360 Value Creation 3: How can CPAs measure Product Sustainability?
Overview
This post is the third and final installment of a multipart series on how CPAs can attain a broader view of value creation by looking beyond shareholder value. This series of posts was written to address the idea that CPAs need to go beyond shareholder value when assessing value creation. Specifically, CPA Canada published Value Creation Decisions and Measurement Primer (available here), which recognized that:
“Value stream models should reflect multiple stakeholder perspectives. Solely measuring performance from a shareholder perspective is inadequate with respect to value creation. A well-performing organization must create value for all stakeholders: customers (or it won’t have revenues), employees (or it won’t be able to keep them), suppliers and business partners (or it won’t have access to needed resources), and for the communities and societies it operates in (or it won’t have a social license to operate).”
It’s the latter part that needs further exploration to assess the sustainability of physical products sold. This analysis goes beyond the standard focus of emission standards and environmental measures. Instead, it measures the impact of repetitive consumption (discussed in the previous post) on resource extraction and post-product waste.
Social media has brought this into focus, but similar issues exist with other industries. Using a “T-Account Assessment Approach,” the following two factors:
1. Longevity
2. Repairability
Section 1 looks at how product sustainability differs from mainstream measures around the environment. Section 2 looks at planned obsolescence and psychological obsolescence in product development. Section 3 looks at the factors to assess how sustainable products are.
Section 1: Product sustainability
Environmental consciousness is no longer the sole domain of activists but is now a mainstream issue. The traditional focus has been on greenhouse gas emissions, air pollution, and ground/water contamination. For example, many of us may recall seeing images of how water coming out of a tap can catch on fire, as depicted in the documentary Gasland. As chronicled by Andrew Nikiforuk (in the Tyee) regarding Jessica Ernst’s epic fight against the oil & gas companies, the issue also exists in Canada.
The publication of Toward Common Metrics and Consistent Reporting of Sustainable Value Creation by the World Economic Forum (WEF) speaks to how such thinking has gone mainstream. WEF prepared the report in collaboration with Deloitte, EY, KPMG and PwC — the major auditing firms. Concerning the environmental impact of industry, the report notes:
“As the visibility of business impacts grows, and expectations of producer responsibility extend along the value chain, the business risk associated with failing to demonstrate a good understanding of, and response to, environmental impacts is amplified.”
The primary metrics focus on emissions and pollution. The report also endorses the Task Force on Climate-related Financial Disclosures (TCFD) “aligned reporting on climate governance and risk management for all.” However, it also goes beyond traditional metrics. For example, it specifically calls out to report “tonnes of single-use plastic disposed of.”
However, the broader question growth-based approach to economics is not questioned. For example, Greta Thunberg has challenged the idea of “fairy tales of eternal economic growth,” as has University of Waterloo Professor Thomas Homer-Dixon, who noted that “it’s becoming increasingly clear that endless material growth is incompatible with the long-term viability of Earth’s environment.”
Consequently, there is a need to look at the production pipeline more holistically: from the point that the raw materials are extracted, to the factories that convert these raw materials into products, to consumers that consume them, and finally to the disposal/recycling sites where it ends up.
Section 2: Are products made to break?
The practise of planned obsolescence can be traced back to lightbulbs. Lightbulb manufacturers, including General Electric, Osram (Germany), Philips (Netherlands) and others, formed the Phoebus cartel in 1924 to reduce their durability. The following IEEE article summarizes the outcome as follows:
“By early 1925, this became codified at 1,000 hours for a pear-shaped household bulb, a marked reduction from the 1,500 to 2,000 hours that had previously been common. Cartel members rationalized this approach as a trade-off: Their lightbulbs were of a higher quality, more efficient, and brighter burning than other bulbs. They also cost a lot more. Indeed, all evidence points to the cartel’s being motivated by profits and increased sales, not by what was best for the consumer. In carefully crafting a lightbulb with a relatively short life span, the cartel thus hatched the industrial strategy now known as planned obsolescence.”
According to Giles Slade, author of Made to Break: Technology and Obsolescence in America, also notes how companies stumbled on this “business strategy” during the Depression:
“After a decade of unprecedented affluence and consumption during the 1920s, consumer demand fell radically with the onset of the Depression, and in desperation manufacturers used inferior materials to deliberately shorten the life spans of products and force consumers to purchase replacements.” [Emphasis added]
Slade, in his book, also notes how design engineers openly discussed in trade publications about “death dates.” He cites an article, “Product Death Dates-A Desirable Concept?”, by E.S. Stafford in Design News that stated:
“It is of remarkable interest to learn from a highly placed engineer in a prominent portable radio manufacturing company that his product is designed to last not more than three years.”
Apple has been taken to court a couple of times because of customer complaints about their products failing. In 2005, Apple settled out of court over customer complaints “alleging that the iPod did not have the battery life Apple represented…and that the battery’s capacity to hold a charge diminished substantially over time”. The article also noted that “[c]onsumers who bought a first or second-generation iPod who experienced a battery failure within two years of purchase.” In other words, these timely failures of the battery would force a customer to buy a new product in two years.
