Case Study: Integrated Profit and Loss Accounting at Natura &Co

Presentation by Alessandra Segatelli, Controllership Director - LatAm, Natura &Co

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Key Points
  • This case study article highlights Natura &Co’s Integrated Profit and Loss (IP&L) approach and methodology, as well as the role of the finance team in its development.
  • Natura is a leader in impact accounting, using its IP&L and underlying methodology to quantify the impacts and net value of its corporate performance on environmental, social, and human capital.
  • The IP&L captures the impacts of Natura’s business activities across its full value chain, ranging from Natura’s supplier chain and extractive communities in the Amazon region, through direct Natura operations, its beauty consultants, to product use and product end of life.
  • Natura implemented the IP&L model as a strategic management and decision-making tool, as the results can be compared directly with the financial results, which helps in risk management and reporting to investors, and contribute to the operationalization of stakeholder capitalism.
  • The controller and finance team are involved in the development of the IP&L methodology, including data collection, measurement and valuation. They support the measurement of key impacts linked to business activities and quantify these to enable decisions that achieve a balance between positive impacts and profitability.
  • In terms of policy, to help develop the connectivity with financial statements, financial reporting standards could usefully develop common methodologies and accounting treatments for some ESG areas including carbon credits. International standards for measuring and valuing impacts would also help drive a more common approach to impact accounting that would lead to integrated reports being more quantitative.
Natura &Co Key Facts
  • Founded in 1969, Natura is a Brazilian global cosmetics company headquartered in São Paulo. Since 2020, Natura is part of Natura &Co group, comprised of four purpose-led beauty companies: Avon, Natura, The Body Shop and Aesop.
  • A pioneer within the beauty sector among B Corps, Natura obtained its certification in 2014, becoming the first publicly traded company in the world to earn it. In 2021, Natura &Co became the world’s largest certified B-Corp.
  • Natura &Co’s consolidated net revenue is R$ 40.16 billion and net income R$1 billion, and has 35,000+ employees,7.7 million consultants and representatives, and 3,700 stores and franchises.
  • Natura &Co issued a US$ 1 billion sustainability-linked bond related to selected sustainability targets, which is the largest single issuance of this type by a Brazilian company.
  • Sustainability is an integral part of Natura’s purpose, strategy and business model across natural, social and human capital dimensions.
  • Natura was highly commended at the 2022 Finance for the Future Awards in the category for embedding an integrated approach and recognizing the finance team’s critical role in delivering this integration.

 Natura’s purpose: To nurture beauty and relationships for a better way of living and doing business

Natura Integrated Profit & Loss Accounting

Natura &Co believes that the value and longevity of a company are directly linked with its capacity to contribute to the evolution of society and its sustainable development. To collaborate with the wide-reaching change our world needs, it is fundamental for us to measure our legacy or, in other words, the impact we generate through our operation.

Natura’s leadership in impact accounting has culminated in its IP&L and underlying methodology to account in monetary values for the impacts of its corporate performance on environmental, social and human capital.

The IP&L methodology connects business activities to impacts and allows the attribution of value to impacts be they positive or negative. This provides quantitative information that permits better strategic decision-making aimed at leveraging positive impacts and mitigating negative ones, for example, in improving supply chain processes and vendor selection, and operations. It also allows decisions to be made to balance profitability at the same time as achieving sustainability goals. 

Natura has a cross-functional committee responsible for the development and strategy of the IP&L methodology, which includes the controllership and technical accounting team, as well as members of the financial planning and analysis (FP&A) team and Sustainability Center of Expertise.

Background

The development and publication of the IP&L started in 2010 with Natura’s efforts to understand its supplier network and key raw materials such as palm oil. Between 2014-16, Natura developed an Environmental Profit & Loss and expanded it to social impacts in 2017-19, particularly to measure and enhance the contribution of its approximately 2 million beauty consultants in Brazil, Argentina, Chile, Colombia, Mexico, Peru and Malaysia to their communities. A full IP&L model was issued in 2021 and is now included in internal decision-making and public disclosure with external assurance. The IP&L has become Natura’s Integrated Report.

The IP&L methodology relies mostly on the Natural Capital Protocol and the Human and Social Capital Protocol (Capitals Coalition, 2016, 2019). The methodology involves

  • Collecting data
  • Identifying and measuring impacts
  • Valuation
  • Taking decisions to leverage positive impacts and mitigate negative impacts.

IP&L Methodology

The Natura &Co IP&L methodology is available at Natura Integrated Profit & Loss Accounting 2021, Technical Executive Summary and Insights. A summary is provided here.

