Putting a true price on human, social and natural capital

A pioneering project that started in AkzoNobel Specialty Chemicals’ bleaching chemicals operations in Brazil has shown how measuring the true impact on human, social and natural capital can point to improvements that give big sustainability benefits. The process is now being applied more widely across the company and is helping to generate business value.

The initiative began with a pilot project in 2014 to study the impact and benefits of the business across financial, natural, human and social dimensions, or “capitals,” with full profit and loss accounting – also called four dimensional (4D) accounting, explains Emma Ringström, Sustainability Manager, Pulp and Performance Chemicals.

“Organizations rely on a diverse set of ‘capitals’ to function effectively,” Ringström says.

"Put simply, through their business activities, companies make use of and convert these capitals into outputs which lead to outcomes that in turn affect the stock of these various capitals as well as a company’s long-term viability.”

AkzoNobel already had extensive experience in environmental accounting through lifecycle analysis, but this new approach was applied to get a fuller understanding of the effect, both positive and negative, that the company’s operations have on society, Ringström explains. “By measuring in this way, we are able to identify the biggest impacts as well as our biggest contribution. Thus, we can find ways to make the most impactful improvements and ultimately increase business value.”

The measurement of human capital relates to the competency development of the employees and the effect this has on their future earnings, calculated as their increase in future earning potential. Social capital is assessed with a risk-based approach identifying issues related to health and safety, wage levels, gender equality and so on, as well as positive societal contributions such as community programs.

The results of the pilot showed that the contribution of financial capital to society was substantially higher than a traditional profit calculation; this is because in addition to traditional profit it also includes salaries, interest and taxes that make a substantial contribution to wealth in society. However, the natural capital impact was largely negative, due to the use of fossil-based energy across the value chain.

Capital drivers in the assessment
Financial – Value added to all stakeholders via profits, taxes and salaries
Natural – Impact mainly from use of fossil fuel, CO2 emissions
Human – Value added to employees as a result of training and career possibilities
Social –  19 out of 20 indicators that were reviewed resulted in a very low to medium risk

“The human capital impact was positive, particularly as a result of the future effect of employee training programs and career opportunities,” Ringström says. The social effect was much smaller, however. “This is mainly due to the nature of the specific operations within the scope of the pilot; these have larger production volumes and involve fewer people compared with industries such as agriculture, food or textiles, so overall the social impact was relatively small.

“For our own operations, social risk can be reduced by developing a more formal procedure for engaging with local communities,” Ringström added. “Some other high risks, related to freedom of association and the right to collective bargaining, were identified in other parts of the value chain when average industry data was used."

The study results pointed to opportunities to make several key changes. “These include increased use of renewable energy, and to put greater focus on better resource use of energy and raw materials - both for ourselves, as well as for suppliers and customers,” Ringström says. “In addition, looking more closely at human capital brought more emphasis on training and developing capabilities, while analysing social capital led to additional community programs being started.”

The company has now applied this approach in an assessment across its entire business, and it now includes extensive economic, social and environmental reporting in its Annual Report. The technique can also be used in risk assessments for investments, Ringström says.

“This technique really expands the boundaries of impact assessment and gives us a much better understanding of our influence across the whole value chain. By attaching an economic value to the positive and negative aspects of each dimension, we can gain valuable insights into how we can drive longer-term business value and help with our strategic decision-making.”