Relative Efficiency Can Still Be Unsustainable: The Executive Case for Environmental Budgets

Being better than competitors is a relative achievement; sustainability asks whether the resulting burden is acceptable at all.

A company can reduce emissions per unit, outperform its peers and improve every year, yet still place pressure on environmental systems beyond a sustainable level.

That creates an uncomfortable executive question: what if the organisation is improving in the wrong reference frame?

Most performance systems are comparative. Management compares this year with last year, Plant A with Plant B, one supplier with another or the company with an industry benchmark. These comparisons are useful. They show direction, efficiency and competitive position.

But they do not answer whether the total impact is compatible with an external environmental limit.

A 2017 study by Wolff, Gondran and Brodhag applied an absolute environmental sustainability assessment approach to the food portfolio of a mass-market retailer. Instead of asking only how the retailer compared with another organisation, the study compared selected life-cycle environmental pressures with ecological budgets allocated to the company. Several assessed pressures exceeded those budgets. The research therefore illustrates a strategic distinction that conventional benchmarking can miss: relative performance and absolute sustainability are not the same management problem.

The Strategic Context

Sustainability targets are often built from incremental logic: reduce energy intensity by a percentage, improve recycling, lower emissions per unit of revenue or outperform a sector benchmark.

These targets are attractive because they are measurable and administratively manageable. They can also produce genuine progress.

The limitation is that they are internally anchored.

If the environmental system has a finite capacity, management eventually has to confront an external question. How much total pressure is compatible with that capacity, and what share can reasonably be attributed to the organisation, product portfolio or value chain?

The absolute sustainability approach explored by Wolff and colleagues begins from this logic. Their framework combines an assessment of the environmental footprint with an allocated environmental budget. If the footprint exceeds the budget, the activity is classified as unsustainable under the assumptions of the model.

The idea is simple. The implementation is not.

It requires decisions about environmental limits, system boundaries, allocation rules, spatial and temporal resolution, data quality and responsibility across the value chain. Those choices can be contested and uncertain. But the conceptual shift matters even before the methodology is perfect.

It changes the executive question from:

"How much have we improved?"

to:

"Is the resulting level of impact sufficient?"

What Leaders Commonly Misread

Efficiency is treated as the destination

Efficiency reduces impact per unit of output. It does not necessarily reduce total impact.

If volume grows faster than efficiency improves, absolute pressure may still rise. An organisation can therefore become more efficient while moving further from an ecological threshold.

This is not an argument against efficiency. It is an argument for distinguishing means from outcomes.

Sustainability is reduced to direct operations

The retailer case deliberately focused on part of a wider value chain because corporate environmental pressure can arise far from company premises. Upstream sourcing choices, agricultural production, materials, logistics and downstream use can be material even when the company's own sites look efficient.

The study's discussion of corporate responsibility emphasises this wider sphere of influence. For leaders, this creates a governance challenge: the company may not directly control every impact, but it can still shape demand, specifications, sourcing, product design and supplier behaviour.

One indicator is expected to represent biodiversity

Biodiversity is not a single variable. The study considered multiple pressures and impact pathways because biodiversity loss can be connected to habitat change, pollution, climate effects, resource pressures and other mechanisms.

A single score can simplify decision-making, but aggregation can conceal different kinds of risk. An organisation may perform well on climate intensity while creating material pressure through land use or water depletion.

Environmental budgets are assumed to be objective facts

They are not automatically objective.

An absolute limit may be scientifically informed, but assigning a share of that limit to an individual company requires a rule. Allocation might be based on economic value, population, production, sector share, historical responsibility or another principle. Different choices can produce different budgets.

That does not invalidate the concept. It means the allocation rule should be visible, governed and tested rather than hidden inside the methodology.

Reframing the Issue

The strategic value of environmental budgets is not that they produce a perfect number. It is that they force management to connect enterprise ambition with system constraint.

That is a fundamentally different discipline from continuous improvement.

A relative target says, "be better".

An absolute target says, "be within a limit".

Both have a role. The first supports operational improvement and competitiveness. The second tests whether that improvement is enough.

This distinction is especially important for portfolios. If the enterprise has an overall environmental budget, individual products and projects compete for part of that budget just as they compete for capital, specialist people and risk capacity.

Environmental performance then becomes an allocation problem.

Which products deserve more of the environmental budget because they create greater social or economic value? Which product categories consume disproportionate ecological capacity relative to their contribution? Which investments genuinely reduce total pressure rather than shifting it elsewhere?

These are portfolio questions, not reporting questions.

Strategic Analysis: From Footprints to Constraints

Wolff et al. found that a small number of product categories could contribute disproportionately to parts of the retailer's ecological burden. This is strategically important because averages can hide concentration.

An executive team facing a broad environmental target may be tempted to distribute improvement evenly across the organisation. That can be inefficient. If most of the pressure is concentrated in a few categories, value-chain stages or processes, the portfolio should be reweighted toward those hotspots.

The same principle applies outside retail.

A hypothetical engineering manufacturer may discover that most biodiversity-related pressure comes not from factory electricity but from a small group of material inputs. A hospital network may find that specific procurement categories dominate parts of its footprint. An infrastructure portfolio may find that a few design choices create most land-use pressure.

The strategic response is not "make everything 10 per cent better". It is to identify where the environmental budget is being consumed and decide whether that consumption is justified.

