Putting a price on the environment

24th November 2014


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  • Water ,
  • Ecosystems ,
  • Biodiversity ,
  • Natural resources

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Roderick McLay

Yorkshire Water's environmental profit and loss account is an industry first. Paul Suff reports

Yorkshire Water has joined the handful of businesses valuing natural capital as a way of embedding sustainability into its core business strategy. Its environmental profit and loss (EP&L) account, which was finalised in July, highlights the risks and opportunities that will drive its long-term business success. Yorkshire Water is the first UK water business to develop an EP&L. The idea is that, by putting a monetary value on positive and negative environmental impacts, the company is better able to manage the challenges posed by climate change, resource scarcity and population growth.

Managing water for the benefit of its customers and the environment requires careful, long-term planning, and Yorkshire Water’s sustainability vision is about “taking responsibility for the water environment for good”. That vision, says the company, which is part of the Kelda Group, is about doing what is right for its customers, employees and partners, the environment and its investors.

“This holistic and integrated approach is critical to the sustainability of our water and wastewater services and our business,” the company says in its 2014 annual report.

Delivering the vision rests on achieving six strategic business objectives (SBOs) over the next 25 years:

  • safe water – ensuring water is safe and that its operations do not harm customers or communities;
  • trusted company – providing products and services that are trusted by all stakeholders;
  • excellent catchments, rivers and coasts – improving the water environment from source to sea;
  • water-efficient regions – supplying enough water to meet current demand and in the future;
  • sustainable resources – ensuring the company uses, manages and disposes of materials efficiently; and
  • strong financial foundations – providing services at a price that customers can afford and generates profits.

“These SBOs are our commitment to sustainability; they encompass all our material issues as a business and shape everything we do,” states the company.

It was the work Yorkshire Water did internally and with partners on developing the sustainability vision and SBOs that triggered its decision to produce an EP&L account.

The direction of travel

“We came up with our vision, but then had to ask ourselves what it actually means in practice, and how we would deal with change, such as a growing population in Yorkshire,” says Simon Barnes, programme director at Yorkshire Water. “How do we quantify SBOs like sustainable resources and water- efficient regions?”

David Symons, director at WSP, which has been working with Yorkshire Water to develop its sustainability vision and strategy, says that two questions posed by Barnes were the catalyst for developing the EP&L. Barnes had asked: “How will we know we’re making progress on delivering the vision? And how will we know when we’ve got there?” Symons says they are questions that sustainability rarely answers. “The EP&L provides a composite number to help Yorkshire Water’s sustainability team understand how it could deliver the strategy.”

Yorkshire Water has set five-year plans for each SBO. Symons says the aim of the EP&L is to guide the direction of travel so that the company is a more sustainable business overall at the end of the plan than it was at the start. “It’s no good reporting at the end of the five years that direct carbon emissions are down 5% if the much bigger impacts lie elsewhere. You’re either asking the wrong questions or kidding yourself that you are making progress,” says Symons.

“It’s about the direction of travel rather than getting the precise figures,” agrees Barnes. “I don’t doubt that there are holes in our EP&L data,” he concedes. “But it’s a start.” He quotes Walt Disney – “the way to get started is to quit talking and begin doing” – to explain his approach, which he says is more to do with acting as a change agent than an environmentalist.

Delivering on the SBOs over a 25-year timeframe means that Yorkshire Water has had to develop a clear picture of how the environmental and business landscape might change. Its 25-year business plan, Our blueprint for Yorkshire, which was published in December 2013, outlines some of the expected changes. These include providing services to an additional one million people by 2037 as the region’s population grows; and respondng to a projected rise in Yorkshire’s average surface temperature of up to 3.6°C by the middle of the century, as well as more regular droughts and flooding, and unpredictable rainfall patterns. This is against the backdrop of a consistently changing regulatory environment for the water industry.

The first step in developing the EP&L, therefore, was to determine what the future may look like for the water company, and to consider the metrics to apply and the methodology to employ.

EP&L and footprinting

Yorkshire Water worked with WSP to identify the most suitable methodology, eventually deciding to adopt two approaches, EP&L and ecological footprinting.

“EP&L puts a monetary value on environmental impacts and, because you’re using a familiar language, it can be used in discussions with board members, finance people and the investors,” explains Barnes.

“Ecological footprinting data by contrast is much more accessible for staff and customers. The EP&L doesn’t mean much to most of the workforce, but they get it when you say that to maintain our current levels of resource use we’d need three and a half planets.”

Yorkshire Water engaged experts at Trucost, including account director Annabelle Bennett and chief executive Richard Mattison, to help with its EP&L; and Mathis Wackernagel, president at San Francisco-based Global Footprint Network (GFN), to assist with measuring its ecological footprint. WSP managed the project, assisting the two technical teams – from Trucost and GFN – to ensure that the EP&L and footprint were comparable in terms of boundaries and data.

“We’d been working with Yorkshire Water for two years on its sustainability strategy, so we had a good understanding of the business and the ‘big’ issues confronting it,” says Symons. He explains that WSP assisted in ensuring the best valuation techniques were applied.