In 2018, Apple confirmed that it purposefully slowed down its older model. As noted in the Guardian: “The feature was recently highlighted by users on Reddit, who noticed that their processors were running slowly in iPhones with older batteries, but that when they replaced the batteries the speed of the phone returned to normal…Analysis of data by benchmarking firm Primate Labs collected from thousands of iPhones appeared to confirm the theory, showing multiple performance peaks for phones of different ages, slowing down from their maximum speed.” Again this would require the customer to upgrade to a new iPhone or pay Apple to fix the problem.
Perhaps, the most significant problem is not planned obsolescence but psychological obsolescence. Harley Earl, a General Motor Executive, put it this way:
Psychological obsolescence is part and parcel of repetitive consumption (raised in the previous post) that seeks consumers to keep on buying.
Slade notes how silver manufacturers “how silver manufacturers mounted a cooperative advertising campaign to “shame the prospect into buying the latest model of a venerably old product.”
Why?
He goes on to explain the essence of psychological obsolescence:
“American newlyweds’ habit of prizing their heirloom silver was preventing repetitive consumption, so “it was obviously necessary for us to make the people who cling to the old sets realize just how out of date they are. Ridicule of the past from which the silver was handed down proved to be the best plan. Any manufacturer of a quality product will tell you that the article that refuses to wear out is a tragedy of business.” An example of how shame was used to market wristwatches can be found in the Elgin series of magazine advertisements: “The objective of this entire campaign was to cause owners of old-style watches to be self-conscious concerning them and to go out and buy the latest type of watch. The copy was by no means afraid to suggest discarding an ancient Elgin, by the way.”… This self-conscious concern about being out-of-fashion is the key feature of psychological obsolescence. Anything that is unfashionably dated is psychologically obsolete, but psychological dating can depend on features other than style or design. Businesses that sell an experience, such as watching a movie, rather than an item to be taken home and used have had to push product dating beyond the limits of style-based marketing. This fact became obvious when America’s entertainment industries looked for strategies to encourage psychological obsolescence.” [Emphasis added]
(Source: Slade, Giles. (2007). Made to break: technology and obsolescence in America. Cambridge, Mass: Harvard University Press p52,53)
Echoing the malaise of social media discussed previously, advertising makes us unhappy. A Harvard study found that if advertising were doubled, it would reduce life satisfaction by 3%. But this is not surprising. Why else would we buy new stuff if you were content with what we have?
Section 3: Assessing Product Sustainability: Factors to consider
When looking at how to assess a product, CPAs can qualitatively evaluate the product sustainability by looking at the following factors:
Each factor is assessed qualitatively as to (1) whether it is a debit (asset) or credit (liability) to Product sustainability and (2) how much impact it has (high, medium, low). Then an aggregate assessment is done on the overall T-Account. For example, a sample T-account that has a net contribution to society would look as follows:
#1 Longevity
One of the most significant challenges with consumer technology is what happens at the end of it. The scale of this problem is significant:
· In 2019, a “record 53.6 million tonnes (Mt) of e-waste was produced globally”. That’s 118 billion pounds of trash includes “$57 billion in gold and other components discarded — mostly dumped or burned”. That’s the weight of nearly 850 million people or almost 11% of the earth’s population.
· In 2016, there were 45 million tonnes or 99 billion pounds of e-waste generated (globally). This amount of waste equals the weight of about 700 million people or just under 10% of the planet.
· Canada generated 724 kilotons or 1.6 billion pounds of e-waste in 2016. How much is that? It’s about the weight of about 8 million people, approximately the population of Washington State (home to Microsoft, Amazon, etc.).
Where this waste ends up is also troubling. An investigation by a group of activists found Canada’s e-waste was ending up illegally in China and Pakistan. They discovered this by attaching GPS trackers to e-waste they left at electronics recyclers or recycler collection sites throughout Canada. They noted that “4 of the discovered exports (to developing countries) were deemed likely to be illegal… aris[ing] from the fact that each of these pieces of equipment are considered hazardous waste under the Basel Convention — and 3 of the 4 countries concerned, Canada, China (including Hong Kong), and Pakistan, are all parties to the Basel Convention”. It also noted that one piece ended up in the US, but the US does not appear to be part of this convention.
A related problem is how these devices are manufactured. According to The Verge, it was discovered that at a Foxconn “factory in southern China that makes Amazon Echo Dot and Kindle devices after a US labor watchdog reported finding poor working conditions on site that violate Chinese law.” The article also noted that the “average monthly wage in Hengyang, Hunan, last year was 4,647 RMB ($725.22), but Foxconn workers earn an average of $390.16 a month. Workers reported having an unexcused absence would cost them three days of wages. Workers also count on overtime to boost their wages, but supervisors take away overtime as a punishment for dropping or damaging speakers or other behavior. Since overtime is the main source of supplemental income, it can also be damaging to workers as they put in excessive hours. Even though Chinese law says that monthly overtime shouldn’t exceed 36 hours, Foxconn workers at this factory were found to put in over 100 hours of overtime each month during peak production season. The report finds that some workers worked 14 days in a row with no days off.”
