While carbon emissions and water and energy efficiency are top-of-mind concerns for companies keen on reducing the environmental impacts of their products, a sustainable future can’t be achieved without considering chemistry — the foundation upon which countless products are built. We’ve already begun to see progress on this front, with an increasing number of companies embracing better chemicals management practices. The chemical industry at large is undergoing a paradigm shift, progressively moving towards the use of safer materials and greater transparency.
German chemical giant BASF, in particular, has emerged as an industry leader for its efforts to integrate sustainability into its core business strategy, developing groundbreaking tools — such as the biomass balance method, which allows companies to reduce their impacts without compromising on product quality; and the Sustainable Solutions Steering Method, which BASF used to systematically review and evaluate the sustainability aspects of its 50,000+-product portfolio — for evaluating and improving products.
Last month at SB’17 Copenhagen and New Metrics ‘17, respectively, BASF’s VP of Sustainability Dirk Voeste and Christian Heller, Senior Manager of Corporate Sustainability Strategy, shared details of a new approach the company has developed to measure a business’s contribution to society — one that can be deployed across industries to revolutionize the way businesses are run.
We spoke with Heller and Voeste to find out more about BASF’s Value-to-Society approach, what it means for the company and the business world as a whole.
How did the Value-to-Society approach come about?
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DV: We, at BASF, aim to contribute to a world that provides a viable future with enhanced quality of life for everyone. Therefore, acting sustainably is an integral part of our strategy and we have embedded this principle into our corporate purpose: “We create chemistry for a sustainable future.” With this ambition in mind we developed the “Value-to-Society” approach.
CH: Our task was to set up a pragmatic and scalable model [for] how we can assess our contribution to a sustainable future. A cornerstone in this effort is to identify, quantify, value and demonstrate our economic, social and environmental impacts on the society.
How does the Value-to-Society approach help BASF carry out its purpose of creating chemistry for a sustainable future?
CH: Our Value-to-Society is characterized by two main innovations. First, Value-to-Society helps us to assess the changes to people’s health and well-being caused and enabled by our business activities along the value chain. For example, we can calculate the impact to society of a newly constructed production plant by looking at different scenarios. Depending on the location, such an investment would create different impacts — for example, by adding value through employment or contracted local construction services on local or regional level. Therefore, this new approach goes beyond the traditional ways to measure business performance at an output level, e.g. based on CO2 emissions.
Second, the metric behind Value-to-Society is designed to apply a common unit to value the economic, social and environmental impacts on people: Euro. Furthermore, it increases the comparability of financial and pre-financial impacts while simultaneously translating our impacts into figures – the language business understands. The results allow us to make better-informed decisions and monitor our progress on a yearly basis. With Value-to-Society, BASF is one of very few companies running an integrated profit and loss approach, which is acknowledged to be the most comprehensive one on the market. As of today, it includes 11 impact categories along the value chain.
How did your Sustainable Solutions Steering approach to evaluating products inform the Value-to-Society methodology?
DV: Each approach has a different focus: Sustainable Solution Steering assesses the performance of our products in the market against competitive products, while Value-to-Society assesses our net impact on society. Due to the different objectives, we are applying different sets of scopes, categories, data and methods. For example, Sustainable Solution Steering assesses the resource efficiency of our products in its specific application. This category is not reflected in Value-to-Society as it looks at the total impact of resource use, such as climate change. All of this helps us to ensure long-term business success – an integral part of our “We create chemistry for a sustainable future“ strategy.
How was Value-to-Society developed? Who/what were the key players and processes involved? How does the methodology work?
DV: Our Value-to-Society approach builds on key aspects of PwC’s Total Impact Measurement and Management approach. In a close cooperation, our internal experts from various departments further developed and tailored the model to our needs and stakeholder expectations.
Today, we are using BASF primary as well as industry data to calculate our Value-to-Society. We measure our impacts in our own operations by aggregating impacts; for up- and downstream in our value chain, we are using input-out modelling techniques. For the valuation of our impacts in society in monetary terms, we are applying techniques from welfare economics to derive multipliers expressing social and environmental impacts in monetary terms.
How deep into the supply chain does the approach penetrate? Does it consider Scope 3?
