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Trucost

True Cost has launched a new blog providing insight into the dependence of businesses on natural capital.

Burgess COMMENTARY

Peter Burgess

Trucost launches new True Cost blog

True Cost has launched a new blog providing insight into the dependence of businesses on natural capital.

Every month we'll focus on a different aspect, highlighting risk and opportunity across a range of business activities. We will be seeking to provide context to the value of ecosystems... because what is valued - is managed.

But what is natural capital and what do we mean by 'True Cost'?

In economics 'capital' is traditionally defined as 'already produced durable goods that are used in the production of goods or services'. In this traditional economic sense, capital is man-made. However, all of what is man-made originates from nature. There is, however, a problem. In 2005 the UN stated that 60% of the ecosystems we rely on are significantly degraded. All the signs indicate we are continuing if not accelerating this degradation. The problem is, nature is often under-valued or free and therefore not factored into business decisions. Unfortunately, the consequence of this is that we don't recognise the value of our ecosystems, our natural capital, until it is gone. As Benjamin Franklin once said, when the well is dry, we know the worth of water. Even today, droughts in the United States and across the world affecting grain and soy crops are threatening another global food crisis. This is a continuing trend that is affecting the availability of resources and commodity prices. Since the turn of the century there has been a 147% increase in real commodity prices, wiping out previous declines of almost 50%. This is a problem business leaders need to address.

Furthermore, our problem is getting larger - over the next 20 years we will welcome 3 billion new mass-affluent consumers to the world, largely in developing nations. Without radically re-designing our system of trade it seems that significant price rises and resource constraints are inevitable. For example, Trucost analysis indicates that more than a quarter of profits would be wiped out across the world's largest companies if water were priced to reflect its availability across current production locations. We will need to find ways of using our resources and preserving our ecosystems wisely against this backdrop of massively increased demand.

So what can be done about this?

One of the most encouraging announcements at the Rio+20 Conference on Sustainable Development in June was a support from the World Bank, 57 countries plus the EU, and 86 companies and investors 'to factor the value of natural assets like clean air, clean water, forests and other ecosystems into business decision-making and countries systems of national accounting'. We hope that in the future businesses will be equipped with tools to understand the value of the natural capital we all rely on.

Ultimately natural capital constraints will create winners and losers - those companies that act now to optimise their products, operations and supply chains in line with natural resource availability and environmental costs will create competitive advantage from reduced input costs and security of supply. In addition, companies that find ways of communicating this will be able to harness the ethically aware consumers of the future. Perhaps those three billion new consumers will buy from companies that use less (or zero) to make more?