Written by Pavan Sukhdev, Founder-CEO of GIST Advisory. Originally published on Huffington Post Business blog pages on 23/11/15
Back in November 2012, we launched the TEEB for Business Coalition (now the Natural Capital Coalition) to make a compelling case for the conservation of natural capital from the business viewpoint. The idea was to integrate the economic valuation of nature's services, both in terms of business dependencies and business impacts, into everyday business practice in order to drive transition to a more responsible and inclusive green economy.
Fast-forward to November 2015, and we have the public consultation draft of the Natural Capital Protocol (NCP) being launched at the World Forum on Natural Capital in Edinburgh. This is progress, and I congratulate all involved in this initiative. But why is this significant?
In his foreward to TEEB in Business and Enterprise the business book that was part of the TEEB report suite, H.R.H. The Prince of Wales remarked that "We need to remember that the ultimate source of all economic capital is natural capital and that the world economy is a subsidiary of nature, and not the other way around." The NCP and its wide consultation process has gone a long way in anchoring this idea within mainstream business thinking, and that in itself is a landmark achievement.
Over 40 companies are already testing various aspects of the NCP in depth, and many are household names such as Coca-Cola, Dow Chemicals, Hugo Boss, Nestlé and Shell. The testing includes, among several other areas, the assessment of water use opportunities and risks, identification of a comprehensive set of material environmental impacts along their value chains, looking at how natural capital assessments can improve the management of environmental issues. When these results are made public, they will become part of the bank of knowledge that business and society need to ensure that business impacts on natural capital are managed, sector by sector, to avoid running into planetary boundaries. That will be the second major achievement. And third, when the tested Protocol together with its sectoral guidelines (such as those already drafted for food & beverage, and for apparels) are ready, the fact that they are universal guidelines sets the stage for integrated management accounting standards and integrated reporting standards that are used globally by entire business sectors as a common lexicon and toolkit to recognize, value and conserve scarce natural capital in an equitable, orderly, and transparent manner.
Moving forward, I hope we can soon launch equivalent protocols for human capital and social capital as well, along the lines of the NCP. The World Business Council for Sustainable Development (WBCSD) has begun preliminary work towards a 'social capital protocol' which envelops the themes of human capital, relationship capital and wellbeing. This can help us upgrade our existing 'one-dimensional' accounting framework to encompass all four dimensions of capital that are widely written about in the literature of environmental economics. The financial, manufactured, human, social and natural dimensions of wealth, be it held in public, community or private ownership, that any large contemporary corporation depends on and has impacts on would finally begin to be managed responsibly.
"4D P&L" accounting is not just a theoretical hypothesis; it is real, and doable. For example, my firm GIST Advisory and its partners have developed a comprehensive accounting model that helps companies identify how their activities impact the environment, society and people at large. AkzoNobel, a major global chemicals company, made use of this model to conclude that while their financial and human capital impacts were positive, their impacts on natural capital were largely negative, and impacts on social capital along the value chain were mixed, positive and negative. Similarly, using our methodology, garments manufacturer Pants To Poverty worked out that their positive social and natural capital impacts far outstripped in size their financial value generation. Having measured their dependencies and impacts, these business leaders can now build on the positives while limiting the negatives.
Tomorrow's corporation will create private profits whilst also delivering gains in public wealth. I would like to believe that the days of the old model - which delivers 'private profits at the expense of public losses' - are nearly over. But how & when will we know?
You cannot manage what you do not measure. The approach to measurement enshrined in the NCP is a vital first step. It encourages us to think beyond, and to complete and integrate the picture of performance across human and social capital as well. So on the eve of UNFCCC's COP-21, thanks to the NCP, we are a step closer to the future we want. It is not a moment too soon.
Written by Pavan Sukhdev, Founder-CEO of GIST Advisory and originally published on Huffington Post Business blog pages on 23/11/15
Pavan spoke at the 2015 World Forum on Natural Capital. To view his slides, visit our Speaker Slides page.
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