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Assetdyne Proxies and Measures of Sustainability

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Sustainability – New Quantitative Approaches,
New Indices and Innovative ways to Preserving Value in a Turbulent Economy. New tools for complexity and entropy-based proxies and measurements of sustainability

Publicado en: Economía y finanzas
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Assetdyne Proxies and Measures of Sustainability

  1. 1. Sustainability – New Quantitative Approaches, New Indices Preserving Value in a Turbulent Economy The paper focuses on complexity and entropy-based proxies and measures of sustainability February 2015
  2. 2. 2Complexity-based measures of sustainability Sustainability, Complexity and Resilience Sustainability is a popular subject nowadays Sustainability implies permanence, a sort of steady-state, almost some kind of equilibrium. However, in today’s world, speaking of permanence or steady state is a contradiction to say the least. From an energetic- thermodynamic standpoint a system or a process is sustainable if there is sufficient long-term energy supply to keep it running (possibly without damaging side-effects). But the question is, sustainable for how long? And with what efficiency? Inefficient systems can function for a long time, as long as energy is supplied. So when politicians or economists speak of sustainability, what do they really mean? What is really meant when we hear “eco-friendly and sustainable”? Are we speaking of 50 years, 100 years or more? And what about efficiency? Does sustainable also mean highly efficient? Are we looking at 30%, 70%, or 90% efficiency. One thing is clear – in order to speak of and to “manage sustainability” one should be able to define it and measure it or, in alternative, provide some proxy thereof. Managing something means measuring that something in order to drive its value to some desired target. Otherwise, it’s just talk. Serious science starts when you begin to measure. Good metrics start with good definitions. In Wikipedia one finds this: “Since the 1980s sustainability has been used more in the sense of human sustainability on planet Earth and this has resulted in the most widely quoted definition of sustainability as a part of the concept sustainable development, that of the Brundtland Commission of the United Nations on March 20, 1987: “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” That is about as imprecise as it can get! How do you measure and manage that? A good definition is one that hints a metric. The one above doesn’t. Sustainability hinges on the following four “systemic attributes”: Resilience, Interdependency, Complexity and Entropy. All these factors impact Governability, without which little can be achieved. These attributes need to be measured if we want to speak of sustainability in a new, systemic and quantitative fashion. Wikipedia defines “resiliency thinking” as: “Resiliency in ecology is the capacity of an ecosystem to absorb disturbance and still retain its basic structure and viability. Resilience-thinking evolved from the need to manage interactions between human-constructed systems and natural ecosystems in a sustainable way despite the fact that to policymakers a definition remains elusive. Resilience-thinking addresses how much can planetary ecological systems withstand assault from human disturbances and still deliver the services current and future generations need from them.” How can this be applied practically to the World as a system? Based on data from the World Bank we have measured the resilience of the World (as described by hundreds of variables per country, spanning the economy, finance, education, healthcare, transportation, energy, pollution, mortality rates, crime, etc.) over the past 5 decades. The result is illustrated in Figure 1 (Global Resilience Index™).
  3. 3. Complexity-based measures of sustainability Figure 1. Global Resilience in the period 1972 The World as a systems appears to be stabilizing at approximately coincides with that of the vast majority of countries and macro Is 70% sufficient for long-term sustainability ourselves to shocks and disasters it very well could be, but how do you guarantee that? Evidently, high resilience comes a cost in terms of performance, flexibility, efficiency and adaptability. Because the world is interconnected – today the degree of discussion of sustainability must be of global systemic nature. As interdependency increases, local isolated analyses will become less relevant and a broad mandatory. It is not only the economy which binds us all, it is also travel, telecommunications, migrations, international finance, as well as conflicts, climate, natural disasters, etc. Complexity is quantified in cbits (or complexity bits) development, sophistication and evolution. A system which evolves becomes more complex think of our biosphere – and can perform more functions. The complexity of the World has been growing more or less steadily over the past five decades. Thi which shows the evolution of the Global Complexity Index™ has been used in our analysis. Over 260000 parameters have been taken into account from 196 countries (these are the same parameters Global Resilience Index). The bumps correspond to crises or prominent of these is the current crisis which had started to build up in 2004. The drop which started in 2008 gives an idea of how severe the crisis is. 3 in the period 1972-2012. Data source: World Bank. to be stabilizing at approximately 70% resilience. This value coincides with that of the vast majority of countries and macro-regions which we have analyzed. term sustainability of our global society/economy? If we don’t expose ourselves to shocks and disasters it very well could be, but how do you guarantee that? Evidently, high resilience comes a cost in terms of performance, flexibility, efficiency and adaptability. today the degree of interdependency is 62% – any discussion of sustainability must be of global systemic nature. As interdependency increases, local isolated analyses will become less relevant and a broad-scope analysis is therefore mandatory. It is not only the economy which binds us all, it is also travel, telecommunications, migrations, international finance, as well as conflicts, climate, natural disasters, etc. (or complexity bits) and is a measure of the degree of development, sophistication and evolution. A system which evolves becomes more complex – and can perform more functions. The complexity of the World has been growing more or less steadily over the past five decades. This is illustrated in the graph below Global Complexity Index™. Again, data from the World Bank has been used in our analysis. Over 260000 parameters have been taken into account from 196 s which have been used to compute the evolution of t . The bumps correspond to crises or destabilizing events. The most prominent of these is the current crisis which had started to build up in 2004. The drop which started in 2008 gives an idea of how severe the crisis is. regions which we have analyzed. of our global society/economy? If we don’t expose ourselves to shocks and disasters it very well could be, but how do you guarantee that? Evidently, mandatory. It is not only the economy which binds us all, it is also travel, telecommunications, and can perform more functions. The complexity of the World has been ata from the World Bank has been used in our analysis. Over 260000 parameters have been taken into account from 196 the During the last three decades the World has been converging to a value of resilience of around 70%.
