Whether or not you really like the phrase, the issue of "natural capital" is one weighing far more heavily on the minds of sustainability executives as more businesses consider the elusive task of valuing vital resources such as water, soil, forests, biodiversity and even clean air.
"In the last few years, the 'why' has become really clear," said P.J. Simmons, chair of the Corporate Eco Forum, during one of several standing-room-only 2014 GreenBiz Forum sessions dedicated to the topic.
"Resource scarcity concerns are what is driving these conversations," offered Dorothy Maxwell, CEO and executive director of the Natural Capital Coalition, during another panel discussion.
Certain sectors — especially mining, energy and forestry companies, along with the financial services firms investing in their future — see this debate as a high priority for the very simple reason that their business models rely heavily on the long-term availability of nature resources.
Everyone pretty much agrees that the potential risks are enormous; some insurance companies, including Swiss Re, are even looking at ways to factor this into premiums, said Mark Tercek, president and CEO of The Nature Conservancy (TNC). "This will force people to value things differently," he said.
"If companies had to pay full costs, it would consume 50 percent of their profits," echoed Libby Bernick, senior vice president, North America, for Trucost. To be more exact, the firm estimates that the annual cost in social and environmental terms of lost ecosystem services, air pollution and related health costs is $7.3 trillion. In 2012, KPMG estimated that if companies had to pay an environmental bill, they would lose 41 cents for every $1 in earnings.
"Business is massively affected by the constraints of the planet," said Nigel Topping, executive director for CDP, which has stepped up its disclosure requirements and is fine-tuning similar guidelines for forestry resources.
The "how" of valuing or pricing natural capital, however, is far less obvious. Part of that stems from the lack of a clear definition as to what should be included in that exercise. Some companies, such as Dow Chemical and Shell, focus on the specific "green infrastructure" that might be impacted by a plant expansion or a pipeline.
"Shell looks at natural capital as the environmental attributes that we need to deal with as we move forward and design a program," said Mike Long, general manager for UA Regulatory Policy & Advocacy, Shell. "What makes a site unique is how civil society is taking advantage of this [resource]."
Like Dow Chemical, Shell has partnered with TNC to help understand the implications of projects and programs. If Shell enters a protected area, for example, will this have a negative impact on biodiversity? Will a new pipeline strain or threaten water resources? Will it result in costs related to litigation or mitigation?
This exercise also considers the benefits of alternatives. As an example, Long points to Shell's shift toward using natural systems such as oyster reefs to protect pipelines and natural resources running along coastal Louisiana. According to a TNC case study, not only is this approach better from an environmental standpoint, it costs just $1 million per mile versus the approximately $15.3 million per mile that it would require to install concrete, gray rock barriers.
"When we go in and start a new project, we do a thorough impact assessment. We don't go into things blindly," Long said.
Finding the right language
These conversations aren't easy. "Convincing an asset manager to look at natural capital is difficult, but the key to it is speaking their language and getting them to understand what you are trying to do," Long said. "You need to show them this is not philanthropy."
That sentiment is echoed by Doug Sharo, lead sustainability specialist for packaging company MWV. "It is important to speak in a way that is understandable in your own organization," he said. "Get the terms right first and then define them."
Refining the price associated with safeguarding certain resources — in the case of MWV, mostly forests — will take months of dialogue and the development of industry-accepted approaches for doing this, Sharo suggested. "We're not at the place where we can understand how to manage this from a risk management point of view," he said. "We are not there yet in terms of how we can add this to our balance sheet."
Ecolab, which focuses on water, hygiene and energy technologies, quickly settled on water as the natural resource that posed the greatest risk to long-term viability, said Raj Rajan, RD&E vice president and global sustainability technical leader for Ecolab. Next, it looked outside the company to collaborate with other key stakeholders. "We are not going to solve this problem within our own fences," he said.
Rajan added: "You're going to get outside the comfort zone…The only thing you will have in common with other stakeholders is your vested interest in this resource."
Frameworks in progress
While there is no template today for natural capital calculations, the new Natural Capital Business Hub highlights the efforts of 40 companies that have made this issue a priority. Sustainability executives should also closely watch an initiative spearheaded by the Natural Capital Coalition, which is developing guidelines it hopes will guide businesses in natural capital valuation exercises. A draft of these protocols should be available by March, and the coalition is welcoming industry feedback, Maxwell said.
"The economic techniques [behind this] have been around for many years. What should be monetized and what is off limits — this needs to be refined," she said. "We are conscious that needs to be done in a consultative way."
The first sector-specific guides related to these protocols will be focused on food and apparel companies, and much of the methodology should be officially available by the end of 2015, Maxwell said.
Top image of coin sprouts by isak55 via Shutterstock