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Clothing and luxury goods giant Kering has gone to great lengths to put a financial value on its environmental impacts, and although question marks remain, it is an impressive effort
Kering Group's consolidated Environmental Profit and Loss methodology and group accounts for 2013 were published recently by the multi-billion-dollar clothing group, owner of Puma, Gucci, Saint Laurent, Stella McCartney, Sergio Rossi and other luxury brands. Kering declares that it is pioneering this tool to calculate the group's environmental cost to society.
The EP&L is both a report of Kering's impacts and a DIY manual for converting environmental impact into financial value. Kering explains: "EP&L is a new way of estimating the cost to society of the changes in the environment resulting from businesses’ activities across the entire supply chain." Generously, Kering has developed an open source methodology, for the benefit of the market. At the same time, Kering hopes to make a strong contribution to the Natural Capital Coalition's Natural Capital Protocol development.
Valuation of natural capital is being pursued in many forms by different organisations as companies seek ways to express their environmental impacts and accountability in full, including what are now referred to as externalities – the often hidden positive and negative indirect impacts of corporate activity. Indeed, this is not Kering's first EP&L report. Puma delivered a company EP&L account back in 2011 and this new publication now covers the entire group.
The most fundamental question is: why equate everything to money? Kering maintains it is in order to “translate environmental impact into a language business understands” as well as to create a common denominator for comparing different values. Kering is aware that there are critics of this approach who say “nature was never intended to be sold”, and so a price should not be placed on the natural environment. Kering argues the EP&L values are not prices, but "expressions of worth" of the benefits that people get from the environment. After working through 50 pages of environmental calculations and methodology, I am not sure I understand the difference.
The EP&L covers the broad scope of Kering's supply operations from raw material production to store activities across six environmental impacts: greenhouse gas emissions, water consumption, waste, water pollution, air pollution and land use. At the same time, it works at three levels of "costing": quantifying the environmental footprint, quantifying the impacts of the environmental footprint, and creating an economic evaluation of the change in people's wellbeing as a result of these impacts. For example, the costs of water consumption and pollution include potential for malnutrition and disease, eutrophication and biodiversity loss. Wellbeing impacts associated with GHG emissions include health outcomes, economic losses and reduced recreational and cultural benefits. The EP&L covers 578 sub-processes across 107 raw materials produced in 129 countries.
The bottom line of Kering's group EP&L report is that Kering's cost to the environment in 2013 amounted to €773m, equal to 8% of 2013 revenue. Kering notes that an estimate by its EP&L methodology partner, financial services group PwC, is that typical industry equivalent performance would amount to €1.1bn – another way of saying Kering is performing 40% better than the rest of the market using average values. Of course, this all depends on the basis of the estimation. Notwithstanding, the level of detail is staggering. For example, European leather has a lower environmental cost than Brazilian leather, because of more productive grasslands. The production of conventional cotton in India is six times higher in environmental cost than organic cotton. Kering uses 10 times more wool than cashmere but the latter accounts for 80% of environmental impacts from animal fibres.
Assumptions and estimations
The estimation of environmental impacts on human health is fascinating, but the level of assumption and estimation required to calculate the cost of each impact requires a leap of faith in the reliability of this methodology. Ranging from the impact on the quality of meat that people eat as a result of the concentration of toxic chemicals in irrigated land through to the "impaired recreation value" resulting in the changes of nutrient enrichment of water sources, and increases in the incidence of lung cancer due to respiratory issues caused by air pollution, the calculation of the final cost to society seems actually quite incredible.
The value of the process
Kering openly shares insights from the EP&L process. At one level, these insights do not appear ground-breaking and seem similar to experience gained from less intensive supply chain mapping processes. At another level, the sheer detail of Kering's process surely drove thousands of conversations and deliberations throughout Kering's broad network and this cannot fail to have had a powerful effect on advancing more sustainable practices. The publication of this report in mid-2015 for impacts generated in 2013 might be an indication of the length of time this process takes. Perhaps, having now established a group-wide baseline, Kering will be able to deliver more timely EP&Ls in the future.
While EP&L offers value in understanding how and where impacts occur and their relative significance, it is only part of the picture. The use and end-of-life phases of products are not included. Kering refers to a pilot project to identify such impacts in the Stella McCartney ready-to-wear brand, saying the results "represented a fairly significant amount of the total EP&L impacts". Kering does not disclose what this means in percentage terms. If such a calculation were applied to the entire business, Kering might discover that improving product end-phase impacts could lead to even greater opportunities than in the supply chain itself.
EP&L without the P
Another gap in the EP&L is that it is currently actually only about the L – that is, a valuation of negative impacts. In fact, there are many things that Kering does and can do to create positive environmental outcomes. For example, supporting more sustainable practices in agriculture that influence an entire region or country could far outweigh the negative impacts of sourcing in that region. At present, the EP&L does not reflect this.
Overall, doubts about the data displayed in this report arise in at least four areas. First, with so much of the data assumed or estimated, how credible a tool can the EP&L be? Second, with no data from the use and end-of-life phases, is Kering really focusing on the part of the value chain that offers the most significant potential benefits? Third, with no balancing calculation of the positive impacts of Kering's activities, how realistic is the EP&L picture? Fourth, is the massive investment in time, energy and consultants required to deliver the EP&L good value for money? Might a less intensive analysis deliver most of the insights that enable the same level of fact-based decision making and be more scalable?
There is no doubt, however, that Kering is pioneering natural capital valuation methodology and that this is a more detailed report than has ever been available before from any company. Equally, Kering has learned much in the process, and the ripple effect throughout the Kering supply chain is surely considerable. It seems clear that this analysis has helped Kering take data-based decisions to reduce its impacts.CR Reporting Kering clothing luxury CR report review