One of a series of excerpts from the 2013 State of Green Business report (download here).
The idea of natural capital — the limited stock of Earth’s natural resources that humans depend on for our prosperity, security and well-being — has been around a long, long time — since the 1973 publication of E.F. Schumacher’s book, “Small is Beautiful.” (Franklin D. Roosevelt didn’t use the exact term, but he referred to “the fact that the natural resources of our land — our permanent capital — are being converted into … wealth at a faster rate than our real wealth is being replaced. … That is the unbalanced budget that is most serious” — in 1937.)
Natural capital creates value through ecosystem services, the “free” deliverables provided to business and society by a healthy planet, including clean water, breathable air, pollination, recreation, habitat, soil formation, pest control, a livable climate and other things we generally take for granted because we don’t directly pay for them. In 1997 researchers estimated the annual economic value of 17 ecosystem services for the entire biosphere at $33 trillion. In today’s dollars, that’s about $47 trillion — more than two-thirds of current global GDP, estimated at $69 trillion.
All that is pretty academic, literally and figuratively. Natural capital and ecosystems services rarely have been discussed inside companies, let alone calculated in their financial statements.
In 2012, that began to change. One of the more surprising outcomes of the Rio+20 United Nations conference was the focus on natural capital, culminating with the signing of a Natural Capital Declaration by 39 global financial institutions — primarily from Europe and South America, but no major U.S. banks. The declaration committed them to develop methodologies to value and account for nature’s vital role in the global economy, and integrate those methodologies into their institutions’ financial decisions. It is unclear whether that means making loans based on a company’s impacts on such things as water quality, soil erosion or flood protection. Still, it’s an important first step. It will take time for this to filter into company accounting and reporting.
A 2012 report by KPMG and the Association of Chartered Certified Accountants brought the concept of natural capital to chief financial officers. KPMG and ACCA conducted a survey, with more than half of CFOs and CEOs saying they had included natural capital concerns in their company’s business-risk evaluations. Forty-nine percent identified natural capital as a “material issue” for their business and linked it directly to “operational, regulatory, reputational and financial risks.” But few companies yet integrate these things into their accounting systems, let alone report such information to investors.
Not just a buzzword
Companies will be under increasing pressure to measure, if not manage, their impacts to natural capital. In 2012 companies seeking financing from the World Bank’s International Finance Corp., as well as from 76 global banks that signed on to the Equator Principles, became subject to due-diligence processes that examine corporate impacts and dependencies on ecosystem services. Meanwhile, more than 16 national and regional governments continued to focus on ways to integrate ecosystem services into public policy, according to a report by BSR.
Natural capital isn’t just a handy buzzword. There are principles undergirding the concept. They include the idea that one species’ waste is another species’ food; that materials cycle endlessly through the web of life; that species live off current solar “income”; that resilience comes from diversity; and that everything is interconnected. Each of these can be translated into everyday business practices, as well as overall strategy.
Our partner in this report, Trucost, has worked on more than a dozen natural capital valuation projects. One project is with Veolia Water, which is looking to help clients understand how the true valuation of water varies across production locations due to the operational, regulatory, reputational and financial risks that water scarcity presents.
One promising initiative aimed at accelerating corporate understanding of natural capital is TEEB — The Economics of Ecosystems and Biodiversity — convened by a consortium including the United Nations, European Union and the International Union for Conservation of Nature. TEEB, which has been described as the Rosetta Stone for natural capital, aims to help the environmental and financial communities start speaking the same language about how to value nature. TEEB’s research is headed by Pavan Sukhdev, a senior banker from Deutsche Bank, along with experts from the fields of science and economics. Among its findings, TEEB has pointed to the connection between species loss and economic well-being, and the need to ensure that human development takes proper account of the real value of natural ecosystems.
Warmed-over environmental commitments?
Even before TEEB’s research is complete, companies are making commitments, albeit tentative ones, around natural capital. A partnership between the Corporate Eco Forum and The Nature Conservancy, launched at the 2011 Clinton Global Initiative, engaged 24 companies within its first year, from Dell to Dow to Disney, to make commitments related to protecting natural capital. Some of those commitments were focused — on forestry or fisheries, for example — but others were all-encompassing. Disney, for one, committed to conduct a study “to quantify ecosystem benefits and services other than carbon.”
But some of the “natural capital” commitments reported by these companies in 2012 seemed like warmed-over environmental commitments companies had already made. GM, for example, committed to achieve landfill-free status at 100 manufacturing sites, “thereby conserving natural resources, keeping them in their use phase, and reducing associated life-cycle environmental impacts.” At the time of the commitment, some 76 GM plants were already declared “landfill-free,” so this wasn’t exactly a stretch goal. However honorable the achievement — GM is the only auto maker to set this kind of target — GM’s Clinton Global commitment was pretty much the continuation of programs it began in the 1990s. (A GM spokesman points out that its commitment was to CEF’s “practical action #3”: “Optimize resource use to minimize environmental degradation,” and that its landfill-free commitment “displaced a lot of virgin material which in part protected a variety of ecosystems or minimized the degradation of them.”)
All of which points to both the double-edged sword of a growing corporate recognition of the value of natural capital. On the one hand, it could lead to corporate decisions that balance economic and environmental needs, and that consider the longer-term consequence of business strategies and initiatives, eventually integrating the concept into planning and accounting.
On the other, “natural capital” could become just another synonym for “environmental responsibility,” the latest advance in corporate messaging without necessarily a corresponding advance in anything else. The jury is still out on that one.
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