The Natural Capital Leaders Index: Methodology

In January, Trucost, in partnership with GreenBiz Group, will unveil the Natural Capital Leaders Index, recognizing those companies that have taken the lead in decoupling economic growth from environmental impact. The Index will be contained within the 2014 State of Green Business report. What follows are the context and proposed methodology of the Index. We seek feedback from the sustainable business community.

Until recently, green performance has had its own set of metrics, rarely understood outside of the sustainability department and even more rarely incorporated in operational decision making.

Such impact metrics have been useful in identifying “how much” or “how many.” Companies are likely to know how many metric tons of carbon dioxide equivalent (and other pollution impacts) they are responsible for. They also may know how many cubic meters of water they depend on -- at least to sustain their direct operations.

But how do you take this data -- the type most commonly found in lengthy sustainability reports -- and transform it from information into actionable business insights that truly can help companies to succeed in the transition to a low carbon, resource efficient economy?

We’re designing the Natural Capital Leaders Index not simply to rank companies but also to shed light on precisely this question.

There are four key steps.

  1. Take the traditional environmental impact data disclosed by companies and supplement it to produce a complete environmental footprint covering companies’ own operations and supply chain.
  1. Apply natural capital valuations reflecting the economic and social costs of companies’ environmental impacts to identify the scale of impact and allow direct comparison with financial metrics.
  1. Identify the extent to which companies are decoupling environmental impact from growth by comparing changes in company revenues to changes in natural capital costs. To get a clear picture, we chose to do this over a five-year time horizon.
  1. Provide environmental context alongside business context by factoring planetary limits into our analysis.

Through these steps we will identify those companies that are truly moving the sustainability needle by decoupling growth from environmental cost.

We’ll also provide visibility of the power of financially orientated environmental metrics to help companies identify the net environmental benefits of different technologies and strategies with sector benchmarks that also enable the progress of industries to be tracked over time.

Of course, assumptions are embedded in our methodology -- and also some limitations which we need to be clear about.

  • First, the Natural Capital Leader Index uses data from the Trucost Environmental Register. For this, we research, standardize and validate the operational and supply-chain environmental impact disclosures of the world’s largest companies annually. We supplement this data with Environmentally Extended Input Output Lifecycle Assessment (EIOLCA) modelling to produce a complete environmental footprint. We then engage with companies to provide the opportunity to either confirm or improve our research by providing additional information.

EIOLCA modelling is particularly helpful when looking across company supply chains where data is less likely to be available. Modelled data has the advantage of providing companies with a data map to identify high-impact areas across their supply-chain tiers around which to prioritize primary data collection and manage business-critical environmental impacts. Given the complexity of today’s global supply chains, this map can be extremely valuable. Because the majority of environmental impacts are embedded in the supply chain -- for food and beverage companies, this is the case for around 90 percent of impacts -- we need to use this data in the absence of primary disclosed data to understand the magnitude of the problem.

  • Second, we are applying global natural capital valuations, again due to the absence of disclosed data. This is a critical limitation because the power of natural capital valuation for a corporation lies in its ability to factor regional natural resource constraints and impacts. For example, applying regional water valuations to traditional water metrics provides insight into the sustainability of water dependency by factoring regional water availability. Shadow water pricing enables companies to optimize their water use -- and manage risk from increasing water costs -- by identifying opportunities to minimize unsustainable and increasingly expensive water dependency.
     
  • Third, our current focus recognizes companies that are improving their operational and supply-chain environmental performance. We would like to recognize companies that are contributing to the transition to a low-carbon, resource-efficient economy by bringing to market greener products, technologies and services as well as companies that create natural capital benefits, but there’s a lack of consistent data to incorporate into a broad analysis. We do, however, aim to include this insight in future editions of the Natural Capital Leaders Index, because financially orientated environmental metrics are particularly well suited to measuring net benefits or product-level analysis.
     
  • Finally, working with Mark McElroy at the Center for Sustainable Organizations, we are providing environmental context alongside business context by introducing insight into the challenges of planetary limits through Context-Based Sustainability analysis. Initially, our analysis is limited to carbon, but as consensus is reached on planetary limits for other environmental impacts such as water and land use, we will incorporate them.

We are conscious of our assumptions and limitations. We are also conscious of our ambition to support companies in addressing complex sustainability challenges.

Traditional environmental and sustainability rankings provide a badge of honor, helping companies to communicate their green credentials to stakeholders. They are important and are to be commended for their contribution to increased environmental data disclosure.

But we need deeper insights. Insights that can be used to drive strategic decision making. Insights that everyone, from product managers and sourcing strategists to financial managers and board members, can understand -- and act on.

We welcome your feedback on the development of our Natural Capital Leaders Index methodology. If you have not confirmed Trucost’s research on your company’s natural capital impacts, you can do so by contacting naturalcapitalleaders@trucost.com.

To provide feedback or find out more, visit www.trucost.com/naturalcapitalleadersindex.

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