Using four dimensions to generate more value

In an effort to gain a more detailed insight into how our profit and loss is generated, we launched a 4D P&L accounting pilot study during 2014 at our Pulp and Performance Chemicals business in Brazil.

The aim was to gain a deeper understanding across the value chain of our environmental, human, social and financial impact. We reasoned that the more we knew about these four dimensions – including their monetary value – the more we would be able to identify possible improvements and, ultimately, increase business value. The study also shows that it’s possible to shape the future by looking at society and the economy with a multi-dimensional perspective.

Based on the findings of the pilot, together with other assessments, we agreed and implemented specific actions during 2015 designed to reduce the negative aspects and build on the positive factors. For example, the business increased its use of renewable resources and is implementing continuous energy and material efficiency improvements in its own operations. Additional community programs have also been launched – with those offering more value to society being prioritized – while additional talent development and training programs for employees have been introduced.

In addition to the insights for our own operations, we have been using this data with customers to improve their energy and resource efficiency, as well as motivating our suppliers to map their sustainability performance. We had the opportunity to share knowledge and experiences gained from the pilot with customers and other stakeholders on many occasions.

In order to build on this progress, we launched phase two in 2015. This involved widening the scope to include our Pulp and Performance Chemicals sites producing pulp bleaching chemicals in the US and Sweden. The methodologies for the assessment of financial capital (including all financial contributions, not just conventional economic profit) and natural (environmental) capital were refined. For social capital, we moved to a semi-quantitative, risk-based method, including a wide range of topics, from worker safety to community engagement. For human capital, we developed our monetization method, based on inflation-corrected future salary growth of employees. To summarize, the methodologies behind the study are now more robust, based on open source methods, and can be applied to all parts of the value chain.

The results of phase two of the pilot (outlined in the chart above) show the highest impact to be on financial capital, positively creating value through a combination of salaries, taxes and interest payments, as well as the traditionally explored company profit. There is also a substantial negative natural capital along the value chain, mainly resulting from the use of fossil fuels as an energy source.

As outlined in the charts above, the human capital – based on generic industry data – is mainly influenced by salary development. This is positive in a lot of cases, but not in all regions and sectors. Nearly all the social capital indicators that were assessed resulted in a very low to medium risk, which indicates a low overall social risk. For our own operations, social risk can be reduced by developing a more formal procedure for engaging with local communities. Some other high risks, related to freedom of association and the right to collective bargaining, were identified in our value chain. Since this is based on generic regional industry data, we will review whether this is also relevant for our specific value chains.

The 4D P&L methodology was also applied to a consumer product relevant for our business – a book. The exercise was carried out to increase awareness among value chain partners of the possible financial, environmental, social and human issues. It also demonstrates how to operationalize the 4D P&L in a full product value chain. Moreover, we wanted to put the business-specific results of bleaching chemicals production into a context and show the contribution of AkzoNobel to a consumer product. With the company providing bleaching chemicals, it was assumed the book would be produced in Europe on 50 percent virgin paper from Brazil and 50 percent recycled paper, with 100,000 copies sold at €20 each.

Part of the 4D results (outlined in the chart Value chain of a typical book) indicate total positive financial capital, mainly in labor intensive steps such as writing, marketing and selling and negative natural capital, mainly in material intensive steps such as paper production and transport.

The 4D P&L methodology represents value creation in multiple dimensions. This is a new way of looking at an economy, where the role of a company in society at large can be assessed. The results add new sustainability perspectives to traditional risk/opportunity processes used in business decision-making. Thanks to this more extensive assessment, we can continue to engage with value chain partners and tackle specific actions that help us to reduce the negatives and build on the positives.