An initiative cannot be judged as better, cleaner or more valuable until leadership is clear about what would happen if the initiative did not proceed.
Business cases often spend pages describing the proposed solution and surprisingly little space defining the alternative future.
That is a structural weakness.
A project creates value only relative to something else: continued operation, replacement at a later date, a competing technology, a different supplier, a different material, a policy change, a changed demand pattern or deliberate non-investment.
The missing comparison is the counterfactual.
When the counterfactual is weak, investment logic becomes vulnerable to attractive but incomplete claims. A waste-to-energy pathway can appear low carbon until the avoided landfill behaviour is modelled differently. A material can appear environmentally superior until durability, curing energy or another impact category is included. A product can appear "carbon negative" only because sequestration and lifecycle boundaries are treated in a particular way.
This is not an argument against sustainability investment. It is an argument for decision quality.
The Strategic Context
Lee, Han and Wang's 2017 study of landfill gas emissions demonstrates why the counterfactual cannot be treated as a footnote in lifecycle analysis.
Their work focused on waste-to-energy pathways. To evaluate the benefit of diverting waste to energy production, the analysis needs to estimate what would have happened to that waste otherwise. In many cases, the assumed alternative is landfilling.
The difficulty is that landfill emissions vary substantially with waste type, decomposition behaviour, climate, methane collection, oxidation and gas-management practice. Their updated parameters materially changed estimated greenhouse-gas results, and the direction of the waste-to-energy comparison could differ by feedstock. In one example discussed in the paper, food waste diversion looked favourable relative to the modelled landfill counterfactual, while yard trimmings could produce the opposite comparison under the updated assumptions.
The lesson is not that one pathway is universally superior. It is that the baseline is part of the answer.
Three other papers in the source set reinforce the same principle.
Proietti and colleagues assessed extra-virgin olive oil using lifecycle emissions together with carbon stored in olive-tree biomass. For the investigated companies, estimated sequestration exceeded the emissions included in their system, leading the authors to describe the product as potentially carbon negative under certain conditions. But the conclusion depends on the selected boundary, production practices, sequestration treatment and what happens to carbon over time.
Geng, Zhang and Yang compared wood flooring with ceramic tile. Their results changed with assumptions about carbon stock, product lifespan, end-of-life treatment, prices and discounting. The study itself tested alternative scenarios precisely because the substitution case was not invariant to those choices.
Passuello and colleagues studied geopolymer binders and found that environmental conclusions depended on activator chemistry, thermal curing and which lifecycle categories were considered. Some waste-derived activator systems reduced global-warming potential materially, while other impact categories could remain higher than the Portland-cement comparator.
Four studies. Four different technologies. One strategic message:
An environmental or investment claim is meaningful only inside a defined comparison.
What Leaders Commonly Misread
The first error is treating "current state" as an obvious baseline.
Current operations may not continue unchanged. Assets deteriorate. Regulation changes. demand grows. Maintenance accumulates. Suppliers exit. Prices shift. A credible counterfactual must therefore be a plausible future, not a frozen photograph of today.
The second error is using the proposed project's boundary for the alternative but a narrower boundary for the baseline, or vice versa.
If a new material includes manufacturing, transport and end-of-life impacts while the incumbent includes only production, the comparison is structurally biased.
The third error is confusing avoided impact with created value.
A project may avoid emissions but require substantial capital, introduce operational risk or reduce flexibility. Another may cost more but protect against a future constraint. The business case must integrate environmental, financial and strategic consequences rather than assume one dimension settles the investment.
The fourth error is choosing the baseline that makes the project look best.
This can happen unintentionally. Project teams become invested in their preferred solution, and assumptions gradually align around approval. Good governance requires counterfactuals to be challenged independently.
Reframing the Issue
The counterfactual should be designed as part of the investment architecture.
A strong business case normally needs at least three views:
1. Business as expected
What is most likely to happen if the proposal is not approved?
This should include realistic changes in demand, asset condition, regulation, costs and operational risk.
2. Minimum viable alternative
What is the least expensive intervention that could satisfy the essential requirement?
This protects against comparing a sophisticated proposal only with "do nothing".
