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Accounting for Environmental Externalities Is Good for Business and the Planet

This post also appears on Greenbiz.com.

This is Part Four of a five-part blog series, Aligning Profit and Environmental Sustainability. Each installment explores solutions to help businesses overcome barriers that prevent them from integrating environmental sustainability into their everyday operations. Look for these posts every Thursday.

David Roberts at Grist, the online environmental news organization, commented on Twitter last week that “people talk about ‘externalities’ like they are just bad vibes or something. But that money is real money. Those costs are real costs.” How real is that money? Dr. Pavan Sukhdev, author of The Economics of Ecosystems and Biodiversity and Corporation 2020, claims that these “externalities”—or costs to society from carbon emissions, water use, pollutants, and other byproducts of business activities—are more than $2 trillion.

Putting a financial value on these environmental costs can help businesses make better informed decisions about how they manage their environmental risk. Not all companies recognize this—and even fewer actually know how to value these externalities correctly. But a few corporations are starting to show us the way.

Learning from Puma’s Environmental Profit and Loss Statement

Puma is one company that thinks this is an important issue. While all companies have to develop profit and loss statements, Puma is the first to develop an environmental profit and loss statement. The company valued the environmental impact of its operations and supply chain in 2010 at about $190 million, factoring in impacts like water use, greenhouse gas emissions, land use conversion, air pollution, and waste. The company is now using this statement as a way to drive environmental initiatives, which it views as key to its long-term commercial survival. Puma’s environmental profit and loss statement is helping employees, shareholders, and suppliers understand the magnitude of the company’s environmental impacts, prioritize which ones to tackle first, and incorporate this information into decision-making.

Evaluating Externalities to Drive Sustainability

As the World Resources Institute reports in its recent working paper, Aligning Profit and Environmental Sustainability: Stories from Industry, other companies are also finding ways to value the cost of environmental impacts to drive sustainability and growth. For example,

  • Natura, the Brazilian cosmetics company, is reducing the environmental impact of its supply chain by including in its supplier selection criteria the estimated cost of various suppliers’ environmental footprints. Natura estimates the financial cost of purchased products’ impacts, such as carbon dioxide emissions, waste generation, water use, and more. By reflecting these impacts into product costs, the company is able to select the suppliers that not only deliver the most cost-effective product, but have the lowest environmental impact. This helps Natura keep costs down and meet its commitment to sustainable sourcing.

  • Greif, an industrial packaging products and services company, does not price environmental impacts directly, but does take a lifecycle view of its products’ footprints in its business planning. For example, Greif expanded its business to include re-manufactured and re-conditioned shipping containers, after finding them to have a lower environmental impact while better meeting the needs of customers.

Using Policy to Account for Environmental Costs

While some companies are taking the lead in developing their own ways of factoring environmental impacts into financial decision-making, public policies that put a price on environmental impacts would help all companies account for environmental externalities. These policies include those that put a price on greenhouse gas emissions or water use, as well as policies that create demand for more efficient products like vehicle fuel efficiency standards or building codes.

While the impact of policies like this will vary across businesses, some companies are already benefiting. Environmental regulations, high energy prices, and a price on carbon in Europe, for example, have helped Siemens grow its portfolio of environmental products, including things like wind turbines, highly efficient combined cycle power plants, and efficient trains. Siemens has not only helped its customers reduce 332 million tons of carbon dioxide emissions—equivalent to about 40 percent of Germany’s annual emissions—but it generated $44.6 billion in revenue from its environmental product portfolio in fiscal year 2012.

Alcoa is another example. The aluminum manufacturer found that the U.S. Corporate Average Fuel Economy (CAFÉ) standards are driving demand for lighter vehicle materials. The company is well-positioned to provide these materials as result of its R&D investments. It recently invested $300 million in an Iowa facility in order to provide lightweight aluminum for the 2014 vehicle model year.

Factoring environmental impacts into business decision-making is critical in helping companies minimize their footprints in commercially smart ways. It’s encouraging to see corporate leaders starting to account for environmental externalities, but to really mitigate environmental and financial risk, we need more action. We look forward to tracking the innovations that help more companies incorporate environmental costs into their financial and product planning.

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