  •  Natura’s sustainability strategy and IP&L address three material sustainability topics covering natural, human and social capital: 
    • Living Amazon Forest: Movement to transform the Pan-Amazon region into a global example of a new society that integrates people, the forest and cities in a sustainable manner, creating more shared value;
    • More Beauty, Less Waste: Offers the most, using the least, and reducing excesses. Natura has used recycled materials and materials of renewable origin, as well as refills, for over 30 years and strives to do more;
    • Every Person Matters: Each person in Natura’s relationship network matters a great deal to the company. With each one, the focus is on making a social pact that decreases inequality and intolerance and promotes social inclusion with effective transformational actions. Each person is a world. And the whole world matters.
  •  Figure 1 captures the business impacts from activities across Natura’s full value chain, from its suppliers and extractive communities in the Amazon region to its direct operations (manufacturing and offices), the Natura sales consultants, the products used by customers, and the product end-of-life.
  •  Measuring impacts involves identifying key activities in the value chain, relevant impact drivers across human, social and natural capital, and assessment paths to understand direct and indirect economic effects. This means that impacts can be monetized, allowing, for example, the value of nature or wellbeing to be expressed in monetary terms. 
  • Methodologies and calculations to convert resources into economic value are based on two main possible pathways: Direct effects on health and quality of life or economic effects that are calculated through utilitarian models, which reflect a change in the quality of life of an individual or collective. Some examples of valuation factors considered for measuring IP&L outcomes are: 
    • Social cost of carbon, which reflects the current and future economic damage per ton of carbon ($97/tCO2 based on PwC’s Total Impact Measurement and Management Framework); 
    • The value of ecosystem services and wellbeing of Amazon supplier communities for the sustainable use of the forest, and other sources for plastic ($760/ha of forest based on substitution or mitigation costs); and
    •  Factors that translate income or taxes into changes in well-being and quality of life, such as HUI (Health Utility of Income) which determines the utility of money in different socio-economic contexts, or HUT (Health Utility of Taxes), which values ​​quality change of life and well-being of a population through the collection of taxes.

  • Ultimately, the IP&L methodology provides an overview of Natura’s net value delivered across human, social and natural capital. In 2021, the IP&L showed a net positive societal value created by Natura of approximately R$18 billion (around US$3.5 billion), mostly driven by social and human capital. For each $1 in revenue, Natura generated $1.5 in positive social and natural impact. The impact of Natura's natural capital is still negative (as it is for most companies), mainly due to the final stages of disposal of products by the consumer and subsequent recycling. It is important to see this indicator reflected in the IP&L precisely to direct and prioritize actions.
  • To address these issues, Natura follows the targets and 40 sustainability key performance indicators (KPIs) set out in its Commitments in its 2030 Vision - Commitment to Life - which covers topics such as net zero, regenerative initiatives, circularity and sustainable materials. Natura has been reducing its natural capital impact for many years. Through its sustainability strategy, it will continue to reduce its negative impact and increase the positive. The KPIs enable performance management and track the company’s sustainability strategy in conjunction with strategic planning.

The Role of the Finance Team

Natura’s Finance Team plays an important role in the measurement of impacts, supporting necessary data collection, monitoring the progress of socio-environmental issues and combating climate change through key indicators, supporting the establishment of tangible and relevant goals, and encouraging the creation of action plans to leverage all the company's results, whether economic, social, human or environmental. 

Now, the integrated assessment that IP&L generates guarantees the implementation of ESG policies embedded in the day-to-day strategy of the group's companies, and ensures decisions always combine both the search for profitability and return to all stakeholders.

In terms of the external reporting and assurance process,

    • Currently, IP&L is disclosed in the Annual Report, separate from Natura’s financial statements. However, the IP&L was structured in the same format as the traditional financial statement, making it possible to identify which activity generates which level of impact and to link the financial statement line to a range of non-financial metrics, such as carbon emissions and offsetting, and supply chain indicators.
    • All sustainability-related KPIs are externally assured since 2001 and by PwC in 2022, and some are outputs then used in the IP&L measurement.

Through its controllership function, Natura also engages and influences external groups that are establishing standards, frameworks, and guidance including the IFRS Foundation and ISSB, the Capitals Coalition, Impact Management Project, Value Balancing Alliance, and World Business Council for Sustainable Development. To help develop the connectivity with financial statements, financial reporting standards could usefully develop common methodologies and accounting treatments for some ESG areas including carbon credits. International standards for measuring and valuing impacts would also help drive a more common approach to impact accounting that would lead to integrated reports being more quantitative.

This was a presentation to the IFAC Professional Accountants in Business Advisory Group during their September 2022 meeting. Read more insights from IFAC’s Professional Accountants in Business Advisory Group’s report: Professional Accountants as Finance and Business Leaders.