3. Strategic alternative
What other investment path could create similar or greater long-term value?
This makes opportunity cost visible.
The proposed initiative should then be compared against all three where material.
System Boundaries Are Strategic Choices
Lifecycle studies force analysts to define what is inside the system. Executives should apply the same discipline to business cases.
Consider a hypothetical manufacturing company comparing two packaging materials.
A narrow analysis may compare purchase price and production emissions.
A broader analysis could include:
- transport mass;
- breakage;
- storage volume;
- equipment modifications;
- product spoilage;
- recycling infrastructure;
- customer disposal behaviour;
- recovery value;
- compliance exposure;
- reputational consequences.
Neither boundary is automatically correct. The decision is to include the consequences that could materially change the investment choice.
The key principle is consistency. If one option receives full lifecycle treatment and the other does not, the comparison is not decision-grade.
Functional Equivalence Matters
Two alternatives should perform the same required function before their impacts are compared.
This is particularly important in engineering materials. A lower-carbon binder is not equivalent to a reference binder if strength, durability or service life requires substantially more material, different curing or earlier replacement.
Passuello and colleagues explicitly discuss environmental impact per unit of compressive strength because their formulations did not have identical technical properties. That is a useful example of adjusting the functional basis so environmental comparisons become more meaningful.
The same reasoning applies in business.
A cheaper software platform is not equivalent if it requires more manual work. A lower-emission transport mode is not equivalent if it cannot meet service requirements. A cheaper supplier is not equivalent if lead time forces substantially more inventory.
The counterfactual must deliver the function, not merely resemble the asset.
Counterfactuals Can Reverse a Decision
The landfill study is strategically valuable because it shows that changing baseline assumptions can change the comparative result.
This is exactly what leadership should test before irreversible commitments.
Ask:
- What assumption has the greatest influence on the ranking?
- At what value does the preferred option stop being preferred?
- Which assumption is within management control?
- Which depends on regulation, market behaviour or technology?
- Which will become clearer if the decision is delayed?
This converts sensitivity analysis into strategic insight.
A project with a strong business case across a wide range of plausible counterfactuals is more robust than one that wins only under a narrow set of assumptions.
The Problem With Labels
Terms such as "carbon negative", "zero waste", "renewable", "recycled" or "low carbon" can become substitutes for analysis.
The olive-oil study shows why caution matters. Its conclusion is useful within the study's defined conditions, but it should not be converted into a universal claim about every litre of olive oil. Company practices varied materially, including farming methods, workload, packaging and processing choices.
Similarly, wood does not automatically outperform ceramic in every scenario merely because it stores biogenic carbon. The result depends on forestry assumptions, product life, end-of-life treatment, manufacturing energy and the comparator.
A label compresses complexity. An investment committee needs to reopen it.
Time Horizon Can Quietly Bias the Comparison
The counterfactual also changes with time. A proposal can appear attractive over five years and weak over twenty, or the reverse.
This is particularly important when alternatives have different replacement cycles, degradation rates or residual values. A durable asset may carry a larger initial footprint but avoid repeated replacement. A low-cost interim solution may preserve valuable flexibility while a technology matures. A waste pathway may create emissions quickly while the baseline releases them over decades.
Leaders should therefore ask whether the time horizon represents the economic life of the decision or merely the period used by the budget process.
The wood-flooring study is useful here because lifespan and the timing of emissions formed part of its scenario analysis. The point is not to import its assumptions into other industries. It is to recognise that the timing of replacement, carbon storage and end-of-life treatment can change a comparative result.
For major capital decisions, the analysis should make visible at least three clocks: the asset life, the strategic planning horizon and the period over which material environmental consequences occur. If those clocks differ, the business case should explain why.
Counterfactual Governance Needs Independence
A project team should not be the sole owner of the baseline against which its project is judged.
Sponsors naturally develop knowledge and conviction around their preferred option. That is useful for delivery but can create confirmation pressure during approval. Assumptions about future maintenance, failure probability, avoided cost, carbon factors or customer behaviour may become incrementally favourable without anyone deliberately manipulating the case.
