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Applying natural capital valuation in mainstream business practices

September 2015

The global economy depends on the preservation of natural resources. Yet the majority of businesses have not traditionally placed a high enough financial value on natural capital - the products and services they derive from nature. As the pressures of resource scarcity, raw material price volatility, pollution and climate change intensify, how can companies reduce their environmental impact and make informed business decisions? Alastair MacGregor, COO of Trucost and Claire Forsyth, director of business development, cr360, discuss

The global economy depends on the preservation of natural resources. Yet the majority of businesses have not traditionally placed a high enough financial value on natural capital - the products and services they derive from nature. The environmental and social impacts of business on natural capital could cost the economy as much as $7.3tn per year, calculates Trucost. As the pressures of resource scarcity, raw material price volatility, pollution and climate change intensify, progressive companies are beginning to consider nature more seriously.

In particular, companies are using natural capital valuation as a tool to reduce their impact on the environment and inform mainstream business decisions that save money, reduce risk, drive positive change and pave the way for more innovative, robust business models. By monetising their environmental impacts, sustainability leaders are bringing natural capital to the attention of senior executives in the universal language of business.

Here, we consider how to apply natural capital valuation in practical terms - both within business operations and across supply chains - and explore how data management can help to put natural capital at the heart of core business practices.

Looking through the financial lens
Making meaningful comparisons between fundamental impacts such as carbon emissions, water consumption and air pollution is challenging. Each impact is measured differently , making comparisons problematic. By attaching a financial value to the respective impacts, it becomes easier to gain an overall perspective.

For example, an environmental profit and loss account (EP&L), a monetary valuation of a company’s environmental impacts (from raw material to product disposal), is designed to mirror financial accounts. It acts as a strategic overview, enabling companies to determine how much their business costs the environment, and compare this with revenue and profit. For example, PUMA’s first EP&L identified that its business operations cost the environment €8m, and its supply chain cost the environment €137m (94% of its total impact). While this did not affect the company’s net earnings, it helped the brand to collaborate with partners throughout the supply chain to reduce its environmental footprint.

Once an organisation has a clear view of the risks its environmental impacts pose to its business, there are multiple ways of applying those findings.

1.Putting a ‘real time’ price on water and carbon
Many companies apply a ‘shadow price’ internally. This is a real-time estimate of the financial value of natural capital impacts that can then be factored into operational costs. It gives businesses an idea of the ‘true cost’ of their impacts and provides an incentive to act.
Some 150 businesses including Microsoft and Dow are using a shadow price for carbon, according to the CDP.

By factoring in an ‘internal’ price for carbon on impacts from electricity use to air travel, Microsoft has embedded the cost of carbon into its financial systems. In this way, it can also judge the relative potential of emissions reduction projects. Its shadow price is reinforced by an internal carbon fee incurred by the business divisions responsible for generating emissions associated with specific impacts.
By adding a shadow price to water consumption, companies can close the gap between the true economic value of water and the price they are paying for it.

Assessing water scarcity in specific locations, the amount of water used by individual facilities and the value of the water to the business and community can help to inform thinking on how water constraints may affect business growth and whether to expand in water-scarce regions. Tools like Ecolab’s Water Risk Monetizer are providing the practical support companies need to achieve this.

2.Managing supply chain impacts
Companies can use natural capital valuation to assess the environmental impacts of their supply chains with greater accuracy. This can amount to 80% of the impacts for the food and beverage sector, according to Trucost. Identifying hotspots helps businesses manage risks more effectively, make cost savings and reduce impacts.

Best practice suggests that companies should conduct a risk assessment to identify which environmental impacts are most material to their business. Comparing these risks in financial terms enables a clearer understanding. A company can then take steps towards building a more resilient supply chain. This could mean requesting detailed environmental data from suppliers or providing training to high risk suppliers.

Similarly, companies could build natural capital questions into supplier audits, informing purchasing decisions and improving supplier sustainability. General Mills set a goal to sustainably source 100% of its ten key ingredients by 2020 after assessing its supply chain hotspots.

3. Designing products with natural capital in mind
Integrating natural capital considerations into product development can help companies to make progress in cutting their impacts. Some businesses are building on their lifecycle analysis data by converting impacts into monetary values, making LCA findings more accessible to senior executives. Interface is pioneering this way of enhancing LCA data.

In addition to comparing different impacts, companies can also consider individual impacts in relation to resource availability . Water, for example, is more valuable in arid regions compared to water-rich regions.

4. Measuring natural capital risks on an ongoing basis
Integrating natural capital valuation into core business practices is fundamental to managing environmental risks on an ongoing basis. In future, advanced data management tools, will enable businesses to see the costs associated with their environmental impacts at the touch of a button. In this way, decision-makers can view the monetary value of environmental impacts alongside business performance, and analyse the impact of natural capital risks on profitability.

Whereas an EP&L provides a snapshot in time, data management software helps companies toanalyse their natural capital impacts on a regular basis – in a consistent and verifiable way. They can then begin the fundamental transition from monitoring negative impacts to driving progress towards a more sustainable future.

 




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