The environmental and social costs of global business water use add up to around $1.9 trillion per year, according to new research by Trucost for the TEEB for Business Coalition, Natural Capital at Risk: The Top 100 Externalities of Business.

Some of these external water costs already are being internalized and hitting bottom lines: Just last year, the worst drought in the United States in 50 years sent commodity prices skyrocketing. Companies, especially those in the food, beverage and apparel sectors whose margins and supply chains are tightly linked to agricultural commodities, can use the true cost of water to get ahead of the trend of external costs increasingly being internalized through regulations, pricing or shortages. 

Gaps in pricing and supply create opportunities  

Most raw materials that businesses depend on require water. However, a gap already exists between water supply and demand, and by 2030 water demand will exceed supply by 40 percent. 

Part of the problem is that water is not correctly valued, and this is creating perverse market incentives. For example, around half of China’s industrial output and 40 percent of its water-intensive agricultural products are produced in 11 of the country’s driest regions, comparable in water scarcity to those of the Middle East. Because the price of water in these regions is among the lowest in the world, the market creates an incentive for retailers and manufacturers to outsource services to this water-scarce region, despite the high risk of drought or damage to long-term water supplies.  

Applying the true cost of water for business optimization

Trucost estimates the true cost of one cubic meter of water ranges between $0.10 where it is plentiful and $15 in areas of extreme scarcity (see Figure 1).  Businesses can take advantage of this wide range and align water use with its availability to evaluate new infrastructure investments, procurement strategies and product portfolios. 

For example, a business can include the true value of water -- not just its current market price -- alongside traditionally costed items in capital budgeting and adjust the net present value (NPV) of cap-ex investments. Figure 2 shows how applying economic values to projected water consumption and deducting the “environmental costs” from future cash flows can reveal which option has a lower risk. For instance, Yarra Valley Water found that each m3 of water conserved delivers $6 through avoided damages to the environment. So, selecting Project A, which uses 1 million m3 less water annually than Project B, would save it $6 million in environmental costs. 

As another example, water valuations can be used to identify strategic sourcing partners and supply chain collaborations. We analysed the water intensity of fruit used in a range of juices. The valuation illustrated the risks by fruit as well as by region, and identified opportunities to shift fruit production to an orchard in a less water-scarce region.

Water valuations also can be used to map commodity flows and quantify risks across a company’s brand portfolio or business unit. Figure 3 illustrates how water valuation can highlight unsustainable water use across multiple FMCG product categories. Somewhat surprisingly, the product categories with the largest water footprints were not always the same as those with the greatest water risk intensity. In this case, water valuation and value chain hot-spotting pinpointed opportunities to invest in new technologies and strategic sourcing efforts to manage commodity risk. 

Understanding the true cost of water is a growing global trend in corporate natural capital valuation. This month, 90 companies are joining a WAVES Partnership in the U.S. to explore natural capital accounting. Forward thinking companies like these that take account of their natural capital dependencies will benefit from a more complete picture of the most effective ways to allocate water and other resources that are under steadily growing pressure.

Across Australia, a National Water Initiative aims to increase water efficiency and safeguard water resources by returning over-allocated and over-used water systems to sustainable levels of extraction and increasing the quantity of water for the environment. To help deliver this, states agreed to manage environmental externalities linked to water use - damage costs often picked up by communities. States are supposed to look into using market-based tools such as pricing to account for environmental externalities. But the National Water Commission says it is frustrated at the lack of progress, and found that arrangements to manage externalities are still needed to "determine whether they are optimal".

Yarra Valley Water hopes to spark action in Victoria by commissioning Trucost to estimate the "value of water". A better understanding of the costs and benefits of water management should help inform thinking on options to deliver measurable, sustainable outcomes. Trucost found that each cubic metre of water used in Melbourne costs society almost AUD6 (USD6) on average. Each m³ of water saved therefore delivers a gain of AUD6 through avoided damages to water's ecosystem functions. The value of water fluctuated with levels of water scarcity. However, it was higher than the average price paid by customers of Yarra Valley Water (AUD1.90 per m³) throughout the eight-year period analyzed. Traditional decision-making, which externalizes the costs of impacts such as depleted groundwater, undervalues water.

Companies can value the benefits of water and other natural capital "sources" and "sinks" to improve decisions. They can include the value of natural resources in business risk and opportunity management. Accounting for the true costs of resource use and pollution can reveal opportunities to optimize operations, products and supply chains. It can provide decision-makers with a more complete picture of the most effective ways to allocate resources.

Our White Paper for Yarra Valley Water calls for industry and regulators to integrate the total economic value of water into decision-making to help deliver water infrastructure with environmental outcomes that benefit communities. The goal is to allocate resources to manage water in a way that avoids or limits environmental degradation, rather than incurring the costs of damages later.

The project is pioneering for a water company, and forms part of a growing global trend in corporate valuations of natural capital. 90 companies are joining WAVES Partnership talks in the U.S. this month to explore natural capital accounting in decision-making. Sportlifestyle company PUMA launched the first-ever environmental profit & loss account in 2010, and has since used insight from valuations to start reducing risk from the impacts of operations and suppliers, as well as to develop more sustainable products.

