Natural Capital
What is Natural Capital?
The concept of Natural Capital encompasses Earth’s limited
resources, that is, clean water, breathable air, and the liveable climate to
name a few. Given the dependency of numerous organisations on natural capital,
the concept is poised to become much more significant on the agenda of internal
discussions within companies.
Whilst it is highly difficult to measure the value of all
the natural capital on the planet, that has not hindered attempts to do so. Valued
at 47 trillion USD (for 17 of the world’s ecosystems)[1],
the value of the ecosystems are insurmountable given the scope of resources the
term “natural capital” encompasses.
Why Will There Be Constraints on Natural Capital?
Items key to the advancement of the planet such as
globalisation, wealth, urbanisation, material use, population and climate
change are all interconnected affecting each other in varying ways forming what
has been described as a “nexus” by organisations such as KPMG[2].
Analysing all listed items in turn, it is evident to see how they are
interconnected.
Using a similar example in KPMG’s 2012 report, “Expect the Unexpected: Building business value
in a changing world”, an increase in wealth (and thus a growth in the
middle class) w4ill very likely increase the demand for goods and services, in
turn, placing more stress on producers and supply chains. The added pressure
will result in added pressure on natural and resource capital to deliver these
goods and services. In order to feed the growing population, agriculture will
be pressure to provide more food, putting increased strain on the planets
waters supply. A growing middle class will likely lead to more individuals
migrating to cities (i.e. urbanisation) again putting strain on natural and
resource capital to feed, clothe, and meet demand for items and services which
are essential such as power.
However, to the astute mind, it is clear that for these projections,
there is a key point missing. How are these resources being maintained? It is both
unsustainable, and irresponsible to continue consuming these resources assuming
their supply is infinite. The supply of fresh water on the planet for example
is extremely limited relative to (undrinkable) saltwater, and the means to
create more fresh water from seawater, is an extremely energy intensive
process, for the time being. Increased agriculture does not account for erosion
of the topsoil, and depletion of key nutrients required to produce basic crops.
Urbanisation also fails to account for the impact of migrations from areas
where climate change has had a particularly damaging effect.
The Growing Importance of Natural Capital
For an organisation, financial reporting is highly developed
having been utilised for decades to determine a myriad of metrics and values
that determine the success (and sometimes failures) of the organisation and
usually where they have occurred. However, the standard and more common means
of reporting (financial reporting) fails to account how sustainably the
organisation is operating. It is to the detriment of the organisations
long-term success if no consideration is made regarding how that performance
was obtained – more so to the planets detriment. How can than the organisation
continue to operate if value is being destroyed as time advances?
Whilst natural capital has seldom been included in internal
corporate dialogue or business strategies, the Rio+20 United Nations Conference
on Sustainability showed a change having what was considered a surprising
outcome: the signing of the Natural Capital Declaration[3] by
39 global financial institutions, primarily from Europe and Latin America.
Further, items such as water security served as key items on
the agenda highlighting how organisations are now beginning to consider the
risk associated with a natural capital constrained world. This act represented
the positive change of mentality by corporation to act responsibly; to operate
in a manner that will not endanger the wellbeing of our planet in years to
come.
Whilst it is not currently included in reporting, it appears
to certainly be on the horizon representing that crucial first step. A joint
KPMG-ACCA report (2012) concluded that over 50% of CEOs and CFO’s include
natural capital in their business-risk evaluation, and 49% highlighting that
natural capital was linked “operational, regulatory, reputational, and
financial risks”[4].
It is clear that companies will be under greater scrutiny to at least measure
their natural capital impacts.
There is also a growing sense of urgency amongst large
organisations to show leadership with regards to the preservation of natural
capital. Coca-Cola for example has reportedly assigned a monetary value to the
natural resources it utilises such as fresh water in collaboration with The
Nature Conservancy (TNC) and World Wildlife Fund[5].
Further, as of July of this year (2013), major retailers in
the building sector have agreed on new water efficiency labelling[6]
marking a key first step to making the initiative widespread in many other
sectors.
What are international organisations doing to facilitate understanding?
To better facilitate the understanding of “natural capital”,
organisations such as TEEB (the Economics of Ecosystems and Biodiversity)
convened by the UN, the EU, and International Union, aim to demystify the
concept and have companies develop a
“universal understanding” of what the true value of natural capital is and why
it must be preserved.
Scenario Analysis
A key point to note is that from a company’s viewpoint, it
is necessary to understand that the insecurity of natural capital will result
in supply chain constraints; particularly for sectors which are more dependent
on natural capital, such as water, or forestry reserves.
Whilst climate change is recognised as a key risk, for risk
assessment, it is not enough to just recognise it as a risk. Analysis must be
completed to determine where there is risk bourne from natural capital
limitations. An organisation and its departments, or business areas, will have
varying exposures to the dangers of climate change and the concept of
sustainability. It is up to the organisation as a whole to gather and hold a
meaningful dialogue – free of technical vocabulary, to allow all members to
engage – and determine which products, services, departments, etc. are exposed,
and to what degree. Then and only then, can action be taken that will serve its
intended purpose: to make the organisation more sustainable.
Conclusion
Natural Capital has traditionally not been a key item on the
agenda of an organisation’s internal dialogues with regards to conservation,
but as time has passed, the issue of climate change, has pushed sustainability
and by extension natural to the forefront of internal communications. Tools are
being developed, and work is being undertaken to more accurately measure the
value of natural capital in order to implement more effective means of
preserving the resource. However, this action needs to be implemented at an
enhanced speed to prevent unfavourable circumstances such as conflict or utter
destruction, which is detrimental not only for business, but to everyone on the
planet.
Written by Jimmy Olet
[1]
State of Green Business 2013 – Joel Makower and Associates (2013)
[2]
KPMG (2012). Expect the Unexpected: Building business value in a changing world
[3]
http://www.naturalcapitaldeclaration.org/
[4]
www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Tax/natural-capital.pdf
[5]
http://www.2degreesnetwork.com/groups/managing-sustainability/resources/natural-capital-accounting-essential-tool-sustainable-future/
[6]
http://www.edie.net/news/4/Major-retailers-agree-on-new-water-efficiency-labelling/
