Impact Measurement and Valuation

We aim to create sustainable value with everything we do – together with our employees, partners and stakeholders. We take responsibility for the safety and health of our employees, customers and consumers, the protection of the environment and the quality of life in the communities, in which we operate. We have therefore adopted a holistic approach, and are assessing the impacts of our operations, products and services along the entire value chain to inform our business decisions and communicate with our stakeholders.

At Henkel, we see sustainability as a constant endeavor to make progress on present topics and keep learning about new issues, based on scientific knowledge. Global climate change is one of the greatest challenges humanity is facing today, requiring urgent and ambitious action. It is also critical to protect and regenerate our resources and life-support systems like forests, water and biodiversity, for present and future generations. We aim to understand our positive and negative impacts in this context and quantify our externalities wherever appropriate and robust data and methodologies are available.

We have identified the impacts and externalities relevant for our business as part of our materiality analysis. In the following in total nine topic areas, we want to drive sustainable development around the world and along the value chain with our business activities. Climate, Circular economy, Natural resources, Equity, Education, Wellbeing, Performance, Transparency and Collaboration.

We use a variety of methods and tools to assess our progress across the entire company and our value chain. We are continuously developing these methods and tools, which include trend and market analyses, as well as the evaluation of ratings and life-cycle analyses. In addition to the achievement of our sustainability targets, we continuously review our management processes and optimize them where needed. This includes measures in the areas of environmental protection and occupational safety, technical developments and process optimization to reduce resource consumption and costs. These measures are supported and implemented by our three business units, as well as our regional and national companies and our corporate functions. Together, they contribute to the achievement of our sustainability targets. 

Our innovation process employs a variety of tools to systematically analyze, measure and evaluate our products. For the product categories, sustainability topics and metrics are considered accordingly in the innovation process. Our researchers have to identify the points in the value chain and the strategic areas in which the product offers concrete advantages. Each product receives a separate sustainability profile based on this data. To make it easier to optimize our products while they are being developed, we integrate the environmental profiles of potential raw ingredients and packaging materials into the information systems of our product and packaging development teams. This allows the footprint of a new formulation to be calculated as early as the development phase. Our business units also collaborate extensively on an overarching initiative for more transparency of sustainability-related data to meet our markets’ growing transparency requirements, drive profitable growth, and position our existing portfolio even more effectively when it comes to sustainability.

Quantification of our Carbon Footprint

The carbon footprint – the emission of CO₂ and other greenhouse gases – is one of the most widely discussed environmental externality. It reflects an urgent global challenge and there is a consensus about the quantification methodology which is broadly applied by academia, industry, NGOs and governments. The following table presents the GHG emissions associated with our business activities along the value chain:

A scientifically sound and ethically justifiable approach that not only quantifies but also monetizes the positive and negative impacts of companies on the environment and society is, for example, a carbon price as a market-based instrument for reducing emissions. Such an approach supports a more holistic assessment of the different externalities, helps to evaluate risks and opportunities and thus allocate financial resources more efficiently.

However, the prerequisites for this are a solid valuation concept, a sound methodology, robust data and reliable and relevant prices to monetize impacts.

To explore the potential impacts of climate change, one of the sources we use is data from transition scenarios developed by the International Energy Agency (IEA), the World Energy Outlook, CO₂ price data from the World Bank and location-specific vulnerability analyses of physical climate risks, which are also based on climate scenarios conducted by the Intergovernmental Panel on Climate Change (IPCC). To assess the transition risks, we used the “Net-zero emissions by 2050” scenario of the World Energy Outlook, with regionally different assumptions for the CO₂ price in 2030. Here we have analyzed in particular the potential financial impact of a significant increase in the price of CO₂ for Henkel. By analyzing the CO₂ price developments based on different climate scenarios, we have identified potential risks both for production and along the value chain. We are able to evaluate the potential direct and indirect effects of rising CO₂ emissions and prices on the costs of the energy, products and services purchased by Henkel on the basis of the modeled development of future CO₂ prices to calculate a “CO₂ shadow price.” This concept takes into account regional price differences and the emission intensity of our sites. We expect to help reduce the potential long-term risks associated with CO₂ emissions by implementing measures to achieve our medium-term and long-term climate change mitigation targets.

Monetizing other externalities is even more challenging and entangled with uncertainties. An example: Agricultural land use could be valued based on cropland lease rates, but these are subject to significant variation even within the EU, ranging from 26 to 600 € per hectare and year in Slovakia and the Netherlands, respectively. The LCA-based valuation approach developed by van Harmelen et al. ‏(2012) approximates the annual external cost of land use at 940 € per hectare. Pricing the land use associated with the raw materials used by Henkel at the latter value results in some 40 million €. Applying the pricing approach to Henkel’s ‘Abiotic Depletion Potential’ ‏(ADP) and applying the price of antimony ‏(Sb) which characterizes this metric - US-$ 9000 per ton – would result in some 220 Mio €. This compares to Henkel’s overall expenditure of 8.5 billion € on direct materials ‏(2018).

Water prices generally depend on numerous political as well as regional factors including the infrastructure. Furthermore, at times of scarcity access to water is generally not controlled by price but rather influenced by political decisions or existing rights. Therefore, even a scarcity adjusted price for water would be a questionable basis for business decisions.

Following and analyzing major attempts in the last decades to develop a sound methodology that measures and monetizes environmental and social externalities, we still see limits monetizing impacts for the following reasons:

Even though the intention is good, the concept of impact valuation is only reasonable, if the prices defined for the externalities are reliable and reflect a very complex reality. This reality comprises seasonality, geographical differences that lead to scarcities, but also regulations and other political activities that do not allow for valid market prices. The situation becomes even more challenging and vague looking at social impacts like wellbeing. Current approaches reflect rather an estimation than an accurate methodology. We are not convinced that using non-market valuation techniques ‏(e.g. willingness to pay or wellbeing valuation) to put a monetary value on these impacts or using secondary data from beneficiary groups is an appropriate approach to solid measurement and reporting.

We do not consider the underlying quantification of impacts and the related science in the first place reliable enough. The data used to monetize impacts often lacks robustness, hence the signal of such monetary value is generally not reliable and relevant enough to derive good business decisions. This is especially the case, if next to seasonal and geographical characteristics also political influence is considered.

And finally, there is a consensus in society and the political debate that certain things should not be priced. When it comes to the value of a life, or the status of health, e.g. in form of the indicator “disability adjusted life years” indicator, the discussion takes place on an ethical level.