Why valuing natural capital is good for business

Companies can weather risks such as climate change, water scarcity and extreme weather events by factoring the economic value of nature's products and services into their business - an increasingly common practice known as natural capital accounting.

Extreme weather events, water crises and climate change are among the most pressing global challenges today which threaten the welfare of communities and businesses alike. But companies can cope with these risks by understanding the economic value of the natural capital that they rely on.

Natural capital refers to the products and services that nature provides to society; examples include the water used in manufacturing processes, the pollination carried out by bees which helps the agricultural industries, and the ability of forests and oceans to absorb carbon dioxide.

Accounting for natural capital entails putting a dollar value on how these products and services - which are essential but often unaccounted for - benefit society, and how it could affect a business if this capital was to be depleted or polluted.

Doing so will not only help businesses ensure their supply chains are secure and affordable in the long run, it is also essential to attracting funding from increasingly sustainability-conscious investors, said experts and business leaders at a discussion held at the SGX centre on Monday.

However, these practices have not been widely adopted by businesses to date.

In the past, sustainability and natural capital valuation were confined to the realm of corporate social responsibility, noted Alastair MacGregor, chief operating officer of UK-based natural capital accounting consultancy Trucost. 

“But it is becoming increasingly mainstream and relevant to a wider range of business functions,” he said, adding that valuing natural capital can help businesses increase revenue, reduce cost, gain new customers and attract new investments. 

Trucost, Responsible Business Forum and the Singapore Exchange (SGX) organised the panel discussion, which brought together companies, investors, and sustainability practitioners to explore the value of natural capital valuation for businesses in Asia. 

The United Nations Environment Programme in 2010 estimated that ecosystems like forests, freshwater systems, soils and coral reefs deliver services worth about US$72 trillion a year, far more than the total world’s gross national income which was US$58 trillion in 2008. 

But business operations today often cause environmental damage, such as greenhouse gas emissions, depleting water resources, pollution, and waste generation, which costs the global economy about US$7.3 trillion a year, according to a 2013 report by Trucost

This has serious consequences in Asia because resources are already scarce in the region, and its population is growing extremely fast, MacGregor told Eco-Business.

The region’s natural capital faces many threats, including pollution in megacities such as Delhi and Beijing, deforestation in countries like Indonesia, and depleting fish stocks in many countries. But, MacGregor said, water availability is the most grave issue affecting Asia, although access to water does vary across the region.

Because of these natural resource-related challenges, businesses are vulnerable to disruptions in their supply chains, and they face increase costs as companies compete for scarce resources. In some instances - such as calls to halt Nestle’s bottled water operations in drought-stricken California - businesses’ operating licenses may also be in jeopardy.

Various methods of natural capital valuation already exist to help companies understand and manage these risks.

These include ‘shadow pricing’, which involves estimating the monetary value for the risk or profitability associated with things like carbon emissions or water scarcity; and supply chain assessments, where companies scrutinise their entire operations for environmental risks and opportunities, understand their financial implications, and use that information to build a more resilient supply chain.

Why natural capital accounting pays

To build on existing approaches and to standardise the reporting process on natural capital, a global coalition of businesses, environmental groups and government agencies in 2013 launched the Natural Capital Protocol project, which is currently being drafted and is expected to be completed in mid-2016.

Over 100 businesses have already expressed interest in pilot-testing the protocol, shared MacGregor. But even in the absence of a universal framework for natural capital accounting, companies have already begun to quantify their dependence on natural resources, he said.

For example, global chemicals giant Dow Chemicals announced last week that it aims to create US$1 billion in value for the company - through costs savings and additional revenue - by carrying out natural capital accounting using a methodology developed in partnership with environmental group The Nature Conservancy.

It is a myth that natural capital valuation or environmental regulations are purely negative for consumers. On the contrary, it will be negative for consumers if companies continue to fly blind; doing so will not only impact their own profitability in the long term,  it will cause inflation through the supply chain and impact consumer prices.

Alastair MacGregor, chief operating officer, Trucost

Simon Bennett, general manager of sustainable development at shipping company Swire Pacific Offshore Operations, also shared that the company had embarked on quantifying the environmental impact of operating and recycling its ships.

After comparing the overall cost of breaking and recycling a ship in China and India, the company found that operating in India had an environmental and health impact that was about 5 times worse than in China. Hence, the company decided to recycle its ships in China, even though by doing so, they get paid less for the scrap metal than in India. 

But such actions demonstrated environmental responsibility to clients, for whom sustainability is a priorty. “We only get contracts because we care also,” said Bennet.

Investors are taking notice

Investors, too, are beginning to assess company’s environmental impact before making investment decisions.

Steve Okun, Asia Pacific director of public affairs at private equity firm Kohlberg Kravis Roberts & Co. (KKR) shared that companies which performed well on Environmental, Social and Governance (ESG) indicators were increasingly appealing to investors.

“There is a lower regulatory risk in investing in solutions-oriented companies,” he said. This was because if a business was built on solving a social problem, it was likely to have government support, he explained.

Companies that have recieved funding under KKR’s drive towards ‘solutions investing’ including Australia-based Sundrop Farms, which grows tomatoes on desert land using desalination and solar power, and Santanol, a sustainable sandalwood plantation in Australia.

Although some degree of up-front investment is usually required to implement changes to protect and value natural capital, “sustainability efforts have to have a payback for the company”, said MacGregor.

If companies managed to secure this payback - whether it is tangible benefits such as increased revenue or intangible boosts to their brand - investing in sustainability would not result in higher prices for consumers.

“It is a myth that natural capital valuation or environmental regulations are purely negative for consumers,” said MacGregor. “On the contrary, it will be negative for consumers if companies continue to fly blind; doing so will not only impact their own profitability in the long term, it will cause inflation through the supply chain and impact consumer prices.”

The practice is also not just for large companies, added MacGregor. While large and medium sized-listed companies may have the resources to undertake a full analysis and evaluation of natural capital, smaller firms can still use the principles and thinking behind the concept to improve their business.

The proprietor of a small bakery, for example, could manage its dependence on natural commodities such as wheat or sugar by entering into long-term agreements with their suppliers, or finding ways to minimise wastage of these resources. 

Natural capital accounting will “become a fundamental element of business operations” in the next few years, MacGregor predicted.

“Companies that don’t take proactive decisions will be heavily impacted,” he said.

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