When hearing about new sustainability initiatives, especially ambitious and comprehensive ones, one tends to assume that the companies announcing them have done their homework. When it comes to developing a new accounting framework aiming to offer a better understanding of the relationship between the business and natural capital, this assumption is even more obvious. After all, would a company come up with such an innovative concept without checking it first thoroughly?
Well, Puma didn’t want us to make assumptions. It wanted us to know it for a fact. In a step that was almost as radical as coming up with its new Environmental Profit & Loss framework (E P&L) in 2011, the company asked a group of independent experts to review the framework and comment on its methodology, benefits and where it can be improved. Last week, the experts’ report was unveiled, giving a thumbs up to Puma’s E P&L and providing us with some more optimism for the year ahead.
Why more optimism? Because while we constantly talk about the need to make systematic changes in the relationships between business and the environment, Puma’s E P&L is currently the only framework that provides businesses with valuable insights on these relationships in a language that they understand and can use to make changes. Yet, to be adopted by more companies, this framework needs more evidence of its validity, feasibility and business benefits. The panel’s report provided us with assurance on the framework’s validity, made the case for its business benefits, recommended how to standardize it, and hence got us closer to making this framework more widely used.
But before you get into a celebratory mode, let’s try to see what the panel actually said and what it means. Overall, the experts unanimously agreed that the concept of the E P&L was an excellent step in the right direction to promote the sustainable use of natural capital. “Ultimately, the E P&L better enables more informed business decision-making that takes account of environmental impact alongside more traditional financial and operational considerations,” they added.
From methodological perspective, the experts wrote that the E P&L applied credible valuation approaches and used appropriate methodology. One problem they did recognize was the fact that the results rely significantly on estimation techniques rather than on data because the lack of such data, which means for example that sourcing location information was limited to the country level. The panel recommended on couple of steps that can help address this issue and reduce uncertainty in the valuations, such as “increasing the number of variables used to transfer values from existing studies to the locations relevant to the business and its suppliers.”
In addition, the panel recommended improving the E P&L by adding the impact of water pollution to the current impact areas of GHG emissions, other air emissions, land use, waste and water use that is covers already.
If these recommendations and comments look too technical for you, just remember their bottom line, which is that the E P&L’s framework, with all of the difficulties it needs to handle, has merits. Now, if you’re into the mechanics of sustainability reporting and accounting, I warmly suggest reading the full report (it’s only 30 pages long), but if you’re not into it, there are two more points I believe you should take from it:
First, the E P&L wasn’t created just to benefit Puma and PPR. It was created to become a standardized framework widely used by business. The panel commented that one obstacle is that “there is a lot of complexity in the E P&L” and that the E P&L is “unlikely to be used by more companies unless a more accessible methodology is developed for companies that do not have strong support from the senior executives.” In other words, Puma has some more work to do, writing “E P&L for dummies,” or as the panel calls it, a “cookbook” to “guide business thorough the process and help with comparability between companies.”
Second, the experts provide strong support of the business case of the framework, detailing the benefits companies can gain from it. According the report, the E P&L is a strategic tool to help businesses to direct their sustainability initiatives where they can make real improvements in reducing their impact. It is also a risk management tool, “providing an early view of emerging risks,” and “enabling businesses to respond strategically to protect and enhance shareholder value.” In addition, the E P&L helps businesses become more transparent and provides them a new level of understanding of the activities and actors down the supply chain.
Now, to be clear, writing these benefits is not the same as providing evidence that they actually exist. Other companies will look very carefully at Puma’s results to see if the E P&L indeed makes a difference before agreeing to commit to it. Still, the fact that the panel presents these benefits and not just Puma gives the business case of the E P&L more credibility.
We already know from Puma that some companies are interested in adopting the E P&L. Yet, to become a game changer, we’ll need to see this framework adopted by more than just a handful of companies. The experts report is an excellent step in the right direction to make it happen.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.