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Accounting for Nature: Opening Bells are Ringing

Cornis pic hiresLast week the TEEB for Business coalition published “Natural Capital at Risk – The Top 100 Externalities of Business”, a report that among others identified coal-powered energy and cattle ranching as the most environmentally costly businesses. Its findings have clear implications for sustainable sourcing and integrated business planning, food for thought as many start to explore the content of the Consultation Draft of the Integrated Reporting (IR) Framework released by the International Integrated Reporting Council (IIRC) last week.

Externalities, their actual or potential business impact and disclosure of related non-financial or financial information, are a matter of growing concern to sustainability and financial officers alike. The IIRC has a special take on this. Other than target audience (investors versus all stakeholders), the basis on which it differentiates the IR from the sustainability report is the suggestion that sustainability reporting “focuses on impacts on the environment, society and the economy, rather than on the effects of the capitals on value creation over time” (as is the case with IR).

This highlights a key distinction employed by a series of reports on the Economics of Ecosystems and Biodiversity in recent years, namely that between “impacts and dependencies”. The argument above suggests that sustainability reporters have tended to focus on the impact of their businesses on their external environment, rather than looking at this from the reverse perspective of considering more specifically the consequences of changes in the external environment on the business of the reporting entity itself.

In coming years, many companies will be asking themselves how the overall stock and flow of capitals, including Natural Capital, impacts their ability to create value in the short, medium and long term – as required by the IIRC Framework. The IIRC recognises the complexities of these developments, and the dilemmas that possible trade-offs between them or their components may pose businesses. It also recognises that much of the capital involved may fall beyond the ownership or control of a business. If material, key trends in its availability, quality and affordability needs to be reported.

The vulnerability of a business to natural resource changes is increasingly recognised. This is also the case with the forthcoming G4 version of the GRI Guidelines, including its core focus on the value chain. If a business were to treat Nature as a valued supplier, what are the capabilities and qualities of that supplier? What would an inventory of that supplier look like? Answers to this can be found in international research captured by the Millennium Ecosystem Assessment (MEA) and follow up reports such as the TEEB series. It among others provides latest scientific agreement on how supplies from nature can be best categorised, and what key trends in its current stocks and flows globally tell us. The lesson for some industries is that they may be out of business in the medium to long term. This relates, among others, to what a top US military official recently described as the biggest long-term security threat in the Asia-Pacific: climate change.

How can a business start to unpack its relationship to these developments? What are the key pressure points it needs to consider in defining strategic risks and opportunities for its own workings? In how far should it revise of rewrite its business model, considering its use of different Natural Capital stocks and services? What tools are available to facilitate its assessment and decision-making in this process? What qualitative and quantitative indicators are most relevant in determining how the use of energy, water, land, biomass and related resources by itself and its suppliers materially affect the viability of their collective enterprise? What exactly is the “integrated thinking” that investors would expect the business to reflect when it describes its business model and its relation to Natural Capital?

These are questions we will be tacking in a challenging brainstorm, with company case examples included, during a series of ACCSR seminars this coming June in Australia. Join us in ringing the opening bells for innovation and investment in Natural Capital.

Dr Cornis van der Lugt’s one-day program, “The Natural Capital Approach: Valuing Goods and Services from the Natural Environment” will be hosted by NAB in the following cities:

  •         Melbourne         June 18
  •         Sydney                 June 20
  •         Brisbane              June 24
  •         Perth                     June 26’

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