IIED, London Workshop on Business Externalities

11th March 2014

Pavan Sukhdev Founder & CEO, GIST Advisory

UNEP Goodwill Ambassador

Author “Corporation 2020”

Managing Externalties: the role of Stakeholder Reporting

An Ecosystem Service…. Source: NOAA

http://www.vets.ucar.edu/vg/T341/index.shtml

US$ 2.15

trillion/ year

estimated

global environ-

mental costs of

economic

activity

Five sectors

account for

about 60% of

environmental

costs

Source: Trucost for

UNPRI, 2010.

Top 3,000 Listed Companies

Corporate Externalities..

US$ 2.15

trillion/ year

estimated

global environ-

mental costs of

economic

activity

Five sectors

account for

about 60% of

environmental

costs

Source: Trucost for

UNPRI, 2010.

Top 3,000 Listed Companies

Corporate Externalities..

Water Abstraction

Greenhouse Gases

Greenhouse Gases

Natural Resources

Natural Resources

Natural Resources

….. Are Pushing Planetary Boundaries

B.A.U. might not deliver ‘The Future We Want’…

We cannot Manage what we do not Measure!

Hence Stakeholder Reporting:

Measuring, Reporting, & Managing Corporate Externalities...

Three Solution Models Visible...

Buy Side Advisory

Single Leader

Sector Leadership

Question: “Who Should do What?” for Measuring Externalities

Quantifying Usage,

Discovering Depend-

encies & Impacts

Standardizing

& Valuing

Impacts

Disclosing

Impacts in

“One Report”

Emissions /tCO2e

Freshwater / CuM

Forests L.U.C. / Ha

Pollution / …

Waste / …

Economic Costs of

Emissions,

Freshwater Use,

Deforestation,

Pollution, Waste …

Framework for

Integrated Reporting

of All Externalities…

incl Social & Human

Capital..

WBCSD…

GRI…

CEF…

CDP, WDP…

TEEB for

Business

Coalition

& Network

IIRC &

Accountancy

Regulators

“Who Does What When?” Business Externalities Roadmap

Stages:-

Objectives Measuring Supply Chain Impacts (quantities) for all significant environmental impacts: Emissions, Freshwater extraction, Land use change , Pollution, Waste

Valuing all material corporate supply chain externalities due to Emissions, Freshwater extraction, Land use change, Pollution, & Waste. (Note: non-environmental drivers of Human/ Social Capital impacts out of scope)

Integrated Reporting of All material Externalities from all business activities, for Internal Management AND Disclosure of Externalities

Deliverables 1. Guidelines for discovering & quantifying all third-party impacts 2. Road-Tests 3. LCA Inventories & other applicable databases

1. Valuation Framework 2. Valuation Pilots / Road-Tests 3. Sector-wise Valuation Methodologies 4. Sector-wise Valuation Standards 5. Open-source Valuation Database

Reporting Framework for All externalities for both (a) internal management and investor use (b) Financial disclosure

Timelines 1. Guidelines : Some sectors done (ISO 14040-44 w/ Product Category Rules) or ongoing 2. Road-Tests : ongoing 3. LCA & other Databases: EU-LCA Platform (ILCD) guidance done;

1. Valuation Framework: May 2013 2. Valuation Pilots / Road-Tests: ongoing 3. Valuation Methodologies: 2014 onwards 4. Valuation Standards: 2015 onwards 5. Open-source Valuation Database: 2014 onwards

(a) April 2013 – Dec 2013 (b) to be decided

Responsibilities (NOTE : this list is not exclusive - mainly Coalition Members & Secretariat who have expressed interest)

1. Guidelines: GRI, WBCSD/ WRI, CEF, CDP (carbon), WDP (water), etc 2. Road-Tests: WBCSD, B Team 3. LCA Databases: Commercial LCA providers; Industry Assoc’s, Env. Ministries, Pollution Control Boards, Public open-source databases (eg: EU LCA Platforms - ELCD, ILCD); etc

1. Framework: TEEB4BC 2. Pilots / Road-Tests: B Team, other leaders 3. Methodologies (i) Development: B Team, Industry Assoc'ns, valuation experts (ii) Peer Review: WBCSD, GRI, WWF, IUCN (iii) Neutral Evaluation: TEEB4BC 4. Standards: GRI, ISO, CEN, CDSB, TEEB4BC, WBCSD/WRI, SASB 5. Open-source Database : TEEB4BC, Commercial LCA providers, IT Advisers

(a) IIRC, GRI, etc (b) ICAEW, GRI, SASB, National

Accountancy Regulators & IASB

Quantifying Impacts

Economic Valuation

Integrated Reporting

Why Stakeholder Reporting?

