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Discussion Panel—Assessment of Externalities: Monetisation and Social LCA

Abstract

This paper aims to explore the topic of monetisation of environmental and social aspects. The content is issued from a discussion panel held in Luxembourg during the LCM2017 conference. It first explores historical and methodological aspects. The recommendations are made for companies who intend to monetise their impacts. Three industrial companies presented their contribution on their day to day use of monetisation. The key conclusions are twofold. In one hand, many challenges remain. The implementation is still not always feasible for all issues and an iterative approach is highly recommended. New methods on social LCA show a growing interest on this topic from various parties. ISO standards work is progressing and will support companies and government in their use of monetisation. From the company point of view, monetisation is a bridge between environmental and social assessment, and economic evaluation, while it provides a common unified unit (money). By using a common unit for financial and non-financial aspects, monetization allows the direct comparison of different aspects and therewith a more informed materiality assessment. By looking at impacts, a new perspective on current and future business risks and opportunities is provided. A better understanding of interdependencies enables more informed decision making. The monetary language is a door opener to access new stakeholder groups such as finance and accounting to raise awareness for sustainability.

Keywords

  • Monetary Language
  • Social Assessment
  • Common Unit
  • Society's Point
  • Life Cycle Sustainability Assessment (LCSA)

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

1 Introduction

Social and environmental impacts occur along the product life cycle and are measured by different indicators. To assess the sustainability performance of a product life cycle, a social, economic and environmental impact assessment is needed.

Despite the absence of scientific agreement on a set of indicators to be considered in the framework of Life Cycle Sustainability Assessment (LCSA), several implementations have been already realised at companies and product levels.

However, the results of a sustainability assessment are often expressed through out several indicators, making their interpretation and the identification of the relative trade-offs challenging. A possibility to facilitate the interpretation is monetizing all impacts indicators. However, monetisation induced a set of methodological issues and choices that are debatable and that must be known before implementation. The aim of the session was to clarify the state of the art of related methodological approaches, towards a guidance for businesses and governments in order to correctly use monetisation in portfolio assessment and decision making.

Based on the outcomes of the session held at LCM 2017 conference, this paper first presents the most important elements from the methodological state of the art, and then some general guidance as well as concrete feedback from industries.

2 State of the Art of the Methodology

Monetisation is nowadays growing from research to standardisation. Monetary valuation has been used in policy making for decades mostly in cost-benefit analyses, since the early 30s in the United States. More recently in the European Union where this approach is observed since the 90s, in directives such as the National Emission Ceilings Directive (NEC directive (2001/81/EC), EU research projects such as the National Energy Education Development project (NEED (2007)), and many others. By the way, an umbrella of different concepts stays under the monetization term such as: market price, abatement costs, societal costs & benefits etc.

Mr. Philipp Preiss clarify the definition as follow, based on ExternE (2005) [1, 2] researches:

  • Externalities arise, when the social or economic activities of a participant have negative or positive impacts on another participant and these impacts are not fully accounted for or compensated by the first participant.

  • External costs are externalities that are transformed into monetary values. They are the share of damage costs which is not internalised.

Monetisation is promoted for several reasons. In the first hand, with monetisation of externalities the monetary values are shown explicitly. However, without monetisation the impacts are implicitly monetised by the difference of the internal costs of corresponding alternatives (i.e. a decision between alternative technologies or policies). Or in other words, if impacts are not monetised the external costs are taken into account as if they were zero.

On the other hand, monetisation offers an additional indicator but must not be the only basis for decision-making. At member state level, environmental agencies are involved, such as the German Federal Environmental Agency (UBA): [3] or the French ministry of environment (MEEM) who held a specific workshop on monetisation of goods and environmental services through life cycle assessment in 2017.

Currently two ISO documents (ISO 14007 and ISO 14008) are under construction in order to provide guidance and allow a wider use of monetisation.

Mr. Preiss points out some limits regarding the comparability of results of various studies. Studies are different regarding their comprehensiveness. There is a lack of transparency if the underlying assumptions and models are not displayed. And generally, there is the lack of a widespread state of the art approach.

Mr. Chanoine (Deloitte) proposed a practical guidance issued from a study carried out with the industrial consortium SCORELCA in 2012 [4] and followed by a second study also driven by SCORELCA in 2016 of which the results are not published yet. It is based on operational recommendations on how to use monetary valuation to monetize LCA results. The proposal is an iterative approach with a go/no go process in two steps. First, a set of questions allows to determine the necessity to carry out monetisation, and how it should be done. Then nine information sheets provide explicit implementation guidance.

