Trucost Blog / 17 Oct 2012

Why businesses should understand the true cost of its environmental impacts

Traditional approaches to the measurement of environmental impacts provide a variety of metrics – but valuing environmental parameters in financial terms
provides an overarching common metric for the assessment of environmental impact or benefit.

Steven Bullock, head of supply chain research at Trucost describes how placing a financial value on environmental impacts is useful for decision making, risk assessment and transparency.

PUMA announced the launch of the first Product EP&L just last week. The Product EP&L is a breakthrough in environmental measurement that defines the true cost of a product.

Why is this an important innovation?  Traditional approaches to the measurement of environmental impacts provide a variety of metrics. For land use it is hectares, for carbon and other pollutants it is tonnes and for water it is cubic meters. This makes comparing the relative contribution of environmental impacts to the overall impact of a company or a product challenging. Valuing environmental parameters in financial terms solves this problem by providing an overarching common metric for the assessment of environmental impact or benefit.

It provides a range of benefits to businesses:

A metric that business managers routinely use and understand

Most companies have yet to truly integrate sustainability within their business models. This is a worrying situation given that our demand for water already exceeds supply and we expect a shortfall of around 40% by 2030. Representing environmental impacts in financial terms enables business managers to factor nature’s cost in their everyday decision-making alongside traditional business metrics, which are already commonly represented in financial terms.

An input to product design

If one product strategy has a high water dependency and another produces more carbon emissions, how do you decide which is the most environmental friendly? Introducing environmental impact valuation at each stage of the product development process, from raw material production all the way to disposal at the end of the product’s life, enables environmental impacts to be compared and optimised at every stage.

A tool for supplier selection

Supplier selection can contribute significantly to the overall environmental footprint. For example, Trucost finds that the cost to nature of breakfast cereal production varies by up to 54% across the world’s top 5 production locations based on local water availability. Valuing supply chain environmental impacts facilitates comparison and optimisation of supplier locations as well as supplier technologies and processes.

A proxy for nature’s invoice

Nature’s bottom line is already being felt through rising commodity prices linked to environmental shocks such as droughts and floods; only this year the United States experienced the worst drought in 50 years which sent commodity prices skyrocketing. The problem is, nature is often under-valued or free and therefore not factored into business decisions. This is a problem business leaders need to address with some urgency if they expect their business to compete successfully in the future. By understanding the value of the services nature provides businesses can mitigate the effects of natural capital shocks.

Understanding how regulatory frameworks will develop

We also expect more governments to introduce ‘polluter pays’ environmental regulations and correct pricing anomalies in water scarce areas. Applying valuations to environmental impacts identifies this business risk and provides focus areas for mitigation strategies.

Raising consumer awareness

In a world of increasing consumer demand we will need to find ways of using our resources and preserving our ecosystems more wisely. Ultimately natural capital constraints will create winners and losers – those companies that act now to optimise their products, operations and supply chains in line with natural resource availability and environmental costs will create competitive advantage from reduced input costs and enhanced security of supply. In addition, companies that find ways of communicating this effectively will be able to harness the ethically aware consumers of the future.

In summary, environmental valuation is a tool to help consumers and businesses understand the value of the natural capital we all rely on. We welcome PUMA’s announcement. Ultimately this is an opportunity for businesses to take the lead in reducing our global environmental impact and guide us to a more sustainable future.