Why accounting for Natural Capital is key for Business success?
Updated: Aug 21, 2021
If you were asked to put a price on nature, you may be stomped for an answer. You may even question why that even matters. Consider the role of the sea in health, energy, agriculture, tourism, medicine, mining, or construction. If for some reason, that resource became inaccessible, what would be the cost to society?
One such exercise was performed by the World Wide Fund for Nature (WWF) in 2015 when they estimated that the “Gross Marine Product” of all human activity that depends on the oceans – shipping, fishing, coastal tourism, and other sectors in the “blue economy” was at $2.5trn per year. This number at the time was equivalent to the GDP of India. The report went on to estimate that the total value of the Earth’s oceans as an asset base was worth more than $24 trillion. 6 years later, Morgan Stanley released a report in 2021 that stated biodiversity provides societal benefits worth $125tn-$140tn every year, 1.5 times the size of global GDP. This figure has been corroborated by the World Economic Forum.
It is well documented that all of nature’s resources are being depleted by human activity. Humans have caused the loss of 83% of all wild animals and half of all plants according to the World Economic Forum. If you are unaware of the extent to which your operations rely on nature's resources, you may be missing areas of vulnerabilities.
Natural capital is natural assets derived from nature such as soil, rocks, air, water, land, sea, and animals from which flows ecosystem services. These services provide a public good by meeting society’s economic, social, environmental, cultural, spiritual, or wellbeing needs. They, therefore, underpin the health, wellbeing, wealth, and culture of a society.
Your decisions should be guided by how your business interacts with its ecosystems. Resource scarcity, raw material price volatility, feedstock inferiority, and pollution are all materialized risks for businesses when the industry in which it resides does not take stock of how its resources are being harnessed and managed. It is incumbent on you to itemize what are the natural capital resources you will rely on to carry your business forward. Consider what are the threats and opportunities linked to these resources and ensure that you are doing all that is possible to ensure that their availability is preserved.
All wealth generated is dependent on at least one natural resource. Increased pressure on nature from uncontrolled drilling, mining, hunting, and climate change leads to biodiversity loss and depleted resources which lead to long-term risks for businesses.
“Long‐term development is a process of accumulation and sound management of a portfolio of assets—manufactured capital, natural capital, and human and social capital.” World Bank
Car production uses approximately 39,000 gallons of water to make one car inclusive of tires. (automotiveworld.com). Similarly, the pharmaceutical field relies on the biochemical profile of plants for medicine production. Unprecedented dry weather due to climate change can reduce access to water and hamper the profitability of these companies. Dwindling energy production can lead to economic strife for those economies that are reliant on it for economic prosperity and generation of foreign exchange. Governments, employees, investors, and financial institutions all become exposed to natural capital risks when businesses collapse due to sustained natural capital disruption in their supply chain.
Emerging territories like the Caribbean depend on natural capital for 50% to 80% of their wealth yet their natural assets continue to be depleted without any remediation efforts to ensure intergenerational wealth. A natural capital approach gives businesses a wider scope of information to make informed decisions. It enables businesses to understand their true costs (to the business and society) and enables them to price their products appropriately. Businesses must therefore be honest and ask themselves how dependent is their business model on the health of their ecosystems? They may also want to consider whether their actions or actions of their community are likely to jeopardize their business model in the long term. They may also want to confirm that this is being captured in their risk registers and appropriately mitigated.
According to the Economic Commission for Latin America and the Caribbean, 9 countries have made progress with their first natural capital accounts (Brazil, Chile, Panama, Peru, Dominican Republic, Jamaica, Paraguay, Saint Lucia, and Uruguay).
Jamaica's pilot project is Yallah's river. Its watersheds supply 42% of the potable water requirements for the country’s capital Kingston as well as the surrounding Metropolitan Region. They saw that economic prosperity would be threatened if the quantity and quality of the metropolitan water supply (future water security) was not maintained given an uncertain climate future. They applied for grants to engage in soil conservation, good land husbandry, and reforestation to continue to benefit from freshwater resources.
The international brand PUMA developed an environmental profit and loss account (EP&L) which is a monetary valuation of a company’s environmental impacts (from raw material to product disposal). They used it to conduct a strategic overview to determine how much their business affects the environment and compared this to their revenue and profit. They identified that its business operations cost the environment €8m, and its supply chain cost the environment €137m (94% of its total impact). This information influenced the brand to collaborate with partners throughout its supply chain to reduce its environmental footprint.
General Mills a food and beverage company is another example of a company that has set a goal to sustainably source 100% of its ten key ingredients by 2020 after assessing its supply chain hotspots. They have also made commitments to manage climate change and to manage their water use for farmers and their operations. A noted quote from their Chief Sustainability Officer in 2020 “Stressors to the earth and its resources impact our ability to feed a growing population. We remain diligent on being an environmental steward and taking action on climate change and water security risks in support of the planet, people, and the communities we serve.”
The world continues to limp through the Covid-19 pandemic which has introduced additional business risks. Research has shown that pandemics occur when the natural asset of biodiversity is depleted and exploited. The barrier that nature once provided between humans and pathogens has weakened and humans are now fully exposed. Urbanization and human encroachment on nature is making it easier for contagion to spread. Effective risk management systems must now make room for capturing the plethora of natural capital risks that are likely to threaten business viability.
Below are some actionable tips that you should use to embed natural capital into business considerations.
1. Capture the true price of your resources
Companies are now starting to price for negative externalities and factoring this into their operational costs. This gives them information and an incentive to manage their business risks as they are using shadow pricing to assign a price to intangible items from which they generate revenue.
2. Manage the backbone of your business
Focus on the crucial aspects of your supply chain. The areas where you have the most costs and derive the most revenue. Conduct risk assessments to identify which environmental impacts are most material to their business and convert them into financial metrics. This allows for greater resiliency and reduction of business interruption.
3. Embed Natural Capital in your Design process
Integrating natural capital considerations into product development can help companies make progress in cutting their impacts. This is made possible by integrating environmental performance at the design stage, performing product traceability, and enforcing compliance.
Sustainable operation within ecosystems is a basic responsibility and a modern-day requirement for smart business! Unmanaged natural capital continues to cost the world billions. Unless addressed, natural capital risks will continue to threaten health, production, profitability, and business interruption.
Now is the time to start embedding natural capital considerations into your decision making.
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