At a glance
Environmental profit and loss (EP& L) is a form of natural capital accounting that evaluates and quantifies the true impact of a business’s operations on the planet. It is a tool to guide sustainability strategies and identify where they can reduce their imprint across a products life cycle.
This article explores the benefits and challenges of using an EP & L and provides case studies on how the methodology has been used to date to drive innovation and reduce inefficiencies.
In focus
What is Environmental Profit & Loss?
Environmental profit and loss (EP & L) is a form of natural capital accounting that supports a holistic view of a company’s performance. It incorporates the premise of a triple bottom line approach, an idea put forward by leading sustainability thinker John Elkington, which incorporates people and planet as well as traditional profit.
It is a form of monetary valuation, analysis and quantifiable reporting on an organisations environmental impact.
This refers to the impact accrued across entire business operations through the lens of a life cycle assessment and includes supply chains.
It monetises the cost of doing business on nature and the environment that enable organisations to operate and produce products/services.
The objective of an EP & L is to illustrate the true cost on ecosystems and biodiversity. There are six Environmental KPI’s (EKPI’s) considered which are:
- Carbon emissions
- Water use
- Water pollution
- Land use
- Air pollution
- Waste
These are costs that may not immediately or directly impact bottom line performance but will do so in the future such as scarcity of raw materials, escalating environmental degradation of land and preferences of the rising ethical consumers. There are numerous examples where businesses have run into obstacles as ecosystems have been destroyed, you can read about this here.
It is a supporting mode of assessment which should not be used in silo but instead to complement existing accounting, auditing and reporting structures.
What are the benefits?
The value of using EP & L in business accounting is that it provides a method to measure, monitor and subsequently improve a company’s environmental footprint and scope 1-3 greenhouse gas (GHG) emissions.
It’s a powerful instrument to raise awareness on how sustainability strategies can create added value through transparency, stewardship, longer term thinking and risk mitigation.
The use of EP & L can empower businesses and their employees to identify areas of inefficiencies and its nuance facilitates conversations about how to improve an organisations sustainability infrastructure.
As a result, this can drive innovation. For example, during Puma’s 2013 EP & L the results revealed a mounting need for sustainable raw materials. Identifying this prompted their parent company Kering to found the Materials Innovation Lab which is now a library of over 2000 certified sustainable fabrics.
The use of an EP & L creates benefits for all stakeholders; both internal and external as corporations ramp up their sustainability commitments to reach the terms outlined in the 2015 Paris Agreement and 2030 UN Sustainable Development Goal’s.
Who uses it?
The concept of EP & L was first introduced by luxury conglomerate Kering, in partnership with PwC and Trucost, an offshoot of S & P Global that assesses risks relating to climate and broader Environmental, Social and Governance (ESG) factors.
Kering, have made their EP & L open sourced, encouraging other organisations across a myriad of industries to adopt this seven-step methodology. Collaboration, not competition is the key to success when pursuing sustainable development. Kate Roughton, author of Doughnut Economics cites the value of open sourced learning in order to dessimate tools that will be essential to create a resilient planet.
The distinct steps of an EP & L are:
- Decide what to measure
- Map the supply chain
- Identify priority data
- Collect the primary data
- Collect the secondary data
- Determine the monetary value of the data
- Calculate and analyse the results
Leading sports brand Puma, were the first to incorporate the EP & L into their ways of working in 2010 with the initial idea originating from Jochen Zeitz, company chairman. Immediately, it pinpointed opportunities to reduce the brands impact. For example, their first report, published in 2011, revealed 94% of their environmental footprint originated within their supply chain. Therefore, it sparked a reduction in waste and negative externalities as they created systems to achieve new targets. This saw Puma successfully decrease their carbon footprint by 15% from 2013 to 2017.
It comes as no surprise that luxury fashion house Stella McCartney integrates the EP & L into its wider sustainability initiatives. The accounting method has allowed the label to identify where they are incurring the largest environmental impact across product design, sourcing, manufacturing and research and development. Whilst the brand is vehemently animal free and ethical at its core, the EP & L demonstrated their impact was most highly concentrated at the raw material stage. As a consequence, between the years of 2013 and 2016, Stella McCartney drove a reduction of 35% of their average environmental impact per kg of raw material. You can read more on the details of their material impact here.
Another case study of the tool in action is Novo Nordisk, a leading Danish pharmaceutical company. By using EP & L, they discovered a seismic 87% of their footprint was occurring within their supply chain and the remainder resided in their direct operations. Its capacity to draw attention to areas which need to be remedied in facilities management, supply chain and distribution is commendable.
What are the challenges?
As a methodology that is still evolving, the EP & L should be viewed in the context of each individual business and should not be confused with traditional areas of financial reporting or subject to financial audits.
Those seeking to adopt the EP & L as a standard practice must be able to commit to each stage of the process, which can take between 12 to 18 months according to Kering. For organisations that are time poor or strained with lack of human resource, they may need to rethink their approach.
This is in part due to the methodology which calls for the interaction with numerous third parties as data has to be collected from suppliers, life cycle analysis databases and other stakeholders.
Another critique can be the accuracy of an EP & L. Putting a price on the worlds natural resources and quantifying the true benefits can prove difficult – how can we really attribute a value in £ to fresh air or clean and safe drinking water?
On accuracy – for organisations that exist across multiple geographies with internationally dispersed supply chains EP & L can prove challenging. This is because EP & L’s use a technique called Environmentally extended Input-Output (EIO) which identifies interdependencies within an economy and includes transactions between all parts of a supply chain in one country over the course a year.
A final hurdle is championing a mindset change from the top down within your organisation to adopt this and act upon the results. The use of an EP & L is more than a reputational exercise. It may reveal uncomfortable truths about your business operations that solidify an urgent need to shift in certain different direction and force a reprioritisation of traditional KPIs.
Final thoughts
The uptake of EP & L by businesses indicates the paradigm shift towards sustainability as demands of investors and wider society call for a more responsible form capitalism and mode of doing business. The accessibility and open sourcing of the EP & L methodology by Kering is a promising roadmap and indispensable decision-making tool as ecosystem preservation and the value of natural resources takes centre stage in the C suite.
If you enjoyed this article, take a look at the business case for going green and the S & S decoded on ESG portfolio screening.
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