An environmental profit & loss (EP&L) statement is a new tool used for measuring the environmental impact of doing business in all its forms. But like a lot of calculations that seem abstract at first, these numbers are very concrete in how they play out in the real world.
Procter & Gamble Co. faced environmental protests at its Cincinnati headquarters complaining that palm-oil in their supply chain was destroying Indonesian rainforests and habitats for orangutans and tigers. P&G took notice and insisted that its suppliers comply with Roundtable for Sustainable Palm Oil (RSPO) standards to certify that they were using “sustainable” palm oil practices. The protests and negative press (e.g., palm oil makes “tigers homeless”) compelled P&G to re-evaluate it’s approach and consequently they decided to go even further. P&G set new sustainability goals, including requiring suppliers to guarantee that they were not part of an environmentally harmful palm oil supply chain by 2015. To achieve this goal P&G decided to work with small farmers to ensure no deforestation by 2020.
Palm oil is used in hundreds of products, but producing it can be messy and has a big and negative impact on the environment.
Bottom line: The world is smaller, and what happens overseas no longer stays there. An iPhone picture and email tells everyone what’s happening in remote plantations. Companies looking to set their own priorities may have to take extra steps to describe their environmental impact.
Where is the earth writing the check?
One way to do that might be to bring the green-eyeshade types into the green-business discussion. Companies have long described their impact on the environment by measuring emissions, materials recycled, and land used and reclaimed. Quantifying those impacts, especially in a broad way across the supply chain, is a logical next step: Essentially, you ask: What does it cost the earth, in terms of resource use, to keep us in business?
Essentially, you ask: What does it cost the earth, in terms of resource use, to keep us in business?
Mike Wallace, managing director of BrownFlynn, a Cleveland- based responsible-business practice consultant, explains: “As a company or as an organization trying to go through materiality analysis, you’re going to identify the things that you perceive as being the most material. And if you can get a little bit more in- depth on that, you might be able to quantify and monetize that information. But sometimes an issue can be material without being able to really quantify it. It might be that, you know, ‘We have a very long supply chain that is very heavily involved in areas of risk for child labor. We can’t really quantify that, but we know it’s true. We therefore feel that our supply-chain management is a very material issue for us.’”
Several methods are out there, but a new one getting some attention is the Environmental Profit & Loss (EP&L) statement. Novo Nordisk, a pharmaceuticals manufacturer in Copenhagen, Denmark, recently announced to some fanfare that it had completed one. It was the second (Puma pioneered it in 2012) such EP&L.
“Most environmental things can be very easily quantified,” says Wallace. “For example, [in voice of client] ‘I make this kind of product, I make this many of them, I know it requires this many trees, or this much iron ore,’ or whatever. And so you can quickly figure out the actual costs of that material. ‘It cost me this much dollars per pound to buy it.’”
Trucost, a sustainability consultant that conducted the analyses and crunched the numbers that Novo Nordisk used to create an EP&L, takes the calculations a step further, says Wallace. (Wallace previously worked for Trucost.)
“If you take some of Trucost’s work, they basically estimated the true costs or environmental impact of a pound of iron ore, for instance: extracting it from the ground, turning it into something else, using all the resources to do all that, etc. And so that’s where the environment profit and loss comes from, because with those particular things, you’re able to quantify them, and then monetize them, and put real dollar values to it.”
Where the impacts were
Philadelphia-based Libby Bernick, senior vice president, North America, of London-based Trucost Plc, says the EP&L helps the company see where the greatest risks in the supply chain are, and where should they focus their efforts on building a more resilient, more robust supply chain.
“Both the Novo Nordisk and the Puma studies quantified the risk of operations and supply chains,” Bernick says. “In both of those studies, both companies were able to see on paper in quantified terms, ‘Here’s the amount of risk in our supply chain.’
“For Puma, one of the key findings and the key measurements was that a large amount of their environmental risk was related to cattle production, the hides that create the layer that goes into the apparel. Understanding that and measuring that helps a company like Puma understand how to engage and who to engage within their supply chain about more sustainable materials, and it also helps them understand how do we develop new products that are more resilient.”
One example was the InCycle product line, which used recycled materials.
“With Puma, I think one of the really interesting aspects of their work is that they published their EP&L at an enterprise level, and then what they did was look at a number of very specific products, and calculated the EP&L for those particular products,” says Bernick. “What they were able to do was understand, of these different types of products, which ones had a lower environmental impact. Part of their thinking was to launch a new line of products called InCycle. And what they wanted to do was really understand: Is it better for the environment? Is it a product that actually has lower impacts? So they were able to use the EP&L to really understand the tradeoffs in that new product line launch.”
The takeaway regarding Puma, according to Bernick: “Companies are able to use this kind of information at a product or product-portfolio level to understand, how do you want to optimize the actual design of the product, how do you want to look at our brand portfolio, and understand where we might want to have different kinds of offerings that have less environmental risk.”
Indirect spend surprise
For Novo Nordisk, a significant portion of their impact was in the raw-material portion of their upstream supply chain. “I don’t think that came as a surprise to the company,” says Bernick, “but they were able to quantify that risk and also pinpoint exactly which products and product categories and areas within the supply chain that (risk) came from.”
For Novo Nordisk, it was related to growing the maize, the corn, used for their products.
“Usually, agricultural products use a lot of water and take a lot of energy to grow them,” says Bernick. “Many times, where they are being grown, or the type of crop that it is, it can have higher or lower impacts. Understanding what the magnitude of what those impacts are can be very useful for developing your strategies and also understanding the magnitude of those risks.”
What they learned
1. Novo Nordisk already had a good environmental reporting system in place. “They just needed to extend what they were already doing. They needed to value their environmental performance in business terms. They were able to make that link between environmental performance and business performance. That process was very smooth. It wasn’t like we needed to go out and find reams of new data,” says Bernick.
2. The environment impacts associated with Novo Nordisk’s indirect spend was higher than anyone expected. “Everybody pretty much knew that the corn production process, the things that go into their products … they knew that that would be a significant part of their footprint. They even expected it to be the largest part of their supply chain footprint. But what was surprising was the indirect spend, the various buys to support its business, that don’t directly go into the product. So all of the ancillary services, the business travel, the professional services they procure, any of their capital equipment that they’re buying, that number was much larger than anyone anticipated. Indirect spend was about 70 percent of their total environmental costs.”
The broader impact? “Once a company measures and understands, a company can either work with its suppliers to find less carbon-intensive solutions or look at the ways they are doing business.”
(Editor’s Note: Novo Nordisk executives declined to be interviewed for this story.)