Investment governance can reduce this risk by assigning challenge rights to finance, portfolio, risk, engineering or another independent function. Their role is not to produce an alternative forecast for every variable. It is to test whether the chosen counterfactual is plausible, internally consistent and treated with the same rigour as the proposal.
For high-irreversibility decisions, leadership can go further and require a short pre-mortem: What would have to be wrong about the baseline for this investment to destroy value?
That question identifies assumptions that deserve monitoring after approval. The counterfactual then becomes a living reference for benefits realisation rather than a document that disappears once funding is secured.
Decision Framework
ERANORTH recommends a seven-part Counterfactual Investment Test.
1. State the decision
Define the actual choice. "Approve the project" is not enough. Specify the alternative uses of capital and the outcome required.
2. Define the baseline future
Describe what will happen without the proposed intervention over the same time horizon used for the proposal.
3. Define functional equivalence
Ensure alternatives meet the same essential need. Where they differ, quantify the consequences.
4. Set consistent system boundaries
Include all material lifecycle and operating consequences that could change the ranking.
5. Identify displaced activities
What does the proposal prevent, replace or defer? Emissions avoided in one process, fossil energy displaced, landfill avoided, maintenance deferred and labour released all require explicit treatment.
6. Stress-test assumptions
Vary the assumptions most likely to change. Use thresholds rather than false precision.
7. Evaluate strategic option value
Consider reversibility, learning, future flexibility and the cost of waiting. Two alternatives with similar current economics may have very different strategic value.
From Strategy to Execution
Immediate action: add an explicit "counterfactual" section to all material investment papers. Require the sponsor to explain why that baseline is plausible.
Medium-term capability building: standardise system-boundary and functional-unit principles across sustainability, engineering, procurement and capital planning. Build sensitivity analysis into normal business-case review.
Long-term strategic positioning: develop an enterprise library of recurring counterfactual assumptions, such as asset deterioration, energy scenarios, waste pathways, demand growth and carbon factors, with governance over versioning and uncertainty.
Related article: Business Cases Are Investment Hypotheses, Not Permission Slips
Related article: Environmental Decisions Need Confidence Ranges, Not Just Precise Scores
Signals to Monitor
Watch for proposals that compare themselves only with "do nothing"; lifecycle claims without a clear functional unit; environmental benefits that depend heavily on one unchallenged assumption; baselines that ignore asset deterioration or likely regulatory change; different time horizons used for different options; avoided-emission credits larger than the direct project impact but weakly evidenced; sustainability labels replacing quantitative comparison; and business cases that remain attractive only when uncertain benefits are treated as certain.
One of the strongest warning signs is a project whose conclusion changes immediately when a single plausible assumption is altered.
Questions for the Leadership Team
- What would actually happen if this investment were not approved?
- Is our baseline a plausible future or merely today's operating state carried forward?
- Do all alternatives provide equivalent function, service life and service quality?
- Have we applied the same system boundary and time horizon to every option?
- Which avoided activities create the largest claimed benefit, and how certain are they?
- What assumption would reverse the investment ranking?
- What alternative use of capital are we implicitly rejecting by approving this proposal?
Closing Perspective
A business case is not a description of a preferred future. It is an argument that one future is better than the credible alternatives.
That argument cannot be strong if the alternatives are poorly defined.
The counterfactual therefore belongs in the centre of investment governance. It determines what is avoided, what is displaced, what is truly incremental and whether the claimed improvement survives a change in assumptions.
Leaders should become suspicious whenever an initiative is described as "better" without an immediate answer to the question:
Better than what?
Source basis: This article is an original ERANORTH synthesis principally informed by Lee, Han and Wang (2017), Evaluation of landfill gas emissions from municipal solid waste landfills for the life-cycle analysis of waste-to-energy pathways; Proietti et al. (2017), Extra Virgin Olive oil as carbon negative product: Experimental analysis and validation of results; Geng, Zhang and Yang (2017), Greenhouse gas reduction and cost efficiency of using wood flooring as an alternative to ceramic tile: A case study in China; and Passuello et al. (2017), Evaluation of the potential improvement in the environmental footprint of geopolymers using waste-derived activators, all published in Journal of Cleaner Production, volume 166.
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