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Linking Life Cycle Assessment with Financial Value Drivers

The weighting of different impact categories and resource use in the impact assessment (LCIA) steps of LCA takes us to the heart of making the business case and linking it with corporate finance. This is where relative importance of impacts and dependencies are assigned, where the level of significance is determined, where ultimately the question of financial materiality is asked from a business perspective.

ISO recognizes that this involves subjective judgment, and is dependent on the overall goal of an LCA study (goal and scope definition). In the accounting and reporting domain, international standards from International Accounting Standard Board (IASB), IIRC (IIRC 2012, 2013), GRI and AccountAbility (AA1000) include recognized definitions of “materiality” and recommend procedures for determining “levels of significance” that involve various stakeholders to a greater or lesser degree.

Monetized costing provides an important way of weighing or prioritizing among various impacts and dependencies. A valuable field for making the link between LCA and business finance is life cycle costing (LCC), both financial LCC and environmental LCC (see Hunkeler et al. 2008; Reich 2005; Hunkeler and Rebitzer 2003). The former refers to financial economic analysis of a product or a function, in other words, conventional business financial analysis that would be done for investment decision-making considering the economic life cycle of the product or function. This contrasts with environmental LCC, which involves weighting the environmental impacts of an LCA system in monetary terms. Links between the two become evident when the environmental impacts have an economic impact on the system being analyzed, for example when environmental externalities are being taxed by local authorities. The environmental LCC may more scientifically reflect resource scarcities than the financial LCC, which when using mainstream economic system prices or market values for resources signal costs that may not adequately reflect real, absolute resource scarcities. This is where risk definition needs to be more science-based and reflect appropriate context. Furthermore, in as far as an investment decision for a specified number of years to come needs to be made in the face of uncertainty (such as future pricing or taxing of resource use or pollution), business managers can benefit from the application of real option (RO) theory in combination with LCA and LCC (cf Cucchiellaa et al. 2014).

Any attempt to integrate monetized values of significant life cycle impacts or dependencies in business decision-making has to address the indicators that are of greatest interest to chief financial officers (CFOs) and those who provide financial capital to enterprises. This is essential in making the business case, mapping out cause and effect relations between environmental or sustainability actions and financial results for the business. It can be illustrated by using a “Green Business Case Model” (Van der Lugt and Bertoneche 2013) that includes the core financial value drivers of special interest to financial managers.

The listed action areas and connectors included in the model (see Table 16.1) have been identified based on the review of over 60 research articles and business reports on the business case that have been published from 2002 to 2012 (see, for example, Margolis et al. 2007; Ambec and Lanoie 2007; Berger et al. 2007; EABIS 2009; Molina-Azorín et al. 2009; Business in the Community 2011). Considering the evolution of business case research over the last decade, it is evident that the indicators most commonly referred to can best be grouped in a three step model of

(i) action areas, which lead to change in the area of what can be described as (ii)

Table 16.1 The Green Business Case Model (columns 1–3), with additional references to LCM linkages (column 4)

Environmental action areas

Connectors: lead indicators

Financial value drivers

LCM linkages

Eco-design (DfE)

Customer attraction

Growth of sales

Product LCA

Goods and services

Brand value, reputation

Duration of sales

Ongoing LCM

Standards (incl. life cycle) and technologies

Innovation

Operating margin

LCC and CBA

Supply chain management

Operational efficiency

Investment in fixed capital

Maintenance, Remanufacturing

Education, training

Human capital, productivity

Investment in working capital

Product service systems

Risk management

Risk profile

Cost of capital

Impact risks

Communications, reporting (incl. stakeholder engagement)

License to operate

Tax rate

LC-based eco-taxes

precursor or lead indicators, change that eventually affect (iii) the financial value drivers. For each of the rows of indicators a cause and effect relation can be hypothesized. For illustrative purposes three of these are discussed below, with examples including special reference to LCA applications. It shows pathways of making the connection between greening actions and business financial performance.

 
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