JPMorgan Chase, UBS assess risks to tally natural capital costs
If sustainability executives want Wall Street and other financial stakeholders to care more about natural capital, they must speak a different language.
That vocabulary should focus far less on measures such as absolute metric tons of carbon pollution emitted, kilowatt-hours of electricity saved, or millions of gallons of water consumed by their organization and more on the demonstrable financial impact of that data on the bottom line.
That translation won't be easy, but it's the only way companies can truly account for the value of natural resources such as fresh water, clean air or tillable soil that are taken for granted, according to experts speaking Wednesday at GreenBiz Forum in New York.
"Wall Street can only make a difference on this stuff if we figure out a way to make money on it," said Matthew Arnold, managing director and head of environmental affairs for JPMorgan Chase, during a panel session dubbed "The Power of Wall Street in Promoting Sustainable Development." "It has to move the needle."
That in itself might not seem a major revelation, but until now few companies have invested in natural capital accounting, partly because it's really, really hard.
That's changing because the case for valuing natural capital is building, mainly a risk mitigation strategy. If those costs were tallied globally, the liability would be considerably more than $1 trillion, according to the State of Green Business 2013 published this month.
Changing the methodology
Erika Karp, managing director and head of global sector research at UBS Investment Bank, jokes that she has been "accidentally sustainable" for quite some time without realizing it.
The UBS research team routinely discusses risk factors like water stress as a way to provide investors with a long-term view into a company's viability — not because it had an environmental interest, necessarily, but because it believes this information is of interest to stakeholders.
"It became more and more obvious that these issues were pivotal," said Karp.
Trying to get investment banks to take big "leaps of faith" isn't for the fainthearted. That's why Karp and Arnold are focused on applying traditional financial risk analysis techniques to the problem of talking about natural capital. "We don't finance fuel choices, we finance balance sheets," noted Arnold.
For both it comes down to a question of materiality: "What does a reasonable person need to know about this?" said Karp.
JPMorgan's process of educating both its own bankers, and by extension its clients, about the environmental, social and governance risks associated with hydraulic fracturing (aka fracking) offers one example of how things are changing.
The bank's exposure to this is substantial: More than 100 of its legacy oil and gas industry clients are involved with fracking to some degree. So Arnold's team has methodically been interviewing each of those companies about their experiences. After more than 80 sessions, JPMorgan has developed a 12-point risk assessment framework that it is sharing not only with its own clients — so they can benchmark their own policies — but with its competitors so that the principles might be adopted more quickly.
"We need to understand this. It is potentially quite threatening," said Arnold.
Photo of Wall St. sign in front of the New York Stock Exchange provided by Karen Struthers/Shutterstock
Sports apparel and shoemaker Puma is widely credited with creating the first corporate Environmental Profit and Loss statements, which attempt an accounting of its exposure.
While the math is still imprecise, these calculations have provided the company with an unprecedented view and directional guidance as to how its operations might be affected in the future, said Richard Mattison, CEO of research firm Trucost, which is helping a number of companies with this exercise.
For example, almost 57 percent of Puma's embedded risk, which it calculated at around $192 million, is related to the cattle ranches it uses to source its leather, particularly the water they need to thrive.
Clothing company H&M faces a similar conundrum: The price of the cotton it uses for its products has been rising quickly over the past 24 months, largely driven by water shortages. And consumer products giant Unilever has estimated publicly that climate change is costing the company around $265 million annually.
"It is of value to understand these metrics from a design point of view, to understand regulatory scenarios and so on," said Mattison.
Slowly but surely, forward-thinking companies are embracing that idea.