Environmental budgets expose opportunity cost

If an enterprise operates under a finite carbon, water or biodiversity-related budget, every major initiative has an environmental opportunity cost.

Approving one product expansion may consume capacity that could have supported another. This creates a need for portfolio governance that considers environmental capacity alongside financial capital.

The decision is not automatically to choose the lowest-impact option. A high-impact activity may create essential value. The requirement is to make the trade-off explicit and search for redesign, substitution, mitigation or demand-side changes.

Value-chain responsibility requires influence mapping

A company cannot manage an upstream footprint solely through internal operational controls.

It needs to understand where it has leverage. That may include procurement standards, product specifications, supplier development, long-term contracts, pricing, assortment decisions, customer information or investment in alternative materials.

This is why absolute sustainability quickly becomes an operating-model issue. The organisation may need new data, supplier relationships and decision rights to act on an environmental hotspot.

Limits must be paired with uncertainty

Ecological budgets can look definitive, but they depend on models and allocation assumptions. Leaders should therefore avoid replacing one form of false certainty with another.

The appropriate discipline is to test the sensitivity of the conclusion. Does the activity exceed the budget under most reasonable allocation approaches, or only under one? Which assumptions drive the result? How wide is the margin?

A result that exceeds an environmental budget by a wide margin across multiple assumptions deserves different treatment from one that sits near the threshold and changes classification under small methodological adjustments.

Decision Framework

A practical executive test can combine relative and absolute performance.

1. Define the system boundary

Identify the product, portfolio, facility or value-chain scope being assessed. Make exclusions explicit.

2. Identify material pressures

Avoid starting with a convenient metric. Determine which environmental pressures are materially connected to the activity.

3. Measure relative performance

Understand efficiency, trend and peer position. This reveals where improvement is occurring and where the organisation is lagging.

4. Establish an external reference

Where credible methods exist, compare the burden with an environmental limit or budget. State the allocation logic clearly.

5. Test concentration

Identify the products, suppliers, regions or process stages consuming most of the budget.

6. Decide the strategic response

For each material hotspot, choose among reduce, redesign, substitute, relocate, influence, offset only where appropriate, constrain growth, or exit.

7. Re-test after portfolio change

A sustainability budget is not a static report. Acquisitions, growth, new products and sourcing changes can alter the position.

From Strategy to Execution

Immediate action

Add an "absolute sufficiency" question to sustainability reviews: even if the indicator is improving, what evidence suggests the resulting level is adequate?

Map major environmental pressures across the value chain and identify the highest-contributing categories. Where no defensible external limit exists, state that limitation rather than inventing one.

Medium-term capability building

Develop a governed approach to environmental budgets. Define who approves allocation assumptions, how uncertainty is shown and how the budget interacts with product and investment decisions.

Integrate supplier and product data so that major hotspots can be traced to decision owners rather than remaining aggregated in a corporate report.

Long-term strategic positioning

Use environmental capacity as a portfolio constraint. Business growth plans should consider whether the operating model can decouple value creation from the consumption of constrained environmental capacity.

The strategic ambition is not simply lower impact per unit. It is a business model capable of growing value without exceeding the limits that leadership has committed to respect.

Signals to Monitor

Watch for:

environmental intensity improving while total impact rises;
a small number of product categories dominating the footprint;
targets based solely on historical performance or peers;
material impacts sitting outside the reporting boundary;
allocation assumptions changing the sustainability conclusion;
growth plans that consume environmental capacity faster than mitigation projects create headroom;
supplier or geographic changes that move environmental pressure rather than reduce it.

Questions for the Leadership Team

Are our sustainability targets relative to ourselves, relative to peers or relative to an environmental limit?
Which product categories consume the largest share of our environmental capacity?
Where do we have influence over impacts that we do not directly control?
What allocation assumptions sit behind any environmental budget we use?
Could a portfolio expansion improve unit efficiency while worsening the absolute position?
Which strategic initiatives would we reconsider if environmental capacity were treated as a scarce enterprise resource?

Closing Perspective

Continuous improvement is necessary, but it can become strategically comforting when the organisation never asks whether the improvement is sufficient.

Environmental budgets introduce a harder standard. They connect corporate activity with an external constraint and expose the difference between doing better and being within an acceptable limit.

The methods remain imperfect. Biodiversity is complex, allocation rules are contestable and data can be incomplete. Those limitations should be governed, not ignored.

The executive responsibility is to avoid confusing relative leadership with absolute sustainability. A company can be first in its sector and still be on the wrong side of the limit.

Source References

Wolff, A., Gondran, N. & Brodhag, C. 2017, 'Detecting unsustainable pressures exerted on biodiversity by a company. Application to the food portfolio of a retailer', Journal of Cleaner Production, vol. 166, pp. 784-797, doi:10.1016/j.jclepro.2017.08.057.
Ewertowska, A., Pozo, C., Gavaldá, J., Jiménez, L. & Guillén-Gosálbez, G. 2017, 'Combined use of life cycle assessment, data envelopment analysis and Monte Carlo simulation for quantifying environmental efficiencies under uncertainty', Journal of Cleaner Production, vol. 166, pp. 771-783, doi:10.1016/j.jclepro.2017.07.215.

About EraNorth Insights
EraNorth Insights publishes practical analysis on strategy, projects, operations, transformation and decision intelligence for professional and organisational use. About EraNorth.