Spend-Based or Activity-Based - A Consequential Decision

In the world of sustainability, life cycle assessments (LCAs) are unavoidable. An LCA is a systematic method used to evaluate the environmental impacts associated with all stages of a product's or service's life, from raw material extraction through processing, manufacturing, distribution and use, and ideally all the way through reuse, recycling or disposal.  

In the world of sustainability, life cycle assessments (LCAs) are unavoidable. An LCA is a systematic method used to evaluate the environmental impacts associated with all stages of a product's or service's life, from raw material extraction through processing, manufacturing, distribution and use, and ideally all the way through reuse, recycling or disposal. 

When used well, LCAs are powerful tools for understanding and mitigating environmental impacts, and provide a comprehensive framework for making informed decisions that can lead to more sustainable practices and products. But, to the extent an activity is covered by, taxes, fees or other payments on the basis of environmental impacts, such as CO2 emissions or pollution, and therefore needs to be able to show credible, and perhaps even audited, data on such impacts, the impact level does not "only" have an impact in environmental, social and governance terms, but can also have significant economic consequences.

There are many LCA tools on the market, and they chiefly divide into one of two main types: spend-based and activity-based, with the possibility to have hybrids of the two.

The majority of LCA tools are spend-based. They use economic data (e.g. financial transactions, spending data, typically through access to a company's ERP system) to estimate environmental impacts by rules-of-thumb, and leverage input-output models that describe the economic relationships between different subdivisions. By mapping expenditures to these subdivisions, the spend-based models estimate the associated environmental impacts.

Spend-based LCA tools can cover a wide range of products and services quickly since they rely on existing economic data rather than detailed process data, but the approach is generally less detailed and less precise at the individual process level because it aggregates impacts based on economics rather than specific activities. Crucially, because spend-based tools are less accurate, auditors apply "fudge factors" to the emissions numbers, which tend to be 30-40% higher than the actual numbers coming out of activity-based tools. 

"Spend-based tools tend to giver 30-40% higher emissions numbers than activity-based tools"

Despite the lower accuracy, and correspondingly higher emissions numbers, many companies, even those using activity-based tools, in their audited emissions reporting tend to use spend-based models, since these are known and generally accepted by their auditors, while activity-based models often need auditing and documentation on a case-by-case basis.

Activity-based (also known as process-based) LCA tools involve detailed modeling of the actual physical activities (e.g., production processes, transportation, energy use) that occur throughout the lifecycle of a product. This approach requires specific data on material and energy flows associated with each lifecycle stage, and thus relies on specific actual inputs (materials, energy, time) and outputs (emissions, waste) of each process, providing a more precise and specific assessment. They therefore provide much higher accuracy than spend-based tools, allowing for more granular insights. However, activity-based tools have a high data requirement, are time-consuming to make and operate and are – by their very nature – less generally accepted by auditors than spend-based tools.

So one might ask why we at Renable have gone to all the trouble of making a largely activity-based digital platform? Well, essentially because it's feasible, and when it is feasible, the inaccuracy of the spend-based tools is simply not good enough for enlightened decision-making, consistent reporting and correct assessments of emissions, with the ESG and economic consequences this can have.

Our digital platform is based on large, accurate data bases, which are dynamically updated to always contain the latest, most correct knowledge. Our flexible track & trace function provides accurate data in respect of the real activities taking place, so emissions reported have a high degree of accuracy.

We are aware that auditors of LCA-derived reporting would generally want an activity-based LCA tool to have an accuracy in the region of 95% or better, and this is the standard we are striving for. To document the process and the accuracy, we will have the platform certified by a third-party certification agency, so that our customers' auditors have a solid, reliable system to base their audits on.

Contact us if you think that an activity-based LCA tool for the circular economy is just what you are looking for.