  4. 4. Complexity-based measures of sustainability Figure 2. Global complexity in the period 1972 But let’s turn our attention to entropy. The creation of entropy ( disorganization) is inevitable every time we transform energy to perform work. Development, growth and evolution inevitably involve the creation of entropy. Until 1998, for nearly three decades, entropy has been increasing at a steady pace, jus 1997 the rate of entropy production (the change of slope indicated by the second red dotted line. In practice, until 1998, the Entropy/Complexity ratio has been constant after 9/11, the World changes dramatically Figure 3. Global entropy in the period 1972 4 complexity in the period 1972-2012. Data source: World Bank. . The creation of entropy (‘waste’, chaos, disorganization) is inevitable every time we transform energy to perform work. Development, growth and evolution inevitably involve the creation of entropy. Until 1998, for nearly three decades, entropy has been increasing at a steady pace, just like complexity. In approximately 1997 the rate of entropy production (the entropy gradient) has increased dramatically – see change of slope indicated by the second red dotted line. In practice, until 1998, the Entropy/Complexity ratio has been constant. After 1998 the ratio more than doubles. In 2001, the World changes dramatically, see Figure 3. in the period 1972-2012. Data source: World Bank. disorganization) is inevitable every time we transform energy to perform work. Development, . After 1998 the ratio more than doubles. In 2001, The World, as a system, has been becoming more complex at a steady rate since the1970s. After 2004 the rate of complexity growth has accelerated, peaking in 2007.
  5. 5. Complexity-based measures of sustainability With all likelihood, 9/11 has consolidated the change for each increase in complexity (growth) the amount of waste that is 100%. This is what happens at global, planetary level. increase in entropy production. These causes have a lot to do with society, less with economy. A new systemic index can now be introduced: the reflects the efficiency of a generic evolv much waste is generated for a unit of development or growth. Since approximately 1998 the index doubles, from 20 to 40, meaning that our society needs to produce twice as much waste for a unit of development as it did in, say, the 70s or 80s. The evolution of the E/ is depicted below: Figure 4. Evolution of the global entropy/ Data source: World Bank It is still too early to say if the current E/C value of 40 is excessive and for how long it can be maintained. However, the fact that it has doubled almost suddenly isn’t a good omen. In terms of single countries – which have b source: World Bank) – the situation in 2012 Complexity is a versatile quantity and pro vitality, sophistication and intricacy. Ultimately, it reflects the culture of a country. Countries with higher complexity may be viewed as more governable. Implementing reforms in such countries may be more difficult. 5 With all likelihood, 9/11 has consolidated the change – entropy is now growing very quickly: for each increase in complexity (growth) the amount of waste that is produced increases by l, planetary level. We identify the possible causes of this tropy production. These causes have a lot to do with society, less with economy. A new systemic index can now be introduced: the Entropy/Complexity gradients ratio which ving system. Basically, the E/C index measures how is generated for a unit of development or growth. Since approximately 1998 the index doubles, from 20 to 40, meaning that our society needs to produce twice as much waste for a unit of development as it did in, say, the 70s or 80s. The evolution of the E/C ratio /complexity gradients ratio in the period 1972-2012. Data source: World Bank It is still too early to say if the current E/C value of 40 is excessive and for how long it can be maintained. However, the fact that it has doubled almost suddenly isn’t a good omen. which have been analyzed adopting similar parameters (data the situation in 2012 is indicated in Table 1 below. ovides, from a very general perspective, a reflection of . Ultimately, it reflects the culture of a country. Countries with may be viewed as more ‘advanced’ (not technologically!) but also less governable. Implementing reforms in such countries may be more difficult. entropy is now growing very quickly: produced increases by e identify the possible causes of this which system. Basically, the E/C index measures how is generated for a unit of development or growth. Since approximately 1998 the index doubles, from 20 to 40, meaning that our society needs to produce twice as much C ratio f . Ultimately, it reflects the culture of a country. Countries with Since 1998 the rate of global entropy production doubles. The same may be said of the entropy-complexity gradient ratio which quantifies the efficiency of a given system.
