company may have developed environmental performance indicators and used them while not implementing the standard. The researches carried out by Henri, & Journeault (2008, p. 166) and Testa et al. (2014, p. 172) concluded that these standards do not warrant that environmental performance indicators are accurate or using correctly through an effective management practice. According to Passetti & Tenucci (2016, p. 237) research, eco-efficiency measurement is not influenced by system certifications such as ISO 14001 and EMAS but they help organisations to control activities related with the environmental plan of the company.

The applicability of these methodologies to evaluate the environmental performance is possible only if the company develop a business strategy which involves planning, implementation, and control focusing in eco-efficiency like the appropriate key to develop sustainability and save cost to the company.

On the particular case of New Zealand, some researchers have implemented indicators to measure the eco-efficiency across 46 sectors of its economy. For each sector, several ecosystem services were measured: water pollutant intensity; energy and air emissions; material intensity; land intensity; and water input intensity. Even though the results of this analysis indicate that New Zealand´s general eco-efficiency improved, some sectors such as water works, mining, farming, dairy farming, meat products, and dairy products have poor performance on an ecosystem service/dollar perspective. In this case, eco-efficiency indicators gave a multi-dimensional picture of eco-efficiency in New Zealand helping to governmental agencies as Energy Efficiency and Conservation Authority and managers taking decisions and giving ideas to implement better environmental plans in each of these sectors of the economy (Jollands, 2003, p.p. 11, 22-24).

Environmental planning

The relationship between the environment and organizations is dynamic. It has been considered for many years as an external factor and it was only considered important when the legislation required it. However, since the acknowledgement of the concept of sustainable development, the environment has been recognized as an essential factor to develop competitive advantages in the market (De Bakker, Fisscher, & Brack, 2002, p. 455).

The process that involves environmental planning in an organisation is a strategic process. It denotes the process of developing its environmental policy and maintaining a strategic fit between the organisation´s goals and the environmental targets. It involves adaptation the organisation to take advantage of opportunities in its constantly changing environment. During this process the company must define objectives to conduct to shape the organisational plans, allocating environmental responsibilities and developing training programmes (Passetti & Tenucci, 2016, p. 230).

According to González-Benito & González-Benito (2005), environmental planning is only the frame to help companies to be aware of environmental effects produced by their activities, but these plans do not reduce the environmental damage if they are not implemented correctly. Moreover, environmental planning assists to get a better comprehension about the environmental regulations and helps companies to develop managerial skills to make decisions.

Finally, this literature review has demonstrated the importance of eco-efficiency as a methodology to achieve sustainable development at the country, industry and business levels. Additionally, environmental planning and environmental management accounting influence positively eco-efficiency measurement, while business strategy, operational practices and environmental management system certification do not have any influence. Likewise, through this review, it is convenient to suggest the importance of establishing research about the effect of the implementation of SV as a methodology for measuring eco-efficiency and social sustainability in industrial sectors such as water works, mining, farming, dairy farming, meat products, and dairy products in New Zealand.

Reference List

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  • De Bakker, F. G., Fisscher, O. A., & Brack, A. J. (2002). Organizing product-oriented environmental management from a firm’s perspective. Journal of Cleaner Production, 10(5), 455-464.
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