Benefits of measuring and valuing natural capital
It used to be accepted practice for businesses to treat environmental factors as ‘externalities’, which couldn’t be accurately priced by themselves or the markets.
But times have changed. The concept of sustainability has become firmly embedded and more recently has begun to be framed in terms of ‘natural capital’ – putting a valuation on the environmental resources a business uses. This could be land and how it is used and degraded or replenished, resources extracted from the ground, water or energy.
“Economists used to talk about natural resources as if they were almost infinite,” says Nathan Goode, global leader for energy and cleantech at Grant Thornton. “But it has dawned on businesses that these resources are anything but.”
Goode, who has spent 12 years working on low carbon, renewable energy, waste management and other sustainability projects, adds: “We’re reaching the point where this issue becomes business-critical. Whether you call it resource management, sustainability, natural capital or something else, it is the single biggest issue facing us today and it’s increasingly difficult to avoid.”
High-profile examples of good practice are already emerging. Large global firms in the food and consumer goods and services industries are, understandably, setting the pace. Goode cites SABMiller, Coca-Cola and Unilever among the businesses that have made the biggest strides in this area. He also applauds retailer M&S, which has won acclaim and customer engagement with its 'Plan A' initiative, and The Crown Estate, one of the UK's largest landowners, for whom the concept of natural capital fits well with its principles of stewardship and the long-term nature of the assets it manages.
But size isn’t everything. “Strong progress is also coming from innovative small and medium-sized businesses, which are more responsive to their customers’ environmental concerns, often where they are part of the supply chain for global businesses,” Goode adds. One example is Muntons, a malting business based in Suffolk, UK, which has some major global customers in the food & drink sector. In some sectors, SMEs are already finding that how they respond to the natural capital agenda can significantly affect their long-term value as a business.
Not everyone sees the imperative just yet. Progress is often slower among mid-sized businesses, unless pressure is coming through the supply chain. As a result, many businesses are still taking only tentative steps – running discrete projects and only including sustainable approaches when tackling a problem in their supply chain, rather than adopting a structured approach to natural capital. The piecemeal approach can help businesses cope in the short-term, but the more far-sighted leaders will see this agenda as a strategic choice.
A key challenge for firms, whatever their state of openness to sustainability, is the complexity of managing and delivering an integrated approach. While C-suite leadership is vital, it’s not enough on its own. Moreover, even for mid-sized businesses the big challenges and opportunities lie with their own supply chains. “Practical results are essential for credibility so for many, the incremental approach is the right starting point,” Goode says.
Thinking about these issues in natural capital terms should provide a strategic focal point for businesses. While there is not yet a standard accounting framework for natural capital, progress is being made. The International Integrated Reporting Council has identified natural capital as one of the six ‘capitals’ that businesses should account for, alongside financial, manufactured, intellectual, human, and social and relationship capital.
The real challenge will come when the markets consistently recognise natural capital in their business valuations. There are some signs of this starting to happen with the debate around stranded fossil fuel assets, for instance. A natural capital paradigm for capital markets still looks some way in the future but there is plenty of debate about how far away it really is.
There are other incentives: accurately assessing and valuing natural capital allows more intelligent risk-profiling of investments, and future-proofing of the business. It puts use of resources such as water and energy in a broader context, taking account of the finite nature of these resources, factoring in what environmental scientists call ‘planetary limits’. This helps firms to develop strategies to reduce resource dependency and increase self-reliance.
“Some business leaders remain in denial about sustainability,” concludes Goode. “But progress around natural capital valuation is happening. The drive now is to see a significant change in the way natural capital is assessed and measured across the whole economy.”