INSIGHT: What's so good about knowing the damage my company causes?

In late 2011, shortly after PUMA published its environmental profits and loss account, Jochen Zeitz, was interviewed by the German tabloid BILD. In the typical blunt yellow press style they asked the essential question for natural capital accounting: “what’s so great about highlighting how harmful to the environment your products are?”

Since PUMA a lot has happened and other companies have conducted similar work. The question is still valid though and the communication of the business case is one of the big challenges for the roll-out of natural capital accounting.

To learn more about the motivation of companies and to analyze the status quo, the Global Nature Fund has recently published the study “How companies value natural capital – taking stock and looking forward”. In our study we distinguished between two applications of “natural capital accounting”. On the one hand we looked at the use of economic valuation methods for a certain project, at a certain facility or a specific decision-making problem. We called this the “CEV-approach” as it is based mainly on the Guide to Corporate Ecosystem Valuation (CEV) of the WBCSD. Dow Chemical’s work with the Nature Conservancy however does fit into the category as well. On the other hand we analyzed how companies apply economic valuation to assess their entire value or supply chain – which we called the “EP&L-approach”. Since 2011 more companies have followed PUMA’s ground breaking work, e.g. the Otto Group in Germany or Novo Nordisk of Denmark as well as Yorkshire Water in the UK.

During the course of the assessment, we have conducted short interviews with most of the CEV-road testers and other pioneers. Similar to PUMAs reasoning, transparency is often named as one of the key motivations for the interviewed companies. They use valuation to find out at which stage of the value chain or which material causes the biggest environmental impact. Building on this knowledge, companies can improve their sustainability management and can target their initiatives more efficiently to where they offer the highest value for money. On the other hand, transparency helps to strengthen risk management. Possible disruptions caused by environmental damages – such as water shortages in a cotton producing region or new environmental regulations as anti-air pollution laws in China – can be addressed early on. Supply chains can be adjusted accordingly and new raw material sources with less impact can be established.

In times of increased awareness for environment and sustainability issues, damages to nature pose a high reputational risk. Especially, as a company’s sphere of responsibility extends, not only in sustainability reporting but also very likely with the revision of the ISO 14001 norm. Economic valuation of natural capital allows to discuss the environmental perspective at the same level as financial capital. As a result it can be integrated in the same manner in the comparison of different production or management options. Therefore, it becomes obvious which product causes the bigger damage and can be better managed. Thus, hopefully, a competition for the most sustainable product is initiated.

Companies with high direct impacts on nature, such as the extractives industries, furthermore use the economic valuation to improve their standing in the society. They can for example calculate the value they create for society (after the use phase) through the restoration of a quarry. In its CEV-road test Holcim did so by estimating the benefits for the surrounding communities after restoring a gravel quarry and establishing an artificial lake. Still other companies mention the identification of business opportunities as a motivation, e.g. to assess potential revenues from eco-tourism.

Links with reporting and accounting

Besides assessing the motivation of the pioneers we also highlight the links with existing sustainability reporting guidelines as well as accounting rules. Sustainability and integrated reporting will be a major driver for natural capital accounting in the future. In the integrated reporting framework, natural capital plays an essential role as the basis of all other capitals. Also, with moving materiality to center stage and emphasizing the relevance of the supply chains, natural capital accounting can become an instrument to support reporting. Materiality analysis could for example be built on the results of an economic valuation study.

The outlook

Some challenges still exist and should be addressed quickly. More companies need to test the tools to allow a development and improvement of these methods and models. This doesn’t mean that every company has to start with an EP&L. You can start small, at one site or with a smaller project and upscale the application of economic valuation. To foster this development the models’ standardization must be modified to make them easier to apply and to allow comparisons with other companies. In this study, we looked at five companies that valued carbon emissions. The range of estimates for CO2 is between 4$ and 66€! An accepted set of cost and value (regionally adapted) estimates is therefore needed. Data availability is another important issue to be considered. Especially for environmental impact categories, such as air pollution whose damage depends on the local conditions, the local context needs to be accounted for.

Despite these challenges natural capital accounting offers a huge potential. Pioneers such as PUMA, Dow Chemical, and the WBCSD have sparked a dynamic which provides the opportunity to incorporate natural capital accounting and the assessment of externalities in the companies. Supported by incentives and regulatory measure, other companies will follow suit and a great opportunity to transform the economy towards a green economy would be seized.
 

Tobias Hartmann spoke at the inuagural World Forum on Natural Capital in the session looking at "Which sectors are leading the way when accounting for natural capital in the supply chain?".

Tobias works as programme manager for the Global Nature Fund (GNF), an international foundation for the protection of environment and nature based in Germany. The GNF is the coordinator of the European Business & Biodiversity Campaign aiming to strengthen private sector commitment for biodiversity and ecosystem services. Tobias currently leads GNFs work related to natural capital accounting and ecosystem valuation. You can find more information about their work at www.business-biodiversity.eu

The study on natural capital accounting was funded by the German Federal Environment Agency and the German Ministry for Environment, Nature Conservation, Building and Nuclear Safety.

Click here to download the Global Nature Fund's study “How business values natural capital – taking stock and looking forward”.

The next World Forum on Natural Capital will take place in Edinburgh, Scotland on 26-27 November 2015, click here to register for updates.