Business today depends on, and/or has impacts on, ALL dimensions of private & public wealth… but..

EXAMPLES Physical Capital Human Capital Social Capital Natural Capital

Private Ownership

- Factories - Buildings - Securities - Cash

- Health - Education - Job Skills

- Gardens - Fields - Forests

Community Ownership * (club goods)

- Community Centres

- Community Schools

- Traditional knowledge

- Community Norms and Customs

- Community Forests

- Grazing Commons

Public Ownership * (public goods)

- Roads - Bridges

- Public databases

- Non-patent knowledge

- Law & Order - Taxation - Social Equity

& Inclusion

- High Seas fisheries

- National Parks/ Forests

* Creating community wealth and public wealth creates “shared value”

Why Stakeholder Reporting?

Business today generally measures & reports only shareholder wealth impacts: private physical capital

EXAMPLES Physical Capital Human Capital Social Capital Natural Capital

Private Ownership

- Factories - Buildings - Securities - Cash

- Health - Education - Job Skills

- Gardens - Fields - Forests

Community Ownership (club goods)

- Community Centres

- Community Schools

- Traditional knowledge

- Community Norms and Customs

- Community Forests

- Grazing Commons

Public Ownership (public goods)

- Roads - Bridges

- Public databases

- Non-patent knowledge

- Law & Order - Taxation - Social Equity

& Inclusion

- High Seas fisheries

- National Parks/ Forests

Why Stakeholder Reporting?

Business for a sustainable tomorrow – will measure & report on ALL dimensions of its impacts …

EXAMPLES Physical Capital Human Capital Social Capital Natural Capital

Private Ownership

- Factories - Buildings - Securities - Cash

- Health - Education - Job Skills

- Gardens - Fields - Forests

Community Ownership * (club goods)

- Community Centres

- Community Schools

- Traditional knowledge

- Community Norms and Customs

- Community Forests

- Grazing Commons

Public Ownership * (public goods)

- Roads - Bridges

- Public databases

- Non-patent knowledge

- Law & Order - Taxation - Social Equity

& Inclusion

- High Seas fisheries

- National Parks/ Forests

How Stakeholder Reporting? GIST 360 ™ Assessment …..

Financial Value Addition

Human Capital Externalities

(“HCX”)

Social Capital Externalities

(“SCX”)

Natural Capital Externalities

(“NCX”)

Measuring “Value Addition” holistically, including all material Externalities

In evaluating third-party impacts across these categories of capital, we find that there are eleven major drivers of externalities arising from typical business activities, which most commonly generate the most significant third-party impacts.

Valuation Framework Based on Drivers

Environmental Drivers

GHG emissions

Freshwater extraction

Waste generation

Land-use change

Air pollution

Land & Water pollution

Human Capital Drivers

Employee training programs

Employee health and safety (EHS) standards

Social Capital Drivers

CSR programs

Business model and supply chain features

Company policies

Example: How can Environmental Impacts (NCX) be

valued for Cement Industry?

WORLD CEMENT

PRODUCTION =

3.3 BILLION TONNES

(2010)

Source : CEMBUREAU

Example: Cement Sector

Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 1: Understand Processes

Natural Capital Externalities

Pollutants emitted from cradle to gate for 1 kg of cement

CO2 (g/kg-cement) 812

SO2 (g/kg-cement) 0.63

NOX (g/kg-cement) 2.5

Dust (g-SPM/kg-cement) 1.5

Total Greenhouse Effect (g/kg-cement) 817a

Total Acidification (g/kg-cement) 2.4b

Total Eutrophication (g-PO4/kg-cement) 0.33c

Total Winter Smog (g-SPM/kg-cement) 2.1d

These results show Cradle to Gate Emissions Averaged from 5 EU Cement Type-I Products. The main constituents emitted from the production of cement are CO2, SO2, and NOX (Source: CEMBUREAU)

a) Includes minor contributions from CH4, N2O or HF

b) Includes minor contributions from HCl and NH3

c) Includes minor contributions from NH3, N-tot and COD

d) Includes minor contributions from soot

Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 2: Understand Drivers & Outcomes

Natural Capital Externalities

Natural Capital Externalities Example: Cement - Emissions+ Pollutants Step 3: Life-Cycle Analyses (LCA’s)

Natural Capital Externalities

June 2013

Natural Capital Externalities (NCX)

