Burgess COMMENTARY

Peter Burgess

How Natural Capital Accounting Can Become Your Newest Communications Tool

Natural capital accounting is growing in popularity. Trucost has worked with more than 50 clients on how natural capital valuation can help them become more sustainable businesses. And more companies are going public about the benefits they are achieving, with Danish pharmaceutical company Novo Nordisk recently publishing its environmental profit and loss account (EP&L), and studies in Brazil by Monsanto and Natura, coordinated by Conservation International, demonstrating the value of natural capital accounting in driving sustainable agriculture.

This growth is due to the dawning realization among companies of the limits to conventional approaches to environmental management. Many claim to have ‘embedded sustainability at the heart of the business.’ This might be their genuine desire, but while environmental impacts are measured in terms of tonnes of carbon and cubic meters of water, and performance on other business activities is measured in dollars and cents, sustainability can never be truly integrated. Companies will forever be comparing apples and pears.

Natural capital valuation knocks down this barrier by putting a monetary value on environmental resources, from pollution impacts to water dependency and land use. This gives companies clarity on how much they depend on nature to generate revenue, what its pollution and natural resource consumption is costing the planet and society, and provides a common metric to truly embed sustainability in business decision-making.

Natural capital valuation also provides deeper insights than traditional sustainability metrics because it takes into account how much resource is being used in relation to how much is actually available — what environmental scientists call ‘planetary limits.’ For example, when water is valued in monetary terms, Trucost takes into account the scarcity of water in the region where a business uses it. In this way, natural capital valuation tells you how big your sustainability problem is — and provides insights to address it.

A wide range of companies use natural capital accounting, from consumer goods firms to utilities to building product manufacturers. What these companies have in common is a desire for a more business-like way of integrating sustainability.

Natural capital accounting is being used in many different ways, yielding a variety of business benefits. One of its main uses is to quantify risks so they can be better managed. Applying regional shadow prices into an EP&L statement highlights the value at risk if a company had to pay the costs of its pollution or natural resource use as a result, for example, of taxes or increasing water costs in arid regions. In this way, companies can assess the natural capital business case alongside the financial business case to build more risk-proof investments and operating strategies, ones that are hedged against future cost increases or resource shortages.

The Plastic Disclosure Project and the UN Environment Programme aim to promote the sustainable management of plastic, by encouraging companies to measure and report plastic use — as many companies already do with carbon. To help companies better understand and manage the environmental risks associated with plastic, Trucost was engaged to value the natural capital cost associated with plastic used by companies in the consumer goods industry. A major driver is the risk to intensive users of plastic from tighter regulation to control the impact of plastic litter in the world’s oceans. The results of the project will be released in early June at Sustainable Brands ’14 in San Diego.

But it’s not all about prevention and precaution. As well as identifying risks, natural capital valuation is being used to identify opportunities such as developing new, more sustainable products.

The Cradle to Cradle Products Innovation Institute, whose standard provides a path to manufacturing innovative, healthy and sustainable products, wanted to understand the holistic benefits of its approach. Using natural capital tools and a valuation framework developed by Trucost, the Institute has assessed the natural capital benefits of 10 products that have gone through the optimization process required by the C2C certified product standard.

Many companies have already conducted lifecycle analyses (LCAs) of their products to quantify environmental impacts including waste, carbon and water use. There is considerable potential in converting these different impacts into monetary costs so that they can be compared and understood in a regional context.

Trucost has worked with carpet tile manufacturer Interface to use natural capital accounting to extend the value of existing LCA studies. “Understanding the significance of carbon emissions relative to other environmental impacts has sharpened our focus on projects that drive down our carbon footprint, says Connie Hensler, Interface’s director of corporate LCA programs. “It has simplified the internal discussions and helped us to prioritize our efforts,” she adds.

The project also gave Interface valuable insight into regional impacts such as water resources and smog creation. For instance, the cost of smog in the UK is almost four times the cost of smog in North America. Hensler says this information can influence Interface’s decisions on where to source raw materials and locate its production plants.

Another benefit of natural capital valuation is its ability to improve communication of sustainability initiatives. A frequent complaint among investors is that sustainability reports do not provide useable data on environmental performance. A group of roughly 100 companies are developing integrated financial and sustainability reports through the IIRC integrated reporting pilot program to give investors data that is fit for purpose. Putting a monetary value on impacts supports these efforts, because companies can demonstrate their understanding and management of value at risk in a way that is meaningful to financial stakeholders.

Companies can also use natural capital accounting to communicate the benefits of new products or technologies to both investors and customers. Energy solutions firm Utilyx wanted to show how its plan to install a gas and biomass-fired combined heat and power plant at a hospital in the UK was a better for the environment than using energy from the grid and the site’s old boilers. Trucost’s analysis showed the new plant would save more than $133m in natural capital costs over its lifetime, largely due to reduced greenhouse gas emissions. A big contribution also came from reduced health impacts of air pollution resulting from switching to cleaner burning gas and biomass compared with coal-fired power stations supplying the grid.

Natural capital accounting could also be used on product labels. Visualize being able to tell a customer, for example, that your product only costs the environment $2 compared to a competitor’s product, which costs the planet $5. It is a simple and engaging way of aggregating several impacts into a single metric that is meaningful to buyers. The Sustainable Brands community, with its wealth of expertise in branding and communications, could do more to explore the opportunities by testing how this information resonates with customers.

The big future issue is how to scale up natural capital accounting so that it becomes an accepted day-to-day part of business management processes. We need to see a time when there is a natural capital cost column in the monthly reports reviewed by chief financial officers, and the natural capital cost of a new project is itemized in the calculations to determine the ‘true’ return on investment.

One aspect of scaling up natural capital accounting is developing a standardized methodology so that more companies can create natural capital accounts and the results will be comparable. The Natural Capital Coalition, a multi-stakeholder group of business, environmental groups and expert advisers, is developing a protocol due to be published by the end of the year.

Another aspect of scaling up is forming coalitions within industry sectors to build awareness of natural capital accounting and gain experience of how it could be applied. Trucost has contributed to this process by writing a ‘white paper’ on natural capital accounting in the apparel sector with the Sustainable Fashion Academy.

The world is emerging from the economic downturn and consumer confidence is growing again. But we cannot afford another resource-intensive, consumption-driven splurge. If natural capital accounting teaches us anything, it is that the future prosperity of business is tied to that of our planet.

So this is the challenge for the Sustainable Brands community. Do you understand your business’s dependence on natural capital? What are you doing to shape the natural capital accounting standards of the future? Could you use natural capital accounting to optimize the performance of your products and communicate those improvements to customers? Get in touch to let us help you rise to this challenge.

James joined Trucost as Research Editor in December 2013. He is responsible for editing Trucost’s public and client research reports, as well as promoting the importance of natural capital valuation in the marketplace. James has over 13 years of experience… [Read more about James Richens]