Our valuations of natural capital use by Consumer Goods companies providing products such as food have revealed options to minimize risk from water scarcity linked to commodity price rises in supply chains, and to develop brands with smaller footprints. To "optimize" is "to make as effective or useful as possible", or "to make the best of". Valuing and managing natural capital costs can help keep control of price tags and profit margins. 

Reuters reports that ArcelorMittal South Africa's share price fell 6% after the Treasury's announcement sparked concern that the R120 (US$14) per tonne of carbon dioxide equivalent tax would hit earnings of heavy polluters. Oil & Gas company Sasol's shares fell nearly 2%, according to Reuters.

Trucost's analysis of carbon risks in South Africa identified ArcelorMittal South Africa Ltd as most exposed in the Basic Resources sector. We found that Sasol Ltd could see its return on equity fall by 16% if modelled carbon liabilities were internalised.

The S.A. Government plans to publish an updated policy paper on the carbon tax in March.

On Feb. 12, GreenBiz will launch its annual State of Green Business report with new research from Trucost on the environmental performance of U.S. companies. Here’s a preview of the findings, focusing on the True Cost of S&P 500 companies in the food and beverage and retail sectors. Putting a price on natural capital -- in other words, assigning a dollar cost to environmental impacts -- provides a business context for the analysis.

Not surprisingly, the embedded environmental costs are significant and represent real financial risks and strategic opportunities for companies. Our research found the direct and supply chain environmental costs of S&P 500 retail companies totalled almost $22 billion. That is a lot, but the costs of the food and beverage companies are more than three times higher at $69 billion. For food and beverage companies the key impacts were water use ($38 million), land and water pollutants ($12m), greenhouse gas (GHG) emissions ($10m) and other air pollutants ($8m). For retailers, the most significant impact was also water use ($8m), followed by GHG emissions ($7m).

How are companies paying for their environmental costs?

Droughts and pollution hot spots are causing food and beverage and retail companies to internalize upstream environmental costs. During the 2012 U.S. drought, water shortages and high temperatures destroyed field crops, driving up corn and soybean costs. This has led to increases in prices for other food supplies such as animal feed. Knock-on effects continue to ripple throughout supply chains and the impact on food prices such as meats, dairy and eggs is expected to be felt into 2013 as companies pass on higher input costs to consumers.

Regulatory frameworks that place a price on carbon emissions are also evolving in regions including California and nine Northeastern U.S. states, parts of Canada, Australia, South Africa, China, South Korea and Europe. Companies with carbon intensive suppliers in these regions are at risk from pass-through carbon costs leading to lower margins.

How well are companies measuring these environmental costs?

To get a snapshot of how well companies are managing their environmental performance, we assessed the disclosure of impacts resulting directly from companies’ direct operations.

We found the food and beverage sector discloses 41 percent of its direct impacts on the environment -- over double that of the retail sector, which discloses 20 percent.

Water is the most material environmental cost for both sectors, but disclosure was worryingly low, particularly given that our demand for the resource is already outstripping supply in some regions.

For retailers, water dependency tends to be embedded in the supply chain; the direct environmental cost being mostly negligible.

However, direct water disclosure is a key challenge for the food and beverage sector, which discloses just 24 percent of its direct water use.

The top 10 disclosers

Both sectors disclose best on GHGs, perhaps reflecting the availability of an international reporting standard (GHG Protocol), as well as awareness of the potential materiality of GHGs for food and beverage and retail companies.

Food and beverage companies have made the most progress, disclosing 73 percent of their GHG emissions, compared to 58 percent in retail.

The food and beverage sector is also making significant progress in disclosing waste and land and water pollutants, with disclosure of 58 percent and 47 percent of these impacts.

Retailers are also making progress in disclosing 43 percent of the total air pollution impacts.

To celebrate the success of companies leading the way in disclosing their direct environmental impacts, we reveal the top 10 disclosers in each sector:

Top 10 S&P 500 disclosers of direct environmental impacts in the retail sector

Top 10 S&P 500 disclosers of direct environmental impacts in the food and beverage sector

How does this compare to disclosure of supply chain impacts?

Not surprisingly, the majority of the environmental costs of food and beverage and retail companies are found within their supply chains. To assess progress in understanding these risks, we compared the disclosure of direct emissions to supply chain emissions for GHGs, the most disclosed direct environmental impact for both sectors.

We found an acute difference. The average retail company discloses 4 percent of its supply chain GHG impacts, dropping to just 2 percent in the food and beverage sector.

While only a handful of companies currently report supply chain impacts, many are gearing up to do so. The Carbon Disclosure Project and Newsweek Green Rankings have both revealed sharp increases in supply chain reporting. In order to meaningfully report these impacts, companies first need a systematic way to identify and capture material issues at each supply chain tier since impacts are often concealed in the raw materials and processing stages.

