“Organizations rely on a diverse set of ‘capitals’ to function effectively,” says Emma Ringström, Sustainability Manager, Pulp and Performance Chemicals at AkzoNobel. By measuring these, she says, “We can find ways to make the most impactful improvements and ultimately increase business value.”
AkzoNobel has proven this through a pilot project at AkzoNobel Specialty Chemicals’ bleaching chemicals operations in Brazil. The company began studying the impact and benefits of the business across financial, natural, human and social dimensions, or ‘capitals,’ with full profit and loss accounting in 2014. Also called four-dimensional (4D) accounting, this process is intended to give companies a fuller understanding of the positive and negative effects of the company’s operations. The dimensions are defined as follows:
- Financial capital - what a company gives back to the community in the form of taxes, interest and salaries paid, and the profits shared with shareholders;
- Natural capital - resources and services provided by nature;
- Human capital - the stock of competence and knowledge of employees; and
- Social capital - employees, customers, suppliers, distributors, retailers and neighbours.
“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,” Ringström explained. “By measuring in this way, we are able to identify the biggest impacts as well as our biggest contribution.”
As such, 4D accounting can point to what improvements will deliver the most benefits and allow for more strategic decision-making.
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The results of the AkzoNobel pilot showed that the contribution of financial capital to society was substantially higher than a traditional profit calculation because it included salaries, interests and taxes that make contributions to wealth in society. The human capital impact was also positive thanks to the value-added for employees as a result of training programs and career opportunities.
However, the natural capital impact was largely negative, due to the use of fossil-based energy and generation of greenhouse gas emissions across the value chain. Increased use of renewable energy and improved efficiency in the use of both energy and raw materials for the company, as well as for suppliers and customers, were identified as opportunities for improvement.
Social capital impacts were small. “This is mainly due to the nature of the specific operations within the scope of the pilot,” Ringström explained. “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,” she 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.”
Ringström said that analyzing social capital led to starting additional community programs.
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. Ringström noted that the approach can also be used in risk assessments for investments.
“This technique really expands the boundaries of impact assessment and gives us a much better understanding of our influence across the whole value chain,” Ringström concluded. “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.”