Symons says that, although ecological footprinting is a developed methodology, the EP&L approach is less well established. “There are some notable pioneers, such as Puma [Kering group], but environmental economics is still in its infancy. It is fairly simple to ask the question: if nature charged the full cost for its services, what would it be? Finding the answer is more difficult.

“There are four or five ways of valuing the water abstracted from a river, for instance,” he says. “They all have merit, but they will provide very different numbers. We were on hand to offer guidance and to challenge some of the outcomes.”

Barnes says measuring Yorkshire Water’s operational and supply chain impacts, such as greenhouse-gas emissions, waste disposal and pollution impacts, was reasonably straightforward. The company already had in place robust data on fuel consumption, sludge effluent, water discharge and land use. Trucost, meanwhile, used a combination of additional primary data and its own modelling to provide data on the impacts from Yorkshire Water’s supply chain.

Analysts at Trucost then applied monetary values to the traditional sustainability metrics from its own library of regional environmental impact valuations, which it maintains from a stock of peer-reviewed academic research to calculate effects at a local level. Trucost can, for example, calculate the local cost of air pollution on human health, crop and forest yields. Its figures for water use focus on local water availability, among other things, while its valuation of land use takes account of the local environmental services that are lost when that land is converted to business use.

Symons says that one of the main challenges in developing the EP&L was ascribing a value to water. “That is fundamental to a water company and would be a colossal line in any water firm’s EP&L, but it is not easy to arrive at a figure.” He explains that it is hard, for example, to assign an economic value for biochemical oxygen demand, which is the amount of oxygen consumed by organisms in breaking down the waste in a water body, or for the presence of endocrine disruptors. “There are simply no appropriate economic metrics,” says Symons.

“But just because some of the figures are lacking, that shouldn’t stop you doing an EP&L,” he continues. “You just have to accept that there are limitations.” However, he believes that economic science will catch up and develop robust values.

Making a difference

Symons says the key to an EP&L is what you do with the numbers. He advises companies to use it as a “signposting” tool to identify their biggest risks and opportunities. Barnes is keen to convey how Yorkshire Water is using the EP&L as a useful business tool rather than as an academic exercise of no real practical use. “I carry it around on my iPad and use it to engage suppliers. I use the EP&L with the senior management groups to highlight the opportunities and risks that drive our long-term business strategy.”

He illustrates its usefulness by describing how the EP&L has been used to support investment in bio-energy plants, which process sludge into biogas to generate heat and electricity. An innovative approach used by Yorkshire Water involves thermal hydrolysis to treat and dispose of sludge. “We have been working on this for five years and believe our method will deliver three times the energy generated by existing energy-from-sludge plants,” says Barnes.

“We applied the risk-based approach used in the EP&L to build the business case for developing the thermal hydrolysis technology. Rather than invest piecemeal in small-scale research and development, we used the EP&L to show why we should invest in this one innovative scheme. It revealed that, for the same capital investment for a plant to simply process the sludge, we could build an energy plant, reducing both operating costs and greenhouse-gas emissions.”

Barnes believes that some of the investment decisions made by water companies since the industry’s privatisation might have been different had an EP&L been available. “Would the same energy-consumption-heavy wastewater treatment facilities built in the mid-1990s have been constructed if companies knew they would have to drive down greenhouse-gas emissions?” he asks.

Going forward, Barnes sees the EP&L being crucial in informing business decisions. “The office for national statistics forecasts a 20% increase in the population of Yorkshire over the next 25 years. Does that mean we have to increase our assets by a similar amount to provide water services for them? And, if we do, what does that mean for our emissions?

“Population growth also has to be considered against our SBO to develop a water-efficient region, for example. So, would it better if we worked with businesses and residential customers to drive down water use so we can provide services without increasing our assets? The EP&L enables us to have these debates and to drive innovation,” says Barnes.

Puma’s environmental profit and loss

Sports goods business Puma, part of the Kering group (formerly Pinault-Printemps-Redoute or PPR), published its first environmental profit and loss account in November 2011. The figure assigned for its environmental impacts in key areas, such as greenhouse-gas (GHG) emissions, water and land use, air pollution and waste, generated through its operations and supply chain in 2010 was €145 million. The economic value of its GHG emissions and water consumption was put at €94 million, and the value ascribed to land use change for the production of raw materials, air pollution and waste along its value chain was calculated at €51 million. Only €8 million of the overall total was from Puma’s core operations, such as offices, warehouses, stores and logistics.

Jochen Zeitz, now director and chair of the Kering board’s sustainable development committee and previously chief sustainability officer at PPR, said at the time: “The Puma EP&L has been indispensable for us to realise the immense value of nature’s services that are currently being taken for granted, but without which companies could not sustain themselves. We view it as an essential tool to help drive PPR’s sustainability development across its group of brands because analysing a company’s environmental impact through an EP&L and understanding where environmental measures are necessary will not only help conserve the benefits of ecosystem services but also ensure the longevity of our businesses.”


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