The GHG Protocol’s Corporate Value Chain Accounting and Reporting Standard, published in October 2011, provides much-needed guidance and recommends companies start by modeling impacts to identify focus areas for efficient primary data collection from suppliers. This type of supply chain “hot spot analysis” has been used by companies like Sprint, PUMA, BSkyB and the Formula One Teams Association.

What are the implications for food and beverage companies and retailers?

Food and beverage and retail companies that take the lead in understanding and managing supply chain resource dependency and environmental impacts will benefit from reduced risk from input costs -- and just as importantly, opportunities to evaluate and lock in strategic suppliers Companies that assign a value to environmental impacts will be able to communicate with CFOs, CEOs, and investors about their performance in a business context.

Valuation of environmental impacts also provides a common metric to integrate environmental considerations into traditional financial metrics, helping companies identify trade-offs, select more environmentally efficient suppliers and optimize supply chains and products in line with natural resource availability and environmental cost. Measuring and valuing natural capital will lead to early mover advantage -- because what is valued is managed.

Trucost provides data, insight and tools to help businesses to integrate nature into everyday decision making; to optimise operations, supply chains and products in line with global resource availability and natural capital constraints. To find out more about how Trucost can help you contact us.

People outside the “green” professional community are increasingly recognizing that companies’ environmental performance is linked to financial performance. This type of mainstream recognition in the business world will help push the sustainability agenda forward in large North American corporations.

Accounting Firms, Others Take Note of Environmental Factors

Accounting firms and management consultants in particular took note of the link between sustainability and financial performance. McKinsey’s Resource Revolution recognized  the importance of sustainablity to business value and opportunity and KPMG reflected in Expect the Unexpected that corporate responsibility in response to sustainability megaforces can be good for the bottom line and shareholder value.

But it was not just consultants..... 2012 also saw investors looking at environmental factors ranging from natural capital and carbon efficiency to good governance and stakeholder relations. Sustainability-themed funds demonstrate that environmental factors indicate how a business is positioning for a changing world constrained by increasing demands on commodities. A growing number of traditional investors were spurred to use environmental analysis in mainstream investments because evidence is mounting that this practice pays off. This marks a shift from traditional socially responsible investment approaches, such as screening out “sin” stocks like tobacco or gambling companies.

For instance, First State’s £275 million Global Emerging Markets Sustainability Fund, which focuses on “sustainability leaders”, has outperformed its emerging markets benchmark since its launch in 2009. Unilever (food producers), Satyam Computer Services (technology) and Aspen Pharmacare (pharmaceuticals) are among the fund’s top 10 holdings. 

David Gait, Senior Portfolio Manager, explains “By sustainable investment, we are not referring to ‘green,’ ‘clean tech’ or ‘ethical’ investing. Our emphasis is on sustainable development. We are simply setting out to invest in companies we believe are well positioned to deliver long-term returns in the face of the huge development challenges facing all countries today.”

Investors Favor Carbon-efficient Companies 

Measuring environmental performance comes down to pollution and natural capital use, and one pollutant most relevant across all industries is carbon. Companies in California, China, South Korea and South Africa will start paying for carbon emissions under pricing programs due to kick in between 2013 and 2015 and they’ll join companies already covered by carbon pricing in Europe, Australia and New Zealand.

The implication of this? Mainstream index providers, fund managers and asset owners will need to to position investments to reduce exposure to risks from carbon liabilities, and increase exposure to companies that stand to gain in low-carbon economies.

In 2012, we saw more investors applied carbon-efficient tilts to their portfolios, while maintaining sector allocations, diversification and financial performance. Three examples stand out:

• S&P Dow Jones Indices designed  the U.S. Carbon Efficient Index to help investors find more carbon-efficient  companies. The U.S. Carbon Efficient Index is a subset of constituents in the S&P 500 with a relatively small carbon footprint, and  maintains at least 50 percent of the underlying sector weightings in the S&P 500. Trucost calculates a carbon intensity so investors can compare companies, indices and funds of all sizes on their dependence on carbon-emitting resources to generate returns.

• European asset managers have already attracted more than US $500 million in assets under management that are carbon optimized. Investors include the U.K.'s largest corporate pension scheme, the BT Pension Scheme, with more than US$161 million in a carbon-tilted passive equity index fund with markedly lower exposure to carbon and fossil fuel costs. The LGIM UK Equity Carbon Optimized Index Fund (managed by Legal & General Investment Management) returned 3.42 percent in gross returns compared with 3.37 percent for its benchmark index (the FTSE All-Share Carbon Optimized Index) and 3.06 percent for the FTSE All-Share Index, between the fund's inception in May 2011 and 30 November 2012.

• The recent Institutional Investors Group on Climate Change survey found that investors increasingly addressed climate change in 2011. For example, the Australian superannuation fund VicSuper has invested more than US$210 million in a carbon-efficient portfolio managed by Vanguard Investments Australia Ltd since 2009, as part of its strategy to manage carbon risk. The Carbon Aware International Shares portfolio consists of more than 700 companies and is benchmarked against the MSCI World ex-Australia Index, but reweights stocks based on carbon efficiency with the aim to achieve a carbon footprint 50 percent smaller than that of the underlying Index.

