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Natural Capital Accounting - E P&L

Natural Capital Accounting helps business, governments, NGO's make better decisions for sustainable development.

What is an E P&L

An Environmental Profit and Loss Account (E P&L) is an effort to account, in financial terms, for the Ecosystem Services upon which a company and its entire value chain rely.

It can certainly be discussed whether or not money is the best unit with which to measure environmental impacts, since it is difficult to place universal monetary values on fundamental services such as fresh water, clean air, biodiversity and land. Nevertheless, a monetary value allows for direct comparison between the E P&L and the regular Profit and Loss Account, which shows company´s net earnings. In the E P&L, the “Profit” refers to any company activity that benefits the environment, whereas the “Loss” refers to activities that adversely impact the environment.

Almost all companies will have a deficit in the E P&L, reflecting the net cost to the environment. In the current system, the losses are not costs that a company will have to pay, and are therefore called ‘external costs’. Adding the external costs to the current financial costs gives reflects the true cost of conducting business, and incentivises companies to reduce environmental impacts (the “loss” in an E P&L). Some costs are already internalised, such as fees to local governments for water treatment and waste disposal.

Over time, it is expected that more of the external costs will be internalised through taxes and fees, and thus the E P&L is a tool for risk management.

How is an E P&L applied

An E P&L aims to place a monetary value on the environmental impacts of an organisation and its value chain. This quantity aims to reflect the value of nature’s services that the organisation depends on, such as provision of natural resources, absorption of gases, filtration and cleaning of air and water etc. In this respect, an E P&L can be applied to an organisation in the following ways:

  • Awareness and Transparency Tool: An E P&L enables an organisation to understand the reliance on nature’s services and which services are integral to the delivery of goods and services. The monetary value of an E P&L allows for a comparison of the importance of nature’s services to other Key Performance Indicators, such as economic revenue and profit. In that way, an E P&L approach aligns with a triple bottom line approach.
  • Identification of Environmental Hot Spots: An E P&L allows for prioritisation of Environmental Key Performance Indicators e.g. global warming, water footprint, land use etc. Additionally, hot spots can be identified throughout the supply chain and within application areas (functions, product series, business areas etc.).
  • Risk Management: Measuring and quantifying reliance on nature’s services allow an organisation to manage and reduce risks. For important Environmental Key Performance Indicators the organisation can act to reduce impacts and mitigate the legal, resource and market related risks connected to them.
  • Sustainable Supply Chain Management: Understanding the distribution of Environmental Key Performance Indicators throughout the supply chain allows an organisation to engage with the most material suppliers and work with those suppliers to encourage impact reduction and resource efficiency, which can be achieved through collaboration. se links til højre for at se hvordan analyserne tager sig ud i praksis

 

Reports from the Danish EPA on E P&L

The Danish EPA has supported the development on several E P&L reports in cooperation with members of industry. Find the reports on the right side of this page. The reports are in available in English.