Creating shared value across three dimensions
The world is changing. And business is changing with it. Ratified in 2016, the Paris Agreement reached at COP21 commits the world to limiting global warming to 2 degrees Celcius – with a stretch goal of 1.5 degrees – setting legally binding targets on carbon emissions. In addition, the world began implementing the Sustainable Development Goals (SDGs) in 2016, which set the development agenda for the next 15 years.
As a result, leading businesses are accelerating their efforts to apply innovation to solve societal development challenges and de-risk their value chains from increasing limitations on resource use and carbon emissions.
For AkzoNobel, these developments mean that creating shared value across three dimensions – economic, environmental and social – is an opportunity to achieve sustained business success. We aim to make increasing use of economic, environmental and social impact assessment – as well as profit and loss accounting – using a science-based, virtual price to calculate externalities in each dimension. These will allow us to make better management decisions, including allocation of human and financial resources.
Our Planet Possible agenda is designed to help drive innovation and enable us to become more radically resource efficient, while inspiring employees, customers, suppliers and other key stakeholders to work together with us in achieving this. Our Human Cities initiative has also been established as an umbrella for the social pillar of our sustainability agenda.
By focusing on product, process and business model innovation, we aim to deliver portfolios of eco-premium solutions – products that are clearly more sustainable than the most common alternatives on the market. These solutions meet environmental and societal needs, while also increasing customer satisfaction and creating growth opportunities.
At the same time, we are focused on product and process innovations that generate more added value from each unit of raw materials and energy used across the value chain. This is measured by our Resource Efficiency Index (REI), defined as gross margin divided by cradle-to-grave carbon footprint. This will enable us to decouple business growth from resource use, take cost out of the business, reduce risks and minimize our environmental impact.
We continue to collaborate with our value chain partners to create impact at scale. We are also continuing to bring together public-private partnerships, for example to accelerate Power Purchasing Agreements for renewable energy and carbon reduction, or to make cities more human and liveable.
In order to better understand where we can have the biggest potential impact throughout our value chain, we have conducted a novel three-dimensional profit and loss (3D P&L) assessment across all our business activities. Monetizing externalities helps us to identify which levers give the biggest outcome in terms of minimizing negative impact and scaling up positive impact. It also helps us assess how our investment decisions can contribute to generating more value in all three dimensions. We plan to roll out this process across the company to enable better management decision-making.
3D P&L assessment
Economic, environmental and social value in € billion (estimated)
Economic value: AkzoNobel created economic value for its employees, suppliers, customers, communities in which it operates, governments and investors. We identified the salaries awarded to all the people employed in the industries along our value chain as a key contributor, as well as the tax revenue for governments, interest for investors and profit for shareholders. The sum of these values is referred to as economic capital.
Environmental value: Our business activities have a degree of impact on the environment and natural resources. In addition, we have the opportunity to generate positive value through our products which help customers to avoid emissions. In monetizing our environmental externalities, we identified CO2 emissions, fossil resource use, VOC emissions and material resources as key contributors. We have used a science-based and publicly available pricing model which was developed during the last 25 years by Chalmers University of Technology in Sweden called the Environmental Priority Strategy, which is based on a long-term perspective. As a result, we used prices that are not representative of the prices today, but instead are based on what would happen in 50 to 100 years if we keep on using natural resources as we do today. For example, we used a price of €135 per ton of emitted CO2 as part of this approach. Overall, this results in an estimated negative environmental capital. The key impacts on the environment occur in our upstream and downstream activities, rather than our own processes.
Social value: We created a positive social capital along the value chain. The current model includes value related to the knowledge and skill development of employees and their future salary development. A minor negative impact is related to the injuries at work of employees. Social impact measurement is still at the beginning of its journey. We are actively engaged with expert groups to develop new standards and methodologies. As those mature, we will continue to include other social impacts, such as from our Human Cities initiative, Human Cities Coalition and the products we develop, through which we affect the lives of millions of people.
In order to create our 3D P&L, we have used some of the latest methodologies available, which we tested and developed in 4D P&L pilots over the last three years. We are participating in the development of the Natural and Social Capital Protocol in the World Business Council for Sustainable Development (WBCSD) and have always used scientific, publicly available methodologies. This information is available on our website.
The results are obtained by using some of the latest thinking in this space and are robust and repeatable. However, we are still at a very early stage of social impact measuring – not just AkzoNobel as a company, but society in general. We will continue to work on improving methodologies and map additional impacts, both positive and negative. This means that our results will change over time, through improvements to our own performance, as well as through the addition of more elements or new views on assumptions in the models we used. We encourage others to work with us to further develop methodologies and agree on common approaches.
Driving our contribution to sustainable development
We set out to simultaneously create value and reduce risks by increasing our positive impact and minimizing our negative impact respectively. We aim to do so in all three dimensions – economic, environmental and social – recognizing that increasing our positive impact does not mean we can offset any negative impact, nor does performing well in one dimension allow us to perform poorly in another.
The conceptual table above shows some illustrative examples of how we create value or reduce our risks in each of the three dimensions.
Everything we do for and with society is channeled through our Human Cities initiative. This incorporates AkzoNobel’s Community Program, which encourages and gives financial support for employees to get involved, hands-on, in their local communities; and our “Let’s Colour” program, which uses the power of color to improve people’s lives.
Resource Efficiency Index is gross margin divided by cradle-to-grave carbon footprint. The index measures value created from use of raw materials and energy.
The carbon footprint of a product is the total amount of greenhouse gas (GHG) emissions caused during a defined period, of the product lifecycle. It is expressed in terms of the amount of carbon dioxide equivalents CO2(e) emitted.
Volatile organic compounds.