Institutional Investors Increasingly Disclose Environmental Performance

Another interesting trend we saw in 2012 is institutional investors that are increasingly disclosing environmental performance of their portfolios in new ways. Disclosure helps to create awareness about risks and it is being fueled by technology as well as sustainability initiatives. For example:

• Each year, VicSuper monitors the carbon impact of its listed holdings, which had a combined value of some US$4,377 million in June 2012. VicSuper reports each member’s carbon footprint from listed equities to help raise awareness of the need to manage carbon exposure, and to help people see that their pension savings are invested in real companies with real carbon emissions. Earlier this month, the fund’s climate risk management was recognized by the Asset Owners Disclosure Project, a not-for-profit organization that gave VicSuper an “AA” rating and ranked it in the top 20 asset owners in a Global Climate Index. The Index top 20 includes three U.S. asset owners:  New York State Common Retirement Fund, CalPERS and California State Teachers’ Retirement System (CalSTRS).
• CalSTRS is among pension funds using environmental data over the FactSet network. Widespread access to robust environmental data from platforms like FactSet has made it  easier for fund managers to analyze companies’  carbon emissions, water use, and waste alongside financial metrics.
• More than 1,000 investors globally with over US$30 trillion in assets under management are incorporating environmental issues into investment analysis and decision-making processes, as one of six commitments under the United Nations-based Principles for Responsible Investment (PRI). Signatories will need to use a new reporting framework to explain how they are doing this in 2013.

The implications are that investors will be under increasing pressure to  disclose,  while corporations can expect greater scrutiny of their own  environmental records, and strong performers could see costs of capital  lowered. Deutsche Bank’s review of Sustainable Investing was one of several studies in 2012 that found a link between corporate  social responsibility, lower risk and financial outperformance.

Originally written for and published on CSRwire Talkback series 2012 In Retrospect: CSR and Sustainability News, Views & Trends

Do you have more examples of how environmental performance is becoming mainstreamed by investors? We’d love to hear from you. Contact Libby to share examples of environmental analysis helping to increase profits.

This blog has been produced exclusively for GreenBiz.

The holiday dinner has always been an occasion to gather family and friends together to enjoy a delicious feast. However, hosting a holiday dinner can come at a high cost — for the host’s pocket and for the environment.

Trucost analyzed the environmental impacts of 2 kg (4.4 lbs) turkey, 1 kg (2.2 lbs) potatoes and 1 kg sweet corn – the average quantities needed to make holiday dinner for a family of four. We examined the stages from farm to supermarket shelf, looking at the carbon and water footprints, and embedded waste and pollution, for each product. Trucost then calculated the natural capital cost of each of these impacts, applying the social carbon cost and the average cost related to water scarcity in the United States. The percentages on our graphic indicate the contribution each impact makes to the product’s total environmental impact.

Our analysis indicates that the true cost of a 2 kg turkey (the centerpiece of the dinner table) should be about 23 percent higher than the retail price, 1 kg of potatoes should be about 17 percent higher and 1 kg of sweet corn approx. 24 percent higher. Potatoes are the most greenhouse gas-intensive product, and sweet corn the most water-intensive. Greenhouse gases are the most significant impact for potatoes and turkey, presenting 44 and 41 percent of the overall environmental cost respectively. For sweet corn, water accounts for the highest external cost, representing 49 percent over the overall impact. In contrast, water only contributes 23 percent to the environmental footprint of potatoes. In fact the potato has a productive water use as it yields more food per unit of water than any other major crop.

However, the data can vary according to production country, a fact reflected in the regionally adjusted prices for water scarcity. For example, if sweet corn was produced in a water-rich state such as Ohio (one of the main corn producing states in the U.S.), the price of water would be 95 percent lower than if corn was produced in a water scarce state such as California. Sourcing corn from California would result in a 46 percent increase in the price of 1 kg sweet corn.

We compared the optimization potential of all three food items by changing sourcing locations from the most to the least water-scarce U.S. states. Sweet corn provided the biggest optimization opportunity, with a 38 percent decrease of the total cost when water is sourced from the least water scarce region. By optimizing sourcing locations by water scarcity we also found the price for potatoes decreased by 16 percent and for turkey 7 percent.

These results are in line with Trucost’s previous blog “The true cost of food,” in which we looked at the breakfast food items of cereal, orange juice and cheese. Considering price optimizations based on the water scarcity of different sourcing locations showed that cereal had the highest optimization opportunity, with the total cost dropping by 30 percent. Hence, both analyses show that the highest optimization opportunities exist for agricultural products.

The drought in the U.S. earlier this year has increased the pressures on water resources. As a result, commodity prices increased. In the U.S. (the world’s largest producer of corn) prices for corn reached an all-time high in 2012. Higher corn prices also influence the prices of other food items that are linked to the crop, such as animal feed and other crops, such as wheat.

