AkzoNobel’s 4D Profit & Loss Accounting of a Book

Introduction to the Company

Based in the Netherlands, AkzoNobel is a leading global paints and coatings company and a major producer of specialty chemicals. It has approximately 45,000 people in around 80 countries and had revenues of €15 billion 2015. AkzoNobel’s Pulp and Performance Chemicals business supplies bleaching chemicals and systems to the pulp and paper industry.

Introduction to the Project

AkzoNobel has been regularly using a 4-Dimensional Profit & Loss (4D P&L) accounting methodology to assess its own operations since 2014. The four-dimensional (human, social, natural, and financial capitals) profit & loss methodology was developed to gain a deeper understanding of the company’s impacts across the value chain. It takes into account not only AkzoNobel’s own costs and profit, but also the value creation (profits) and negative effects (losses) that take place in other links of the value chain.

Since one of AkzoNobel’s main products to the pulp and paper industry is chlorate for white-bleaching paper, it was decided to apply the 4D P&L study to the paper book. This puts the business-specific results of bleaching chemicals production into context and shows the contribution of AkzoNobel to a consumer product. 

Stage 1: Frame

The three key business value drivers behind AkzoNobel’s decision to develop a 4-D P&L methodology applied to a book and to do regular 4D P&Ls internally on its own operations are to: 

  1. Optimize human capital management—Understanding the spread and composition of the value chain provides guidelines for action and investment, such as optimizing the management of human capital across locations and business activities.
  2. Strengthen the value chain—Raising awareness of impacts with suppliers and customers improves relationships with them through increased engagement. 
  3. Fuel product and service growth and innovation—Understanding where the impact hotspots are in the value chain allows for the reduction of negative impacts and builds on existing positive ones. 

Social capital issues were prioritized using the WBCSD’s Social Life Cycle Metrics for Chemical Products.21  One of the questions from the risk assessment methodology is: “How do your business activities impact accessibility of community resources?” The answer is location specific. For instance, in Sweden water is not a prioritized issue, but throughout the value chain it can be a risk in other areas. 

The key stakeholder groups for assessing impacts are defined by the WBCSD’s risk tool as workers, consumers and local communities. 

Stage 2: Scope

Several key audience groups for the results of the assessment were identified.

1. Internal stakeholders: 

  • HR management uses a benchmarking analysis comparing AkzoNobel’s results with industry averages in order to optimize the use of HR and help attract and retain talent
  • Procurement team uses the results to assess supplier performance
  • The product development team uses the results to guide investment decisions and to discuss product innovations

2. External stakeholders: 

  • For suppliers, the company uses the results to exchange best practices, motivate them to map their sustainability performance, and drive improvement in their operations
  • For customers, the company uses the results to exchange best practices on improving their product usage, health and safety performance, and resource efficiencies.

Applying the 4D P&L methodology to a book was chosen as it is easier for external audiences to understand than the impacts of a specific bleaching chemical. The assessment is used as an internal improvement tool based on a reference baseline. It is the “business as usual assessment”. The results can be compared both to other products and to future assessments after initiatives have been undertaken in the book value chain itself.

The geographic, organizational and temporal scopes of the assessment were chosen to reflect the cradle-to-grave impacts of producing 100,000 copies of a €20 book in Europe using 50% virgin paper from Brazil and 50% recycled paper and using AkzoNobel’s bleaching chemicals. 

AkzoNobel has an assessment maturity scale for building on its impact analyses over time: 

  1. Do baseline assessment;
  2. Identify hotspots and implement an initiative (to minimize risk or maximize opportunity);
  3. Re-do assessment to quantify impact of initiative.
Stage 3: Measure and Value

All capitals are reported as monetary values, except for social capital. Monetary valuation helps comparisons across the different capitals and understanding of what positive value is generated per euro of negative value. The company decided to use a semi-quantitative risk-based approach to the social capital indicators because it is difficult to come up with a harmonized monetary valuation approach across all the social indicators, and because of the existence of ethical considerations around choosing a monetary value that represents a person’s life. This value is known in economic terms as the value of statistical life (VSL).

Monetary valuation can make it difficult for people to understand the drivers of impact, so it is important to be transparent about the methodology. In future assessments, AkzoNobel would like to consider placing a monetary value on the downstream positive impacts of their products (such as micronutrients) and programs and is already putting a monetary value on the negative health and safety impacts using the lost time injury rate valuation approach.  

The human capital valuation approach chosen is the expected value of future earnings method. This is takes into account the following factors: current wages, inflation-corrected wage development, time to retirement, fraction of compensation related to work. The methodology is well established in academic literature and is widely used by governments and statistical authorities.

The social capital risk assessment method was taken from the WBCSD’s Social Life Cycle Metrics for Chemical Products. Examples of the risks assessed include: health and safety, child labor, discrimination, freedom of association, and maintenance of a healthy work-life balance. Each risk in each location is given a risk score of one of five risk levels, ranging from very low to very high. 

Data collection for AkzoNobel’s own operations was relatively easy. Collecting data from suppliers and customers presented more of a challenge. Some suppliers/customers did not have the relevant data or would not disclose it. In these cases, AkzoNobel would look at the annual reports of these organizations, sustainability rating reports, or use local geographic data as a proxy.

The data required for the human capital approach was acquired from statistical bureaus around the world (such as wage levels for various industry sectors, anticipated wage growth, retirement ages, and anticipated inflation). 

AkzoNobel reduces the data collection burden on the customer/supplier by filling out the tool using publicly available data on the company. AkzoNobel then shares this with the customer/supplier to confirm data and ask them to fill gaps. This process helps to improve relationships and facilitates mutual learning. 

A limitation of the social capital risk data collected is that some of the data gaps had to be filled from generic risk databases. Therefore, the information does not necessarily accurately reflect the situation of AkzoNobel and its suppliers/customers. In such cases, AkzoNobel continuously engages to get supplier-specific data around these topics.

Stage 4: Apply and Integrate

The greatest benefit of undertaking this assessment for AkzoNobel has been around the tracking and monitoring of impacts to facilitate continuous improvement, and around the engagement of employees, suppliers and customers. Demonstrating that AkzoNobel is proactive about measuring its social impact is crucial to maintaining supplier and customer relationships given the current importance of the topic.

AkzoNobel is using the results of the regular 4D P&L assessments to help drive product and service innovation; launch additional community programs, prioritizing those offering more value to society. Regarding human capital, the company has introduced additional talent development and training programs for employees. The HR management team has been benchmarking the results with industry averages and using the information to attract and retain talent.

For clear communication of the results, AkzoNobel has compared the positive and negative values created in the book value chain. The company reports the following:

The combined overall increase in financial and human capital (€21.74) is more than 10 times greater than the loss of natural capital (-€1.87). Few social risks have been identified. This is an encouraging result: we believe that this loss in natural capital can be (further) reduced by using our AkzoNobel technology and value chain cooperation

AkzoNobel is integrating the results of the 4D P&L assessments into business decisions across the company. All employees have access to an Excel tool that allows them to input a specific scenario, such as changing an electricity supplier to one in a different location or implementing a specific community program, and to see the impacts of this change on the 4D P&L. This is critical for employee engagement and raising awareness throughout the organization on all possible impacts of the business on society.

In the future, AkzoNobel would like to include more downstream impacts of their product use, both positive and negative.