21

Natural Capital Externalities

22

LCA’s enable quantification of major environmental drivers of business, which materially impact natural capital, & also human capital (health) and social capital (quality of life). Trucost classifies environmental drivers of corporate externalities into six high-level eKPIs across major categories of unpriced natural capital dependencies and impacts. Each of these impacts can be valued in economic terms. Drivers Impacts (examples)

1. GHG emissions Climate change damage 2. Air pollution Health damage 3. Land and water pollution Eutrophication 4. Land use change Ecosystem service losses 5. Waste generation Dis-amenities 6. Freshwater extraction Pre-emption from others use

These six eKPIs reflect the channels through which companies’ impact natural capital and match the categories that targets are established for, consequently informing strategies and initiatives. These categories are also drivers of, and impacted by, regulations.

GIST 360™ NCX™

Trucost “EP&L” and “eKPI’s”

Natural Capital Externalities

Natural Capital Externalities

23

Outcomes: The typical EP&L study will quantify the natural capital embedded in direct and supply chain operations

Example: “Direct” or “gate-to-gate” phase refers to the processes that take place within factory premises “Indirect” could (for example ) comprise energy, materials, transportation

“Materials” refers to the sourcing and processing of material inputs “Energy” refers to the production of energy needed along the supply chain “Upstream transportation” refers to the transportation of material inputs to the factory

NOTE: Trucost’s valuation builds on a library of 1,000+ peer-reviewed articles and reports, as well as government studies.

Natural Capital Externalities

GIST 360™ NCX™

Trucost “EP&L” and “eKPI’s”

Natural Capital Externalities

Environmental Externalities Measuring & Disclosing : PUMA

Source: PPR /PUMA Press Release, 16th Nov 2011

Natural Capital Externalities

Can Externalities also be Positive?

YES: Positive Externalities can result from Corporations business models & policies...

Example 1: Infosys, +ve HCX

Wxample 2: Natura, +ve SCX

Mysore Campus, Infosys - World-class Training for 30,000 p.a.

- Attrition feeds trained IT talent to the world - Positive externalities over US$ 1 billion p.a.

Positive Human Capital Externalities Human Capital Factory for IT Talent: INFOSYS

Human Capital Externalities

• “Human Capital refers to the knowledge, skills, competences, and other attributes embodied in individuals that are relevant to economic activity” (OECD, 1998).

• Among the most important assets and a key determinant of country’s

overall economic performance

• Among the most important assets for any business and a key determinant of business performance

• One of the “Six Capitals” in IIRC’s recent consultation draft of their “Integrated Reporting” framework (<IR>, 2013)

• Neither national accounts nor business accounts reflect human capital

creation or loss, nor human capital externalities

What is “Human Capital”? Human Capital Externalities

HCXTM Model: Results from Infosys Annual Report 2012

Human Capital Externalities

• Social Capital can be defined (source: IIRC) as “the institutions and relationships established within and between communities, groups of stakeholders and other networks, and the ability to share information, to enhance individual and collective well-being. Social and relationship capital includes:

• Shared norms & common values and behaviours

• Key relationships and the trust and loyalty that an organization has developed and strives to build and protect with customers, suppliers and business partners

• An organization’s social licence to operate”

• Some business models, company policies and CSR activities are designed to improve such institutions and relationships, and in doing so, will usually generate positive externalities (eg: improvements in public health, societal job creation, environmental conditions, etc.).

What is “Social Capital”? Social Capital Externalities

Source: http://www.managementexchange.com/story/innovation-in-well-being http://totallybeautyaddict.fr/mon-jolieapero-chez-natura-brasil/

Positive Social Capital Externalities Business Model with Social Benefits: NATURA

1.4 million housewives earn 33% sales commission - Economic security improves family & social status for women - Training is used to sell other companies’ goods - Greater proportion of household expenditure on health & education - Increased labour market flexibility and efficiency

Social Capital Externalities

GIST 360™ comprises four assessments:- Reported Value Addition

(using Company Financial Statements) Human Capital Externality valuation

(using our HCX™ Model) Social Capital Externality valuation

(using context-specific valuation methods – SCX™)

Natural Capital Externalities valuation (using Trucost - EP&L)

Measuring Externalities for a “Stakeholder Value Added” Report

www.corp2020.com

http://www.youtube.com/watch?v=Jqk0ad5LKlI

A Non-Economist Explains ‘Corporation 2020’….

Thank You !

www.gistadvisory.com www.corp2020.com

Pavan Sukhdev,

Founder & CEO, GIST Advisory pavan@gistadvisory.com