In addition to the analysis summarized in our graphic, Trucost wanted to gain a more complete picture of life cycle cost associated with the holiday dinner by incorporating the greenhouse gas emissions and costs associated with food preparation. By including domestic transport, home cooking and waste, the greenhouse gases (kg CO2e) for the turkey increased 42 percent.

The cooking phase of the turkey accounts for the second-highest emissions after production, contributing 21 percent of overall emissions. For potatoes, greenhouse gases (kg CO2e) almost tripled when taking into account retail, cooking and waste disposal. In fact, most of the emissions for plant proteins stem from the post-farm phase. For potatoes, about 90 percent of overall emissions come from the post-farm phases: processing, transport, retail, cooking and waste disposal — with most of the emissions coming from the energy used for cooking. This means frying rather than baking potatoes reduces the emissions associated with cooking (excluding emissions from the oil used for frying).

By including shopping and home preparation, we can see a 26 percent increase in sweet corn greenhouse gas emissions.

The familiar sight of holiday dinner leftovers provides another focus for reduction efforts. While some may be saved for another day, a good portion will probably end up in the waste bin. A 2012 study by the Natural Resources Defence Council states that Americans throw away 40 percent of their food every year, at a cost of $2,275 for an average family of four. Most of this food ends up in landfill, where it makes up the largest share of solid waste . Food disposed of via landfill becomes a significant source of methane, a greenhouse gas which has a global warming potential 21 times higher than that of carbon dioxide. Composting is a viable alternative to reduce methane emissions and help soil to hold or sequester carbon dioxide.  A study by CleanMetrics estimates that each year the food wasted represents 29 percent of annual production, costing the United States around $198 billion.

Essentially, wasting food ends up wasting resources such as water and energy. Hall et al. (2009) calculated that the 40 percent of food wasted since 2003 was responsible for wasting 25 percent of total freshwater use and 4 percent of petroleum oil consumption within this period. However, the responsibility for food wastage does not lie just with the end consumer. Businesses must also take ownership of wastage which occurs throughout their supply chains.

In developed countries, food wastage mainly occurs during the retail and consumer stages, while in developing countries high losses occur in the post-harvest and processing phase. This is intensified by spoilages in warm and humid climates, which can lack modern storage and transport infrastructure. 

Trucost’s analysis shows that the cost of a holiday dinner for 4 would increase by approximately 22 percent if environmental costs were correctly accounted for. More sustainable food production requires collaboration along the entire supply chain – from farming to waste disposal. It is vital that retailers take steps to mitigate environmental impacts, such as investigating alternative sourcing locations and educating consumers on more sustainable ways to prepare and dispose of food. Our calculations indicate that incorporating environmental costs into sourcing location selection can make a 14 percent cost difference to a business.

Food production relies on natural capital and resource depletion will present risks for any company. Undertaking natural capital valuation can help a company to better understand these risks and start embedding environmental considerations into their decision making. This information can be used to inform future planning and create more sustainable and robust value chains.

Trucost provides data, insight and tools to help businesses to integrate nature into everyday decision making; to optimise operations, supply chains and products in line with global resource availability and natural capital constraints. To find out more about how Trucost can help you contact us.

This blog has been produced exclusively for GreenBiz.

Past True Cost columns have relied on generic product data. This month, we provide a case study based on actual product data, following the work PUMA has done to identify the environmental price tag of its products.

PUMA wanted to understand whether its efforts to develop more sustainable clothing products had in fact been making a positive difference after all environmental impacts across the full product lifecycle had been taken into account.

The PUMA Product Environmental Profit and Loss (EP&L) analysis compares a pair of PUMA’s conventional Suede sneakers versus a pair of PUMA’s soon-to-be-launched biodegradable InCycle Basket sneakers.

The analysis takes account of the environmental impacts caused by greenhouse gas (GHG) emissions, waste and air pollution, as well as the use of natural resources such as water and land along the entire value chain, from the generation of raw materials and production processes to the consumer phase where the product is used, washed, dried, ironed and ultimately discarded.

(Click on the graphic below to view it in full size.)

The results of this analysis confirm that PUMA’s focus in creating a sustainable footwear alternative was not in vain. The environmental impacts of the conventional PUMA Suede sneaker amounted to €4.29 ($5.61) per pair, while those of the InCycle Basket sneaker were only €2.95 ($3.86) – around a third less environmental damage across the product lifecycle.

How was this achieved?

Previous EP&L analysis of PUMA’s operations and supply chain identified that its environmental impacts were mainly concentrated in the raw material production and processing tiers of PUMA’s supply chain. This provided important focus areas for environmental optimization.

Greenhouse gases. Substituting the conventional PUMA Suede leather uppers for a combination of organic cotton and linen led to significant GHG savings for the InCycle sneaker, as the GHGs associated with rearing cattle for leather production far exceed those related to cotton farming. Further GHG savings resulted from a switch to organic cotton which avoids the use of GHG-intensive synthetic fertilizers. And finally at the end-of-life, the InCycle Basket has the lowest GHG emissions because it is 100 percent compostable, whereas the traditional PUMA Suede is not currently recyclable and cannot be composted due to chemicals used in the production of the Suede. The PUMA Suede will ultimately end up in a landfill or incineration.