As a first conclusion, monetary valuation in LCA should be used when identified as necessary, depending on the objectives of the study. It has been presented as an approach to solve trade-offs. As a counterpart monetisation remains an approach potentially complex to implement due to the set of parameters to be considered in correlation to set monetary values, moreover considering the potential subjectivity of those parameters. Also, it remains especially complex when it is required to develop specific monetarisation factors, which may request time, funding, some specific competences investments and political decisions.

3 Feedback from the Industry on the Application of Monetisation

This section provides feedback from three chemical companies.

Mr. Sonnen (Ecomatters), in collaboration with AkzoNobel, provided insights on how a company can monitor its global activity (downstream, upstream and themselves) on economic [5], environmental costs [6, 7] and social capitals [5]. It allows the company to identify business risks, opportunities, stimulate innovation and cooperation with value chain partners. This also permits to reduce the negative and strengthen existing positive externalities.

Since 2013, BASF calculates it ‘real’ contribution to a sustainable future. With the Value-to-Society approach, BASF assesses its positive and negative economic, social and environmental impacts on society along the value chain in €. The results are used in positioning and communication as well as progress monitoring. Application in decision making and goal setting is piloted. However, due to data accuracy, maturity level of methods as well as conceptual challenges, for a systematic embedment further research and standardization is required. These are under construction. Mr. van Gelder stated for BASF “With Value-to-Society we have a new macro perspective on benefits and costs of our economic, environmental and social impacts along the value chain”.

Mr. Wathelet (SOLVAY) introduced the Sustainable Portfolio Management (SPM) map [7, 8]. There, the products are presented on a map according to two criteria: Operations Vulnerability (monetized environmental impact of production/sales price) and Market Alignment (analyse of a product in an application through the lens of sustainability—benefits or roadblocks). This allows to categorized the products under three categories: Solutions (outstanding sustainability contribution for the society), neutral, and challenges (Strong negative signals in sustainability, to be improved or abandoned).

Those three companies are using monetarisation of LCA results to express the environmental impacts in terms of costs. Methods to evaluate social benefits remain very diverse. They all three agree that monetarisation of social and environmental aspects is very intuitive, allowing to gather positive and negative aspects of a system on a unique scheme, and can be useful to engage with top management. They also acknowledge the needs for further research.

4 Discussion and Conclusion

External cost calculation constitutes a bridge between economic decisions and environmental and social assessment while it can provide both types of results in a common unit, and is relevant to support three levels of decision: technical solution, product portfolio and the company strategy.

It can also be a support to engage with top management, allowing to align with materiality assessment and stakeholder’s expectations.

Nevertheless, many challenges remain to improve the applicability of monetisation methodologies, and company acceptance. To be implemented, it is required to collect raw information from the supply chain and consumers. This starts with the life cycle inventory collection from the direct supplier to the very first one. Then the definition of monetization factor for each impact is necessary and crucial, for this last task a customer´ survey can held in order to define the wiliness to pay. In alternative, monetization factors presented in literature can be used for the first implementations.

The panel recommendations were to adapt the effort according to the pursued goal of the study. An iterative approach is highly recommended in order to first conduct a streamlined assessment, and then implement more complex methods when necessary.

The company acceptance relies on the communication of monetized results since monetization could be used at various level in companies, the targeted audience is diverse and the media shall be adapted in consequence. An exhaustive state of the art on methodological issues related to monetary valuation and on the way to interpret the monetised indicators would be valuable to the practitioners.

One remaining challenge also stands on the capability to introduce these cost and social information in decision making and performance monitoring. This raises here a new question grounded in the financial accounting. How to integrate costs and revenues which are not paid or perceived directly? Shall external cost performance be a key indicator and for whom? How to transfer the benefits and positive impact to the contributors?

As a final conclusion, despite these raising questions the panel underlined the remaining researches to be carried on, and agreed that environmental and social cost assessment, already today, have a major ability to reinforce decision making.

References

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Acknowledgements

We would like to thank the panel for their contribution: Mr. Chanoine (Deloitte), Mr. Sonnen (Ecomatters), Mr. Van Gelder (BASF) and Mr. Wathelet (SOLVAY).

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Correspondence to Stéphane Morel or Marzia Traverso .

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Morel, S., Traverso, M., Preiss, P. (2018). Discussion Panel—Assessment of Externalities: Monetisation and Social LCA. In: Benetto, E., Gericke, K., Guiton, M. (eds) Designing Sustainable Technologies, Products and Policies. Springer, Cham. https://doi.org/10.1007/978-3-319-66981-6_43

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