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Financial benefits of Natural Capital accounting

Natural capital can be defined as the stock of our natural resources

Later this month, Edinburgh will host the World Forum on Natural Capital. This year marks the third time this bi-annual international event has been held in the Scottish capital.

For those who may not know, natural capital can be defined as the stock of our natural resources. This includes plants, animals, air, water, soils, minerals, all of which combine to yield a flow of benefits to people on earth. They also benefit business.

On November 27, hundreds of people from across the globe, including foreign government representatives, senior figures from NGOs, international agencies, and leading businesses, will gather at the Forum to highlight the importance of natural capital across the world and the need for it to be managed as a vital asset.

A key focus will be on the economic importance of natural capital for business. All companies impact and depend on natural capital for their continued success.

The Natural Capital Protocol provides a standardised framework to identify, measure, and value impacts and dependencies on natural capital. It was developed to enable business to understand how to assess risks and opportunities related to the value from our land and seas.

We’re delighted to have led the development of the Protocol on behalf of the Natural Capital Coalition. And we’re continuing to go further.

Eva Zabey is Director, Redefining Value at World Business Council for Sustainable Development (WBCSD)

A ‘sister’ approach that the World Business Council for Sustainable Development (WBCSD) has been developing is focused on assessing the value of social capital — the resources and relationships provided by people and society — and how this needs to be factored in, alongside natural capital, as key a financial indicator for businesses.

The first version of the Social Capital Protocol will be open for consultation in 2018.

Beyond relying on traditional models to gauge their value, companies are increasingly seeing the strong business case for measuring and valuing how they impact and depend on natural and social capital.

In doing so, they can understand the ‘true’ value – relative importance, worth or usefulness – of their business activities and how their actions affect their products, employees, water and land use, GHG emissions, and more.

By having an accurate understanding of their ‘true’ value, companies are able to determine their and long-term viability, including how effectively managing natural and social capital underpins sustainable performance.

Here are some examples:

One company applying natural and social capital protocols to their strategy is Nestlé. Over the last three years, the Swiss-based multi-national has been carrying out natural capital valuations across its global operations. Take, for example Nestlé’s tomato sauce production facility in Spain: based on previous experiences to improve water efficiency and preserve biodiversity, their goal was to quantify the creation of shared value across the production cycle — from raw materials to product’s end of life and provide new insights to guide future work.

Our study looked at areas such as greenhouse gas (GHG) emissions, water consumption, land use and pollution. The impact valuation methodology helped them understand how different drivers in tomato sauce production could be influenced to have positive effects.

The findings enabled Nestlé to prioritise short and medium-term investments, particularly to focus upon other ingredients and packaging to reduce harmful impacts, protect the natural capital resources their business relies on and cut production costs.

Germany-based BASF, the largest chemical producer in the world, is also highly committed to putting natural and social capital considerations at the heart of determining its true value, an approach which is also financially benefitting its business in the process.

Based on its assessments since 2013, BASF has seen clear evidence of sustainable growth by measuring the impact of business activities on the environment and society in monetary terms.

This has given the company a new perspective on the financial aspects of sustainability performance. By valuing the externalities of its business in monetary terms, BASF has gained new insights in the potential risk exposures and the opportunities along its value chains. This method of analysing and demonstrating business performance to stakeholders is also strengthening the company’s licence to operate.

Argos is also applying natural and social capital to its financial modelling and its strategic thinking, and is already seeing positive results. As a global manufacturing company, dealing in polymers and petrochemicals, agricultural products and commodities, its business operations are inextricably linked to natural resources.
As part of its strategic management and to monitor progress towards its stated purpose ‘to build dreams that foster development and change lives’, Argos is firmly committed to measuring its environmental, social and economic impacts on society.

As such, the company developed its Value Added Statement. This tool allows Argos to assess and manage its main operational externalities and provide insights on how it can deliver value to society. Notably, from a financial perspective, this approach has helped inform and improve business decision-making, manage risks more accurately and deliver greater transparency to stakeholders.

Because of this, Argos was able to determine a clear monetary value on its natural and social capital impact. Using this methodology, the company calculated a net value added to society of over $929m in 2016, a 10 per cent increase from the previous year. Meanwhile, its operational environmental effects accounted for a net cost to society of $287.5m, two per cent lower than 2015. These figures reflect Argos’s significant annual decreases in societal costs from GHG emissions, water consumption and impacts on biodiversity.

This provides a striking example of how factors, often considered to be intangible, can be effectively evaluated and tracked. With these issues becoming an increasingly important consideration for global investors, this approach is beneficial in sustainability terms, and it’s essential for the long-term progress of a business.

As we’ve seen in the above examples, putting natural capital and social capital at the heart of a company’s decision-making and performance monitoring processes gives businesses many advantages. These include reduced volatility in supply chains, de-risking of regulatory compliance and easier access to finance.

Indeed, a growing number of major lenders are now insisting that companies understand and demonstrate nonfinancial risks before they will be considered for finance.

Excellent progress is being made across the corporate world and we look forward to getting more businesses on board. It is important that we continue to demonstrate the positive financial impact that results from companies making such commitments, achievements we will be proudly highlighting at this month’s World Forum event.

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