All tallied, GHG emissions from the production, consumer use and end-of-life of the PUMA InCycle sneaker cause around 35 percent less environmental costs from GHG emissions than the conventional PUMA Suede.

Water. The InCycle sneaker outperformed the PUMA Suede with 21 percent less water consumption. This can be linked directly to leather, which requires more water during the tanning and processing phase than cotton. The PUMA InCycle sneaker does, however, have a higher water cost during the raw material phase since organic cotton farming is more water intensive than cattle ranching.

Land use. Choosing which country products and services are sourced from has a direct impact on land use valuation, since this relates to the types of ecosystems that are affected. The analysis found that the InCycle sneaker has a 20 percent reduced environmental cost from land use because a far larger area of agricultural land is required for the production of leather, in particular related to cattle farming, than for the production of cotton.

Waste. When analyzing waste generation throughout the product life-cycle, the InCycle sneaker creates approximately one third of what the PUMA Suede generates. The main savings are at the raw-material production and processing stages, where cotton generates far less waste than leather. Additionally, due to the compostable nature of the PUMA InCycle, there aren’t any environmental costs associated with waste at end-of-life.

Air pollution. The PUMA InCycle sneaker has a 14 percent higher environmental cost related to air pollution than the PUMA Suede because the energy required to convert cotton into thread and weave it into fabric is higher than the energy necessary to process leather.

However, applying a financial value to these competing environmental costs quickly revealed that the negative air pollution impacts were easily offset by the much more significant savings in other areas.

Focusing on waste

To clear the waste that 100,000 pairs of conventional sneakers cause during the production process and the consumer life, 31 waste disposal trucks are needed. Now consider this against the billions of sneakers made each year – around 21 billion pairs in 2011 alone – and you will begin to see the tip of the iceberg of what needs to change.

Perhaps PUMA’s most significant product innovation was the compostable feature of the InCycle sneakers. In terms of the true cost of the waste disposal methods assessed, composting 100,000 pairs of PUMA’s more sustainable sneakers would lead to environmental cost savings of €3,555 ($4,647) over landfill and €3,185 ($4,164) over incineration.

To provide some additional context, about one billion items of clothing are sent to landfills each year. Imagine if those items were instead composted and turned into organic fertilizers and soils for the production of new clothing.

As consumers, are we aware of the environmental costs associated with different waste disposal routes?

If counting the “environmental calories” of various materials, production technologies and locations can help business to holistically reduce the environmental impacts of product production, could it also help consumers to make better informed purchasing decisions and improve product use and disposal behaviors? 

Trucost provides data, insight and tools to help businesses to integrate nature into everyday decision making; to optimise operations, supply chains and products in line with global resource availability and natural capital constraints. To find out more about how Trucost can help you contact us.

Republished from Newsweek; with thanks.

Apple, Nike, and Wal-Mart have at least two things in common: they are among the most well-known brands in the world, and they all outsource environmentally intensive manufacturing processes to other companies in order to produce the vast majority of the goods that we buy from them. Today, these companies are also increasingly investing in the management of the risks embedded in their supply chains.

For example, the Foxconn factory in Shenzhen, China, along with other suppliers, manufactures Apple's iPhone 5, which has sold millions of copies since its release this fall. The manufacturing of the iPhone produces pollution; who is responsible for that pollution? Is Foxconn responsible, since the emissions and waste derives from their plants? Or is Apple responsible, since it depends on the services of Foxconn? Without Foxconn or the other suppliers, Apple would not have the iPhone to sell. Some responsibility also sits with the financial institutions that benefit from the shares of Apple stock they own. As the old saying goes, you are what you eat, or in this case, what you profit from. 

In order for companies like Apple, Nike or Wal-Mart to manage the environmental impacts embedded within their supply chains, they need to be able to measure them. Standards for measuring and reporting supply-chain environmental performance are still new. One of the most widely used, the Greenhouse Gas Protocol's Corporate Value Chain Accounting and Reporting Standard, was only published in September 2011, and took more than 2300 experts from 55 countries more than two years to develop with the World Resource Institute and World Business Council for Sustainable Development.

The use of these standards to focus and report on the environmental performance of supply chains is happening in a small but growing number of companies. Last year, 54 companies were involved in Carbon Disclosure Project (CDP)'s supply-chain initiative accounting for supply chain environmental impacts. In this year's Newsweek Green Rankings, 168 of the 838 companies-20 percent-disclosed some supply-chain emissions data. The most commonly reported, by 129 companies, were emissions for employee travel on airlines. But only 36 companies (4 percent) disclosed information on outsourced services they purchase from other companies, and just 6 companies (1 percent) disclosed the environmental impacts associated with their investments; only one of these was a financial institution (Citigroup, which disclosed the emissions associated with a thermal power plant project that it financed).

While the current number is small, it is comparable to the exponential growth in the reporting of direct greenhouse gas emissions data back in the early 2000s, when the GHG protocol for these emissions was first launched. In 2003, there were fewer than 300 companies reporting some of their direct greenhouse gas emissions; today more than 3700 companies report this information.

