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Stick the environment where it belongs – on the balance sheet

Last month at Rio+20, 37 chief executives of banks, investment funds and insurance companies signed up to a Natural Capital Declaration. The Declaration recognises the growing relationship between biodiversity loss, ecosystem degradation and water quality and availability as well as firm risk. This declaration signaled another step forward in the slow revolution in our management of environmental affairs. No longer is the environment or “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 National Australia Bank, Calvert Investments, China Merchants Bank, Standard Chartered, Rabobank, and Nedbank South Africa – stated their interest in improving current methods of integrating natural capital 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.

You may not have heard of it, but it’s been here all along

Natural capital and its measurement is not a new idea. For example, leading food and beverage firms have measured and disclosed relevant metrics on water for some years now. Consider the work of the CEO Water Mandate. Or the Natural Capital Leadership Compact, where business commits to integrating natural capital considerations into their assessments of business risk and opportunities. Participating company SABMiller’s CEO stated that without the pricing of natural capital, “we will continue to risk undermining long term economic growth through wasteful resource use”.

Several major firms have achieved greater understanding of their value chains and improved stakeholder relations through an integrated resource management approach. PUMA, for example, used the approach to show significant environmental impacts far upstream in its value chain in its 2011 environmental profit and loss account. A more holistic approach is evident when Dow Chemical and others collaborate with local authorities and NGOs such as The Nature Conservancy to conserve local watersheds, wetlands and swamps to protect and purify local water supplies.

Firms looking to mirror such achievements can look to issue- or resource-specific initiatives, such as the Carbon Disclosure and Forest Footprint Disclosure projects, which offer a growing database of information on the use of natural capital and climate response strategies. Over the coming year, these schemes will merge to cover carbon, water and forests within one initiative.

Managing natural capital strategically

Biodiversity, resources and services related to ecosystems are vital components of natural capital. The Economics of Ecosystems and Biodiversity (TEEB) in Business and Enterprise (Earthscan 2011) 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 is twofold. First, the firm must find the right balance between deepening (focusing on individual resources) and widening (covering a comprehensive environment and social agenda) in its management strategy. Secondly, the firm must find the most appropriate management area and business level at which to anchor its approach to natural capital.

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, valuing and spotting 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 a growing sense of urgency.

Natural capital is fundamental. The business leaders of tomorrow will be the ones who recognise this and who prioritise the ‘green value’ of their assets and business models.

 

Cornis van der Lugt will visit Australia in October 2012 to facilitate a two-day workshop on incorporating ecosystem services into integrated management and reporting systems. Visit http://accsr.com.au/html/2012_learning_greeningyourbusiness.html for more information and to book your place.

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