The new phase in the evolution of natural capital accounting
Accounting systems are to businesses what water is to fish — essential and irreplaceable. In all of its quantitative and monetary clarity, corporate decision-making often occurs in the context of numbers and an accounting system. As such, the ability of senior business leaders to manage businesses and risks is contingent upon seeing (and understanding) numbers.
Yet, companies often have far more data on business risks than is included into accounting systems, particularly related to environmental, social and governance (ESG) issues. Often, however, these data are not measured and reported on in a way that allows senior business leaders to understand their significance for business risks and opportunities. Yet, omitting inclusion of ESG data creates a blind spot around corporate risk and opportunity — one that can now be addressed.
Enter natural capital accounting (NCA), in which environmental scientists are collaborating with economists and statisticians to bring environmental impacts and dependencies to light, within accounting systems. Applying NCA systems can enable business people to see commonly missed risks, costs and benefits associated with businesses’ reliance on nature’s services. When appropriately applied, NCA can inform a wide range of decisions and improve assessment of situations based on financial values within structured (and therefore verifiable) approaches.
Companies that apply NCA do so to make better and more informed decisions — in terms of less risk (as well as healthier places to live, work and raise families), higher efficiency (use natural resources where they yield the most), and improved capacity of natural systems to function and produce ecosystem services (PDF) upon which people and societies rely (such as productive topsoil and naturally filtered water).
"Natural capital accounting?" is a question that likely soon will be replaced with a more neutral: "I’ve heard of that."
As companies perceive of the benefits to better understanding environmental (as well as social and governance, or ESG) risks, the question quickly shifts to what methods to apply. Fortunately, "how to" methodological approaches are no longer a gap, but more of an area of assessing what is most appropriate for a particular context and application.
With over 17 tools and approaches, as documented by BSR in a 2015 report, it is useful that the European Union’s Business and Biodiversity Platform has developed a business guide (PDF) on how to select among 11 of the leading approaches. In addition, the Natural Capital Coalition is developing an approach for harmonizing the existing approaches into one globally relevant Natural Capital Protocol (the Protocol) to bring clarity — as well as to signal maturity in the field. This protocol will be available in July — with initial sector guides on Food & Beverage and Apparel — following from a collaborative process, including extensive peer review that has engaged thought and practice leaders around the world.
These methods for quantifying and monetizing environmental impacts are not completely new, but built on decades of academic, public policy and NGO research. Foundational studies include: the state of the natural systems upon which people and businesses rely (such as the 2005 Millennium Ecosystem Assessment or MEA); categorization approaches and indicators for tracking the services which societies have come to expect from nature (2013 Final Ecosystem Goods and Services Classification System or FEGS-CS [PDF]); analytical frameworks for expanding corporate thinking about how businesses depend on nature (2008 & 2012 — WRI’s Corporate Ecosystem Services Review or ESR); global reviews of the underlying economics of nature and society (2010 The Economics of Ecosystems and Biodiversity or TEEB); valuation approaches (2011 Corporate Ecosystem Valuation (CEV); statistical frameworks (2012 System of Environmental Economic Accounting SEEA); corporate natural capital accounting; and the Natural Capital Protocol Protocol.
The takeaway for corporate leaders is that a broad range of credible, replicable, rigorous tools are available for different purposes. By using the appropriate tool, companies can measure impacts on the environment and monitor the effectiveness of their actions to decrease adverse impacts and to increase positive results.
Business leaders are taking note and implementing Natural Capital Accounting. For example, work has been undertaken by the luxury brand Kering (and its Environmental Profit & Loss, or EP&L, approach) as well as LafargeHolcim’s Intergated P&L (or Environmental and Social Profit & Loss), and pilot testing by Novo Nordisk’s in creating an EP&L account (PDF). Numerous other corporate initiatives have been profiled and shared as best practice examples in a growing number of conferences over the last couple of years, including the recent World Forum on Natural Capital.
Uptake of NCA is also underway within the public sector. National governments around the world are developing natural capital accounts that can be integrated into Gross Domestic Product (GDP) calculations. These governments are applying the System of Environmental-Economic Accounting (SEEA [PDF]) and the SEEA Experimental Ecosystem Accounting — which has strong support, as it was adopted in 2012 by all United Nations member states and jointly published by the U.N., European Union, U.N. Food and Agriculture Organization (FAO), International Monetary Fund, OECD and World Bank. A key project in taking this work forward is the World Bank’s Wealth Accounting for the Value of Ecosystem Services (WAVES) partnership that includes pilot testing countries and donor nations of Botswana, Colombia, Costa Rica, Denmark, European Commission, France, Germany, Guatemala, Indonesia, Japan, Madagascar, the Netherlands, Norway, Switzerland and the United Kingdom. Notably, the EU has legislation which mandates SEEA-based reporting of natural capital accounts for all EU member nations.
Looking forward, improved alignment and collaboration between government, business and financial institution based NCA approaches will be important — as the latest EU B@B Platform NCA comparative analysis report (PDF) advocates.
The takeaway is simple. Undertaking natural capital accounting opens up options for using other business tools, such as for investment risk management, which can show that liabilities are far greater than loan values (documented in a 2015 report [PDF]). The intent is that all of these NCA applications can help to decrease corporate risk and increase values created — financially, socio-economically and environmentally. The timing is more than ripe to evolve accounting systems and show a greater range of risk and opportunity.