For all the talk about “natural capital” that’s been taking place within the business community over the past couple of years — and it’s been growing markedly — there’s been no way of knowing which companies are showing the way. What does it even mean for a company to be a leader in natural capital efficiency? Which companies are most efficiently using natural resources in order to generate financial capital?
We’re about to find out.
Next January, in the 2014 edition of GreenBiz Group’s State of Green Business report, produced in partnership with Trucost, we’ll debut the Natural Capital Leaders Index, naming sector leaders for companies both in the U.S. and globally. It’s a daunting task that’s never been done before.
First, some context. “Natural capital” refers to the limited stock of Earth’s natural resources that humans depend on for our prosperity, security and well-being — including things such as clean air and water. As I wrote in this year’s State of Green Business report:
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.
The economic toll of business activity to natural capital is significant. Recent research conducted by Trucost found that the natural capital impacts of business cost the global economy around $7.3 trillion per year in terms of the environmental and social impacts associated with lost ecosystem services, pollution and the related health costs.
Putting a dollar amount on an individual company’s natural capital impacts, and doing so in a way that is consistent across companies, is ambitious but not impossible. A number of global business groups — including The World Bank, the TEEB for Business Coalition, the Cambridge Programme for Sustainability Leadership, the World Business Council for Sustainable Development and the WAVES Partnership — have been developing methodologies for natural capital accounting at the company level. Trucost has been at the table for most of these, along with individual company efforts at Interface, General Mills and Puma, among others.
In the 2014 State of Green Business report, we’ll debut the Natural Capital Leaders Index, naming companies “that effectively have decoupled the growth from environment impact,” according to Richard Mattison, Trucost’s CEO. “In other words, while they're growing their revenues, their environmental impact and their dependency on natural capital — and therefore their risks of that natural capital not being available, or being degraded — are minimized. So, really what we're doing is we're highlighting resource-efficient businesses.”
Needed: A harmonized and standardized approach
Under Trucost’s methodology, each industry sector’s intensities will be normalized by revenue and will be considered separately for both direct and supply-chain impacts. The industry sector intensities will be aggregated for overall environmental impact, specifically listing greenhouse gas emissions, water and waste. We’ll also provide industry sector average benchmarks to help companies understand their performance and enable the progress of industries to be tracked over time.
The companies in the Index will be chosen from among 1,800 or so global companies that make up a subset of the MSCI Index and the U.S. companies that make up the S&P 500. The Index will list to up six leaders (three each from the U.S. and global lists) in each of 19 sectors.
I asked Mattison to describe the state of the art for putting a financial cost on an environmental impact. “There's a whole host of academic literature on this. The field of environmental and ecological economics has been doing this for 40 years now, and economists have been working very hard at finding ways of pricing these types of valuable resources when the market doesn’t price them. They're called externalities.”
All that academic literature has created a whole host of measurement techniques and data sets, says Mattison. “Therein lies part of the challenge. What's really required is a harmonized and standardized approach to pricing resources so that businesses can understand them, and any kind of reporting and measured that are developed are comparable with any kind of reporting coming from other businesses so that we have apples-to-apples comparisons.” The aforementioned TEEB for Business Coalition is among those working on developing frameworks “to make sure that we have harmonized and standardized approaches to calculating these types of prices,” says Mattison.
But Mattison is quick to add: “Just because it’s difficult to do doesn’t mean we shouldn’t do it. Oil companies find it quite difficult to accurately state their reserves, but it would be ridiculous if they didn’t actually report on their calculations of what those reserves look like to their shareholders, because otherwise, how would you value the company? I think this is a similar situation, where it’s very important to understand what natural capital companies are depending on and how efficient they are, and whether they're generating more output per unit of input.”
The need to do so will become more critical, says Mattison. For example, he says, “As we go forward, with 3 billion more middle class consumers and huge increases in demand, especially in emerging markets, all the best forecasts indicate that the demand for water will outstrip supply by 40 percent by 2030. So we need to create more efficiencies and get better at creating products and services that we all need, with less inputs from nature.”
To be sure, creating the first Natural Capital Leaders Index is an extraordinarily exciting and ambitious project. And we are highly cognizant that we are breaking new ground here. The methodology, however well anchored in academic rigor, will be a work in progress. The field is an emerging one, although I have great confidence in Mattison and his team at Trucost, which has been at the forefront of natural capital measurement methodologies.
And given the stakes, it would be wrong to let the perfect be the enemy of the good.
“We can't lose sight of the fact that the focus has to be on sustainable growth, not just growth at any cost, because growth at any cost really leads us down completely the wrong pathway,” says Mattison. “It also creates additional risk for businesses — short-term gains in return for medium-term crises. So that's the message of this: that we should be looking for ways to achieve sustainable growth and, therefore, to decouple dependency on natural capital from that growth.”
The 2014 State of Green Business report will be published Jan. 21. Please send questions or comments to firstname.lastname@example.org.
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