Metrics
The Environmental P&L Account

Embedding environmental impacts in the P&L ... Through accounting for its environmental impact, PUMA is positioning itself to identify business risk and uncertainty and enhance the sustainability of its products

Burgess COMMENTARY

Peter Burgess

Embedding environmental impacts in the P&L ... Through accounting for its environmental impact, PUMA is positioning itself to identify business risk and uncertainty and enhance the sustainability of its products

Puma sportswear

PUMA has developed a methodology to measure the value of nature's services to the company. Photograph: Norbert Millauer/AP Sportlifestyle company PUMA believes the current economic model, which originated in the industrial revolution, is no longer viable and must give way to a new business paradigm that works with nature. Simply put, business should account for and, ultimately pay for, the cost to nature of doing business.

In 2010, together with PricewaterhouseCoopers and Trucost, PUMA developed a methodology to measure the value of nature's services to the company, and the true costs of its impacts on nature. The resulting tool, PUMA's Environmental Profit and Loss Account (E P&L), is the company's first attempt to measure the environmental impact of producing and selling products.

Currently these costs do not hit the financial bottom line, but could easily do so in the future – for example, as a result of new government policy and regulations, environmental activism, consumer demand, growing scarcity of raw materials, or as a direct consequence of escalating environmental degradation.

E P&L gives an overview of the most material impacts

PUMA's E P&L showed that the company's overall environmental impact amounted to €145m. Although it is difficult to place this amount in a broader context, as no other business has yet publicly disclosed similar information, at €145m each year, the scale of the impacts is undeniable.

By converting non-financial impacts into monetary terms reflecting impacts on the environment and the concomitant negative effects on society, the E P&L shows which of PUMA's environmental impacts are the greatest and where these impacts occur.

• • At €47m each, its greatest impacts were from the use of water and the generation of greenhouse gas emissions
• • The conversion of land for agriculture for key raw materials such as leather, cotton and rubber was the third most significant impact at €37m
• • Other air pollution, affecting acid rain and smog, and the impacts of waste were less significant at €11m and €3m respectively
• • From the €145m, production processes in the supply chain were responsible for €137m, with the production of raw materials accounting for €83m of this. The impacts from PUMA's own operations were €8m

• • A strategic tool, highlighting areas of focus for sustainability efforts, while inspiring others to follow
• • A risk management tool, allowing the company to identify potential supply chain risks before they crystallise
• • A transparency tool, enabling a new and 'disruptive' form of disclosure and bringing clarity and openness into dealings with a wide group of stakeholders

From a narrow business perspective, externalities might be seen as a short-term benefit: why pay for costs if you don't have to? But they can also be a strong indicator of emerging risk.

Government policy, environmental activism, community unrest and the direct consequences of environmental degradation are all means by which the external costs of production can be internalised, often unpredictably and with dramatic consequences for affected companies.

Understanding the size and nature of externalities in the supply chain can thus give an early view of potential risks, enabling a business to respond strategically and in good time, and by so doing, protect or enhance shareholder value.

Equally, companies that are able to identify and understand their dependence on natural resources along the value chain are well placed to manage underlying risk from rising raw material costs, and scarcity of supply issues. Through the E P&L, PUMA is positioning itself to address these challenges proactively to minimise risk, hedge against uncertainty, and identify new opportunities to enhance the sustainability of its products.

Today's consumers are largely unaware that negative production externalities are not internalised and that this is why products are cheaper than they should otherwise be; basically, pricing today does not reflect the true environmental cost of production. In the future, an increased ability for consumers to understand the negative environmental impacts associated with production may well influence their purchasing choices.

This provides not only a complex challenge for companies, but also a strong impetus, as the world enters a new age of responsible consumerism, one best navigated from a position of knowledge, and best addressed with transparency rather than obfuscation and denial.

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