The list below highlights the 28 companies listed in the Green Rankings that have disclosed information on their supply-chain impacts in 2012. These are the companies that are leaders in supply-chain emission disclosure. The companies span a number of sectors and levels of performance in the Green Rankings, but all are leading the way in taking responsibility for their outsourced environmental impacts.

Leaders in Supply Chain Emission Disclosure by Sector

As highlighted above, an increasing number of companies is measuring some of the environmental impacts of their supply chains. Companies ignore the magnitude of these environmental impacts-and the environmental (and financial) risks and opportunities that they represent-at their own peril. A Trucost study for the United Nations Principles for Responsible Investment (UN PRI) found that of the $2.15 trillion of environmental damage caused by the world's largest 3000 companies annually, 49 percent comes from impacts hidden within supply chains. Integrating this information into the management of business can help companies mitigate risk, reduce costs, and reduce their impact.  

Water is a case in point. Water lies at the heart of our global economy. The majority of raw materials that businesses depend on require water in one way or another. However, a gap already exists between supply and demand. If we do nothing to correct this imbalance, by 2030 demand will exceed supply by 40 percent.

We are already experiencing the effects of water scarcity-just this year, the United States experienced the worst drought in 50 years, sending commodity prices skyrocketing. Part of the problem is that water is not correctly valued. Inaccurate pricing of water as a valuable resource leads to perverse market incentives. Demand for water is often at its highest in places where water availability is low. For example, the "Dry 11" of the 31 regions of mainland China provinces create 52 percent of China's industrial output and 40 percent of its agricultural products. As the name suggests, these are the driest provinces, with water resources comparable to those of the Middle East.

Trucost found that if water subsidies were to be removed and water was priced according to its availability, more than a quarter of profits of the world's largest companies would be wiped out.

Another example of the significance of these hidden environmental impacts in companies' supply chains can be seen in financial-service companies. These companies have a relatively light environmental footprint within their operations, consisting primarily of electricity consumption, water use, and waste disposal from their offices, but the environmental risks associated with their investments are much greater. For example, as of June 30, 2012, T. Rowe Price owned about $400 million, or about 6 percent, of the utility FirstEnergy. The emissions associated with this one investment, making up less than 0.1 percent of T. Rowe Price's total investments, accounts for over 900,000 of FirstEnergy's 15 million metric tons of greenhouse gas emissions. This is almost 24 times greater than the greenhouse gas emissions from T. Rowe Price's offices and electricity use.

Some companies, such as Puma, are actively collecting supply-chain environmental performance information for use in their business decision-making. Puma, part of the PPR Group, conducted a detailed analysis of the environmental impacts of its operations and supply chain as a part of its Environmental Profit & Loss initiative. The results showed that only 6 percent of the company's environmental impacts come from Puma's offices, warehouses, stores and logistics. The rest come from its supply chain more than half (57 percent) from the production of raw materials, including leather, cotton and rubber, for the shoes and apparel they sell. The findings of this assessment can be used by Puma to review where it sources raw materials from, and what materials to source at all. Having this information available can change company strategy.

While few companies measure these impacts, and fewer still have been as proactive as Puma, there is an increased understanding that there is a business case-and an environmental imperative-for coming to grips with the environmental risks and opportunities of supply chains.

PUMA announced the launch of the first Product EP&L just last week. The Product EP&L is a breakthrough in environmental measurement that defines the true cost of a product. More on the PUMA Product EP&L is available here.

Why is this an important innovation?  Traditional approaches to the measurement of environmental impacts provide a variety of metrics. For land use it is hectares, for carbon and other pollutants it is tonnes and for water it is cubic meters. This makes comparing the relative contribution of environmental impacts to the overall impact of a company or a product challenging. Valuing environmental parameters in financial terms solves this problem by providing an overarching common metric for the assessment of environmental impact or benefit.

It provides a range of benefits to businesses:

A metric that business managers routinely use and understand

Most companies have yet to truly integrate sustainability within their business models. This is a worrying situation given that our demand for water already exceeds supply and we expect a shortfall of around 40% by 2030. Representing environmental impacts in financial terms enables business managers to factor nature's cost in their everyday decision-making alongside traditional business metrics, which are already commonly represented in financial terms.

An input to product design

If one product strategy has a high water dependency and another produces more carbon emissions, how do you decide which is the most environmental friendly? Introducing environmental impact valuation at each stage of the product development process, from raw material production all the way to disposal at the end of the product's life, enables environmental impacts to be compared and optimised at every stage.

A tool for supplier selection

Supplier selection can contribute significantly to the overall environmental footprint. For example, Trucost finds that the cost to nature of breakfast cereal production varies by up to 54% across the world's top 5 production locations based on local water availability. Valuing supply chain environmental impacts facilitates comparison and optimisation of supplier locations as well as supplier technologies and processes.