  6. 6. Complexity-based measures of sustainability Table 1. Country complexity, entropy an period 1972-2012. Complexity is a measure of vitality, sophistication and intricacy from a general perspective. Ultimately, it reflects the culture of a country. Countries with higher complexity as more ‘advanced’ (not technologically!) but also le countries may be more difficult. From a complexity perspective, Italy, USA, France and Germany are the most countries. Entropy, as mentioned, measures the amount of sense – and there are countries which clearly produce more than the average: Italy, USA, Germany, France and India. Singapore, on the other hand, is far less entropy significantly less complex. Japan is in a similar situ function like ‘clockwork’. From an ‘efficiency’ point of view, i.e. based on the E/C ratio, which measures the amount of waste per unit of development, Italy, Germany, France and China present the best credential USA and Japan have the worst E/C ratio. The Eurozone, surprisingly, boasts a ratio of 310, well below that of its largest member states (so much for linear thinking!). In conclusion, the E/C ratio may be a proxy values indicate that a particular country is may be more expensive to achieve and maintain. Countries with high complexity are generally more advanced – their inhabitants may be more receptive to refo sustainable less wasteful lifestyle – but are also less governable. Finally, since the E/C ratio is a general feature of any evolving system, it may be applied to measure the sustainability potential of corporations and to measure their impact on society in a more comprehensive the CO₂ footprint. References [1] Marczyk, J. A New Theory of Risk and Rating 6 nd global entropy/complexity gradients ratio in the 2012. Data source: World Bank Complexity is a measure of vitality, sophistication and intricacy from a general perspective. Ultimately, it reflects the culture of a country. Countries with higher complexity may be viewed (not technologically!) but also less governable. Implementing reforms in such From a complexity perspective, Italy, USA, France and Germany are the most ‘advanced’ Entropy, as mentioned, measures the amount of ‘waste’ – again, the term is used in a very broad and there are countries which clearly produce more than the average: Italy, USA, Germany, France and India. Singapore, on the other hand, is far less entropy-heavy but it is also significantly less complex. Japan is in a similar situation. In both these countries many systems point of view, i.e. based on the E/C ratio, which measures the amount of waste per unit of development, Italy, Germany, France and China present the best credentials. USA and Japan have the worst E/C ratio. The Eurozone, surprisingly, boasts a ratio of 310, well below that of its largest member states (so much for linear thinking!). proxy of sustainability or sustainability-potential. High e that a particular country is potentially ‘inefficient’. In such cases, sustainability may be more expensive to achieve and maintain. Countries with high complexity are generally their inhabitants may be more receptive to reforms necessary to lead to a more but are also less governable. Finally, since the E/C ratio is a system, it may be applied to measure the sustainability potential eir impact on society in a more comprehensive manner than A New Theory of Risk and Rating, Editrice Uniservice, 2009. ISBN 9788861784819. may be viewed ss governable. Implementing reforms in such very broad heavy but it is also ation. In both these countries many systems s. USA and Japan have the worst E/C ratio. The Eurozone, surprisingly, boasts a ratio of 310, well may be more expensive to achieve and maintain. Countries with high complexity are generally rms necessary to lead to a more but are also less governable. Finally, since the E/C ratio is a system, it may be applied to measure the sustainability potential than 9788861784819.
  7. 7. 7Complexity-based measures of sustainability Copyright © 2015 Assetdyne Ltd. Any reproduction or distribution of this document, in whole or in part, without the prior written consent of Assetdyne is prohibited. The concepts and methods presented in this document are for illustrative purposes only, and are not intended to be exhaustive. Assetdyne assumes no liability or responsibility to any person or company for direct or indirect damages resulting from the use of any information contained herein. The methods described in the present document are protected by US patents. Reverse-engineering of the concepts, methods or ideas contained herein is strictly forbidden.

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