Environmental Profit & Loss Accounting: Can We Make It Work?

In November 2013 the first World Forum on Natural Capital took place in Scotland, signaling that the concept of Natural Capital Accounting as pioneered through emerging tools such as the Environmental Profit & Loss Account is starting to pick up pace. Even more recent is the establishment of the Natural Capital Business Hub in February 2014, showcasing a broad range of promising natural capital case studies which have yielded a positive return on investment.

Natural capital accounting or NCA draws strongly on well-established ideas around calculating the Economic Value of Ecosystems Services as a tool in decision making.

NCA takes this a step further by not using it merely as a decision tool when comparing between development or product alternatives, quantifying the (replacement) costs of the provisioning and regulatory services that ecosystems provide. It puts the natural environment on the balance sheet by integrating it into government and business accounting frameworks. This makes a compelling argument as an instrument for economic story telling.

Even so, in the current absence of global NCA standards similar to the traditional accountancy field, and with complex and multi-tiered supply chains, developing NCA balance sheets can appear like a mammoth task for a multi-national company of reasonable size. Apparel company PUMA and in its footsteps other early pioneers of the so-called Environmental Profit & Loss Account have gone about this by using ‘Environmentally extended Input Output’ (EIO) modeling, a technique developed in the 70s . One which identifies the interdependencies of different branches of an economy and allows for pinpointing hotspots across the supply chain, in order to quickly zoom in where it matters most (‘materiality’).

Natural capital accounting can therewith bring insight in the true costs of (product) development. As well as the associated risks and vulnerabilities plus the level of direct company control, the so called tiers in a supply chain, in order to decouple growth from unsustainable dependency on vulnerable natural resources.

The Basics

So how does Environmental Profit & Loss Accounting (EP&L), one of the emerging tools under the NCA umbrella, actually work you may ask? Let’s first explore a few of the fundamental basics of conducting and applying EP&Ls.

At the heart of EP&L is the use of EIO (Environmentally extended Input Output) tables. EIO models calculate environmental impacts throughout supply chains by combining economic flows and environmental data. An IO table represents all economic transactions between all sectors in a specific country during a year. For each sector, the EIO table integrates this with environmental impact data, which are expressed as monetary values -instead of physical units- per each one currency unit (say one dollar) of consumption for a sector in the table.