A proxy for nature's invoice

Nature's bottom line is already being felt through rising commodity prices linked to environmental shocks such as droughts and floods; only this year the United States experienced the worst drought in 50 years which sent commodity prices skyrocketing. The problem is, nature is often under-valued or free and therefore not factored into business decisions. This is a problem business leaders need to address with some urgency if they expect their business to compete successfully in the future. By understanding the value of the services nature provides businesses can mitigate the effects of natural capital shocks.

Understanding how regulatory frameworks will develop

We also expect more governments to introduce ‘polluter pays' environmental regulations and correct pricing anomalies in water scarce areas. Applying valuations to environmental impacts identifies this business risk and provides focus areas for mitigation strategies. 

Raising consumer awareness

In a world of increasing consumer demand we will need to find ways of using our resources and preserving our ecosystems more wisely. Ultimately natural capital constraints will create winners and losers - those companies that act now to optimise their products, operations and supply chains in line with natural resource availability and environmental costs will create competitive advantage from reduced input costs and enhanced security of supply. In addition, companies that find ways of communicating this effectively will be able to harness the ethically aware consumers of the future.

In summary, environmental valuation is a tool to help consumers and businesses understand the value of the natural capital we all rely on. We welcome PUMA's announcement. Ultimately this is an opportunity for businesses to take the lead in reducing our global environmental impact and guide us to a more sustainable future.

This blog has been produced exclusively for GreenBiz. 

Personal computers are ubiquitous in our everyday life. We all rely on them and, in fact, it would have been impossible for me to write this without one. It is one of the great success stories of our time.

Most people are aware of Moore's Law - that computing power doubles roughly every 18 months. What most people don't know is that the electrical efficiency - the number of computations that can be completed per kilowatt-hour of electricity used - also doubles every 18 months. This is great news in a world where carbon emissions need to be reduced and energy costs are rising.

However, while electrical efficiency and computing power seem to be rising at a constant rate, the growth in the sales of PCs is accelerating.

The number of computer units shipped has increased from 135 million in 2000 to 355 million in 2011. This is predicted to rise to over 700 million by 2016 (including tablets) - fantastic growth rate by any measure. In the last decade sales doubled. In the next five years they are predicted to double again. Is this growth rate sustainable?

Trucost calculated the financial costs for the environmental impacts of a desktop and a laptop. It is worth noting that we used industry average data and that, of course, there is significant variation among products. We analyzed the stages of the product lifecycle - from raw material processing and manufacturing through to transportation, use by the customer and endisposal or recycling. The carbon emissions, water, and waste flows were calculated for generic products in each category. Note that for the use phase we did not include the emissions arising from the Internet (data centers), only the electricity consumed by each device. Trucost then calculated the "natural capital" cost of each of these environmental impacts. For carbon we used the social cost. For water, a local issue, we correlated the volume of water required to produce the raw materials with local scarcity by gathering data on the location of production and pricing water accordingly.

Our analysis indicates that, on average, if nature charged for its services, the "true cost" of a desktop computer would be around 6 percent higher than the retail price, while the laptop would be 14 percent more expensive.

Carbon emissions create most of the cost but there are significant differences between the desktop and the laptop. The largest proportion of the desktop's impact comes from its electricity consumption. Laptops consume significantly less energy during the use phase, which is the reason why they perform better overall, though they are marginally more water intensive than desktops.

To demonstrate the optimization opportunity for a laptop computer, we analyzed the true cost of aluminum extraction, a key raw material in laptop production, across the major production locations. We found a very significant 60 percent variation. China had the highest impact due to its coal dependency. Canada had the lowest impact due to the fact that its industry sector uses natural gas for 46 percent of its energy production.

So, is the growth in sales of PCs sustainable?

The answer depends in part on how growth of PC unit sales is balanced against gains in energy-efficient technology, and on a switch from coal to less carbon-intensive forms of electricity generation. Emerging-market PC sales are growing at faster rates than developed markets, so a lot will depend on how countries such as China generate electricity.

But this is not the only dynamic at play. Sales of desktops are declining and are forecast to be 22 percent of the total by 2016. Shipments of laptops will grow to just over 50 percent, with tablets accounting for the remainder. Unlike desktops, most of the impact of a laptop (and tablet) lies in the raw material and manufacturing phase. As our analysis of aluminum extraction demonstrates, it will be critical for PC manufacturers to focus on optimization opportunities in the supply chain in addition to improving the energy efficiency of the product. Companies are now using natural capital valuation tools to examine how they can create efficiencies across the value chain that balance a number of different environmental impacts.

Louis Gerstner, the former CEO of IBM, once said, "Computers are magnificent tools for the realization of our dreams, but no machine can replace the human spark of spirit, compassion, love, and understanding." If we are to grow sustainably, we need to optimize value chains in order to preserve the natural capital we all rely on. This will require businesses to work collaboratively to redefine how and where products are made and used. Perhaps we need more of that human spark!

Trucost provides data, insight and tools to help businesses to integrate nature into everyday decision making; to optimise operations, supply chains and products in line with global resource availability and natural capital constraints. To find out more about how Trucost can help you contact us.