Valuing your impact on society – more than just this season’s must have
08 March 2017
I’m probably further away from being a fashionista than I would like to admit. And working with Kering (the global Group behind luxury brands such as Gucci, Alexander McQueen and Stella McCartney) on its Environmental Profit & Loss account (EP&L) for the last five years has not influenced my sense of fashion as much I would have hoped!
But what it has taught me is that exploring the ways a business impacts on society provides a new lens for creating value. For example, through understanding the link between overgrazing of goats (with their ‘stiletto heal’ hooves) in Mongolia and the price and quality of cashmere, Kering are working with herders to not only reduce the impacts but secure future supplies.
Traditional metrics such as profit, revenue and return on capital are an important means to track commercial progress, but I strongly believe these provide too narrow a lens and leave business without the necessary tools to fully understand the risks and opportunities posed by its relationship with society. A more holistic perspective makes sure the entire landscape of business activity, interactions and impact is in full view – very helpful when you’re trying to make strategic decisions.
Many CEOs appreciate this approach – our recent PwC Annual CEO Global Survey found 76% of CEOs say business success is about more than just financial profit. But saying it and measuring it are two different things. In an interview with Michael Beutler, Sustainability Operations Director from Kering, discussing financial performance, he says “traditional measures seem primitive in comparison to natural capital and impact measurement”. The idea that looking at financials alone is the first step along an evolutionary path when it comes to performance really interests me. The accounting tradition, underpinned by double entry bookkeeping, hasn’t changed much in two hundred years – but business has. We’re now talking about the 4th Industrial revolution with digital technology driving innovation at rapid pace and new business models responding to changing consumer behaviours.
Working with Kering, we’re bringing our knowledge on environmental impact measurement and valuation to the fashion industry. And in many ways we’re crossing uncharted territory.
Few companies recognise the value of measuring and valuing how their business - and the wider value chain - impacts society and the environment. Yet it’s a driver for risk reduction in the business, identifying impact hotspots to be reviewed and ultimately removed. Kering initially naturally assumed that managing their direct impact was key to reducing their overall impact, but as it turned out, 75% of its environmental impact was from the transformation of raw materials into its products. The implications of this are significant as the value was not in their own control but deep in the supply chain.
Kering realised that the transformation of products from cotton plant to fabric, goat to cashmere, mining to precious stones, was just as much part of their business as their own operations. The stories behind creating the materials and accessories for the cat-walk were suddenly under the spotlight and open to critique just as much as their designs. Manufacturing processes, resource scarcity, carbon emissions, land usage, and water usage were all front and centre as well. Kering is using this new knowledge to integrate sustainability into design, empower their buyers to make sourcing decisions based on environmental impact too, and drive negative impacts out of the manufacturing process through innovation.
It’s not just a ‘nice-to-do’. According to Marie-Claire Daveu, Chief Sustainability Officer at Kering, “rethinking luxury is a necessity to adapt to our changing world while responding to the concerns of new generations of luxury clients.” Risks are changing and business needs to flex to respond. The World Economic Forum runs an annual global risk survey and ten years ago, no environmental risks featured in the top five either by impact or likelihood. Now, five of the ten top spots are occupied by environmental issues including extreme weather events, major natural disasters and failure of climate change mitigation and adaptation. It’s a big shift in focus from economic to environmental risks by business leaders and one that has made it from the catwalk to the boardroom.
I believe understanding impact is a new way for business to measure their success. Traditional financial metrics only go so far, but to quantify, value and manage environmental impacts provides a more holistic view beyond the simplicity of profit and loss. Building in an organisation’s social impact completes the picture and truly puts the business in its wider context, its relationship with the environment and society.
For more on our impact work with the fashion sector, view our Kering case study.