Similarly, the mineral required to build such technology has resulted in the use of child labour. As reported in the Guardian:
“A landmark legal case has been launched against the world’s largest tech companies by Congolese families who say their children were killed or maimed while mining for cobalt used to power smartphones, laptops and electric cars, the Guardian can reveal…Apple, Google, Dell, Microsoft and Tesla have been named as defendants in a lawsuit filed in Washington DC by human rights firm International Rights Advocates on behalf of 14 parents and children from the Democratic Republic of the Congo (DRC). The lawsuit, which is the result of field research conducted by anti-slavery economist Siddharth Kara, accuses the companies of aiding and abetting in the death and serious injury of children who they claim were working in cobalt mines in their supply chain.”
These problems, however, are not limited to the electronics industry. The clothing industry is also resource-intensive. To grow cotton, it requires a significant amount of water:
· T-shirt: 2,700 Litres
· Jacket: 10,000 Litres
· Jeans: 6,800 Litres
But how much water does the fashion industry use as a whole?
According to a 2017 report co-authored by the Boston Consulting Group (BCG), it currently uses 79 trillion litres of water. It is expected to consume 118 trillion by 2030. This volume equates to the annualized water needs of almost half the planet or 3.2 billion people.
In terms of clothing waste, it is at a similar scale of e-waste:
“The average American now generates 82 pounds of textile waste each year. That adds up to more than 11 million tons of textile waste from the US alone.” [Emphasis added] Globally, this amounts to 48 million metric tons; (see appendix B in here). That’s over 105 billion pounds, or the weight of about 775 million people.
Before the pandemic, Bangladeshi garment workers would make $95 per month. Post-COVID, as reported on VOX companies, abandoned $3.2 billion worth of orders. VOX went on to write: “Met with public outcry and adept campaigning by grassroots groups such as Remake, some brands, including H&M and Zara owner Inditex, later reversed course and committed to pay up in full for completed orders. Countless more, however, didn’t, leaving factories in the lurch and their workers in the cold.” [Original link maintained]
Evaluation Guidance:
Companies should design their products to be future-proof and enable customers who opt out of “psychological obsolescence” to keep their phones for a long time. For example, offering a large amount of memory on the device is one way to achieve that.
However, this won’t stop the electronic waste crisis. To accomplish this, a fundamental rethinking of how devices are built need to be advanced. PhoneBloks was an initial attempt at making a modular smartphone that could be upgraded part-by-part. The project initially garnered consumer support, Google-backed it, and then suddenly killed it. However, not all is lost. Another company, Fairphone, is attempting to deliver on the modular design, improve product sustainability and offer a better life for the people involved in its manufacture.
Although there is a low likelihood that the larger tech companies would take on such a fundamental rethinking voluntarily, they may be forced to do so. The European Union is also looking to pass laws that will cause the larger tech companies to make devices last longer.
#2 Repairability
A parallel approach to reducing the number of consumer goods bought is making it easy to repair the item so that people can fix them and continue to use them instead of having to dispose of them.
Though this may seem intuitive, companies actually fight such legislation to maintain a monopoly over the ability to service their product. In Ontario, an attempt was made to pass legislation that would “force companies like Apple to provide small businesses and average consumers with official parts, diagnostic tools, and repair manuals upon request, and at a fair price.” The politician who proposed the bill “was approached by Electronics Product Stewardship Canada (EPSC) — an industry group that represents Apple, Panasonic, and other major tech companies — as well as representatives from from Apple and Panasonic, he told me. “I had an Apple senior counsel fly in…to come and see me”…Samsung also got in touch”.
Apple aggressively pursues small businesses that attempt to repair their products. Even when a court sided with a Norwegian repair shop over Apple’s claim that he was engaging in counterfeit goods, Apple appealed the case and won. Apple also fails to adopt standard accessories. Apple invented the lightning charging port instead of a universal standard like the USB-C port when it discarded the 30-pin connector. In Europe, they fought against adopting a universal charger. But few may know that they have their proprietary pentalobe screws that “guarantee[ing] repair tools would be both rare and expensive.”
Evaluation guidance:
CPAs working to assess the repairability of a device can leverage the work done by organizations like iFixit, which assess the “repairability” of the product. The organization publishes the repairability scores of smartphones, with Fairphone being the only device receiving a 10/10 rating.
Although the “right to repair” legislation did not pass in Ontario, there is an indication that the US government is looking to tackle this issue. Alex Rossman, who has been featured on CBC and has been fighting for the right to repair for eight years, is hopeful about the legislation but notes a lot of work is required for the Executive Order to have an actual impact.
Closing thoughts
Having discussions with companies around product sustainability is likely going to be challenging. However, the need to do something about the problem of short-product lifecycles is clear when realizing that +200 billion pounds of electronic and clothes waste is generated annually. Solutions may not be immediately present themselves in such discussion. However, we get closer to the solution when we recognize that the current approach is unsustainable.
The opinions expressed herein are Malik’s own and do not represent that of his employer(s). He does not endorse any of the products, services or other offerings raised within this or other posts. Any such commercial offerings are included solely for illustrative purposes.
