Thursday, July 19, 2012

Stick the environment where it belongs - on the balance sheet

Last month 37 chief executives of banks, investment funds and insurance companies signed up to a Natural Capital Declaration. It recognises the relationship between biodiversity loss, ecosystem degradation and business risk. Its launch signalled another step forward in a slow revolution that is underway in our management of environmental affairs. No longer is the environment or the "natural resource base" seen as an optional extra for business but rather as a critical factor within the business value chain.

The Natural Capital perspective views nature as a critical supplier of goods and services. This goes beyond business case approaches where business innovations happen to have good environmental consequences as well. It also goes way beyond simply limiting damage to the environment due to regulatory and reputational risk. Rather, it focuses on risks and opportunities in the longer term ability of a business to generate value for its customers and investors.

The Declaration signatories - including Calvert Investments, China Merchants Bank, Standard Chartered, Rabobank, National Australia Bank and Nedbank South Africa - stated their interest in improving current methods of integrating the Earth's natural assets into their financial valuations. Governments intend to do the same, with "Natural Capital Accounting" for improved economic decision-making. The signatory financial institutions recommended the introduction of requirements for companies to disclose data on their use of and impact on Natural Capital.

Measurement and the disclosure of relevant metrics on for example water is one that leading companies from the food and beverage industries have tackled for some years now. Consider the work of the CEO Water Mandate of the UN Global Compact. Some have joined the Natural Capital Leadership Compact (hosted at Cambridge University), committing among others to integrate Natural Capital considerations into their assessments of business risks and opportunities. Participating company SABMiller's CEO stated that without the pricing of externalities, "we will continue to risk undermining long term economic growth through wasteful resource use".

Noteworthy is the growing interest of not only the agrifood and extractive industries but a wide range of industry sectors in integrated resource management as a factor in driving innovation and longer term competitiveness. It implies a focus not only on individual resources such as energy, land or water in isolation, but an integrated approach to deal with possible trade-offs and turn dependencies into opportunities. This more comprehensive approach was evident when PUMA published its environmental profit and loss account in 2011, showing significant environmental impacts far upstream in its value chain.

A more holistic approach is also evident when Dow Chemical and others collaborate with local authorities and NGOs such as The Nature Conservancy to conserve watersheds, wetlands and swamps to protect and purify local water supplies. These initiatives have much to learn from issue- or resource-specific schemes such as the Carbon Disclosure and Forest Footprint Disclosure projects (due to merge over the coming year to cover carbon, water and forests). Important lessons relate to carbon accounting, prioritising indicators and defining appropriate steps along a mitigation hierarchy that starts with avoidance and employs compensation or offsetting only as last resort.

The Economics of Ecosystem Services and Biodiversity (TEEB) in Business and Enterprise (Earthscan 2012) report highlights emerging tools available for businesses to manage biodiversity and the services that ecosystems provide. These include services such as genetic resources for pharmaceutical markets and insect pollination for agrifood markets.

For businesses attempting to take a more integrated approach to Natural Capital use and managing their ecosystem impacts, the challenge internally is twofold:

  • Finding the right balance between deepening (focusing on individual resources) and widening (covering a comprehensive environment and social agenda); and
  • Finding the most appropriate management area and business level at which to anchor its approach.
Meeting the Natural Capital challenge involves adapting existing tools such as life cycle assessment, environmental management and reporting systems to best incorporate consideration of ecosystem services and biodiversity. It also involves the fine art of converging sustainability strategy and business strategy, spotting and valuing those areas where natural resource questions most materially impact financial value drivers such as operating margin and capital expenditure. This is a learning process involving not only science but also art, albeit one with growing sense of urgency. The business leaders of tomorrow will be the ones with clarity about the resilience and 'green value' of their assets and business models.

> See the new video by the World Business Council for Sustainable Development (WBCSD) on getting Natural Capital on the balance sheet, "Pitch for Nature" released in November 2013. 

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