DV: As a chemical company, we operate in different value chains with purchases from and sales into nearly every industry and country. Value-to-Society strives to value the impact of our business activities in society as holistically and pragmatically as possible. It covers our own operations, our complete supply chain as well as our customer industries. On a case-by-case basis, we are assessing the impacts of products in the use phase and end-of-life, and are currently working on concepts to measure the impact of our products in their use phase more holistically.
How do you plan to use the data collected from the application of Value-to-Society? How will it shape BASF’s existing practices, processes, etc? Will it be used to help drive R&D?
CH: Until today, we have piloted this concept at various organizational boundaries such as corporate, project and product level. During our four-year journey we identified the benefits and limitations of the applied data and methods. Monitoring our progress on a yearly basis will support BASF’s continuous improvement and its contribution to a sustainable future. This can only be achieved by innovations together with our business partners, and Value-to-Society directly shows main areas along our value chain to work on.
DV: There are still further efforts required for decision-making and steering on the base of our approach, such as accuracy and timeliness of data, maturity and convergence of methods, and alignment of different assessment concepts. However, at BASF we use the results of our calculations to provide an additional perspective for our decision-making processes. And we are convinced that over time this concept will find its way into the management systems of companies.
What were the key challenges that arose during the development and application of the approach?
DV: As in many cases, the biggest problem lay in the availability of data for such a comprehensive model. The boundaries for the calculation along the value chain are defined based on the relevance of the value chain step, the availability of data and methodologies, and the feasibility of the calculation approach at each level of our business. We also faced some challenges in the identification of benefits and limitations.
What value does BASF derive from this exercise? What could other businesses gain from taking a similar approach?
CH: Measuring and expressing our impact on society in monetary terms improves the understanding of the relevance of specific economic, social and environmental impacts, and their interdependencies along the different levels of our value chain. This transparency supports the integrated character of our actions, contributing to BASF’s long-term business success. Our approach adds a macro-societal perspective to current assessments. Furthermore, the comparability of financial and non-financial aspects along the value chain allows us better-informed decisions regarding the relevance of various business impacts.
DV: We want to share our experience and learnings with our external partners and stakeholders to contribute to the continued standardization and operationalization of impact valuation. We are convinced that our approach can be transferred to other companies and help to get a better understanding of economic, social and environmental interdependencies.
Why is expressing BASF's impact on society in monetary terms so important?
CH: In our Value-to-Society approach, all company-driven impacts on society are measured in a common unit: the euro. This allows, for the first time, the materiality of these impacts to be compared across financial and non-financial impact categories, as well as a better understanding of their interdependencies along the value chain. Furthermore, applying a common unit improves our integrated thinking and decision-making.
Can you share an example of what you've learned about BASF's value to society through use of the methodology?
DV: After defining scope and methods, we were very curious to receive the first results of the calculations. As we had no experience with the monetary valuation of non-financial impacts, our team had quite diverse expectations on the overall performance of the company. What surprised us most was the significant contribution of our benefits to society (mainly gross value added) compared to the costs (mainly environmental and health & safety). Our assessment shows that our business model provides a positive contribution in each step of the assessed value chain. The general picture is stable since our first calculation for the year 2013 (for results in detail please have a look at our Value-to-Society webpage). What we recognized is that the main drivers of our value contribution to society are growth and portfolio changes.
What we understand beyond the results is the power of using a monetary metric for non-financial impacts. Expressing social and environmental impact in € makes your communication much more tangible, and opens doors to new audiences in and outside your company such as finance, controlling or the financial market.
Christian, you mentioned that **'**Value-to-Society directly shows main areas along our value chain to work on' — can you give a few examples of this?
CH: As Dirk mentioned, we were all looking forward to the results of our first calculation. To interpret these in a meaningful way, you need to understand the informative value in a specific context. For example, we are using currently 73€ as cost for 1 ton of CO2e emitted. This price is an indicator how future CO2 emissions can influence the financial performance of your company — e.g. through carbon taxes. Therefore, on the one hand, the results are a clear indicator for our business risks. On the other, Value-to-Society provides a high-level analysis of the areas for improvement along our value chain – meaning opportunities to help our business partners with our solutions to reduce their risks.