Toby Webb asks Dorothy Maxwell author
of Valuing Natural Capital – Future Proofing Business and Finance
(Dō Sustainability, April 2015) how business and
finance are engaging on natural and social capital.
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| Dr Dorothy Maxwell |
TW: “Natural and social capital” are increasingly advocated
as part of the corporate sustainability toolkit. Is there a business case
for valuing these or is this just a trend?
DM: Natural and social capital are trending sustainability topics and it can
be difficult to separate out the rhetoric from their tangible role in solving
sustainability challenges.
Putting aside the jargon, the business case for maintaining
the resources and critical support services nature provides (natural capital)
is clear. It underpins the successful functioning of our businesses, economies
and society at large.
Over 60 percent of this capital, for example, freshwater,
forests and biodiversity are in decline from over-exploitation and systems such
as the ability to regulate climate and flood defences are failing.
These are not
just vital to our human wellbeing, financially the value of this to society is vast
(social capital). Yet the market largely treats it as “free” which incentivises
its degradation. However as resource constraints and the impacts of climate
change continue to bite, these externalities are increasingly expected to be internalised
through regulation and markets.
TW: So
what is the financial value of natural capital?
DM: Conservative estimates value nature’s services to the
global economy at approximately US$100 trillion/year
(2011 figures).
If Mother Nature sent
an invoice for the global cost of environmental damage from business activities
alone such as water pollution, loss of fertile land, soil erosion, drought,
overfishing and deforestation this would be over $US6trillion/year. These costs are estimated to rise to $US28 trillion by 2050 if ‘business as
usual’ continues. The important message this sends is the urgent financial
rationale for reducing natural capital risk.
TW: Which business sectors
have the greatest risks and opportunities?
DM: Sectors with the greatest risks and opportunities are
those with high natural capital dependencies. Examples are food, energy
generation, extractives, forestry, water utilities, pharmaceuticals, tourism
and the financial services sector underpinning them.
For example, an estimated 25–50 percent of the pharmaceutical market is derived from nature’s genetic
diversity. It is estimated that one major drug is lost every two years due to
natural capital degradation.
Identifying
the potential for Stranded Assets in investment decisions, such as for the
fossil fuel energy sector, is a particular priority in light of sustainability
challenges. In addition to corporations,
banks, pension funds, investors and insurers are increasingly looking at
natural capital risk to inform assessment of material risks and opportunities
in their portfolios.
So if you are a business, managing your natural capital will
mitigate risk, secure resource supply, resilience, maintain a licence to
operate, profit, reputation and ensure long-term value creation.
TW: Does natural capital valuation
help to inform assessment of risk & opportunity any more than existing
tools?
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DM: Assessing the environmental and social impacts of business is largely
mainstream. Many tools, standards and schemes exist to support this. Assessing
the dependency a business and wider stakeholders have on nature’s services is
not.
Measuring both impacts and dependencies gives a more holistic picture of
risks and opportunities. Financially valuing these further translates this
‘non–financial’ information into ‘financial’.
This common language can play an
important role in communicating and prioritising sustainability at the CFO and
board level.
It can enable the most significant or ‘material’ (in financial
accounting language) to be understood in commercial terms and the implications
for the company and its wider business model.
TW: How are corporations and financial institutions “accounting” for
sustainability?
DM: Businesses measuring the costs and benefits of their sustainability
impacts and dependencies find this valuable to inform decisions on risk
management, capital allocation, Net Present Value (NPV) and Return on Investment
(ROI). Sustainability costs and benefits internalised in the market can be
incorporated in existing management accounting techniques.
Marks and Spencer (M&S) are a good example
of how measuring the costs and benefits of sustainability in business
demonstrates the financial business case. Using management accounting they have
shown their Plan A (now Plan A 2020) sustainability programme has delivered
savings of £465 million ($US701million) plus wider benefits including staff
motivation, brand enhancement and supply chain resiliency over the seven years
it has been operating.
Externalities can also be estimated such as seen in the apparel
company Kering Group’s Environmental P&L. They have used this information
to inform raw material decisions in the supply chain. Some other examples from business
are:
o The Dow Chemical Company's
integration of financial valuation of wetland services identified NPV savings
of $US282 million for implementing a constructed wetland instead of an effluent
treatment plant over the project’s lifetime, plus a wide range of non-financial
biodiversity benefits.
o The UK’s largest property and
landowner, The Crown Estate determined their Windsor Estate delivers £4.4
million ($US6.6 million) per annum gross external benefit by measuring
environmental, social and economic value.
As a Financial Institution, for many years, Inter-America Development
Bank (IDB) has operated its Biodiversityand Ecosystems Services Program to inform its investments in
Latin America and Caribbean region. This is one of the most biologically
diverse regions in the world. Through this program, IDB assesses client dependency on nature’s services in ESG to inform
lending decisions and to develop green investment products.
TW: Is valuation really just about commoditizing nature?
DM: This is not about commoditizing or privatizing nature, a
common criticism of financially valuing nature’s services. The purpose of
assigning a financial value is not to change the fundamental value of nature –
which is arguably priceless.
The importance of translating natural capital
considerations into financial information is that it allows more informed
decision-making especially on trade-offs. At the bigger picture level
having a financial value for natural capital shared by society at large, as
distinct from being perceived as ‘free’ can shift behaviour away from
degradation to restoration.
TW:
Beyond Carbon pricing, resource taxes
and other market incentives to reduce natural capital degradation are being
talked about. What are the key initiatives business should watch?
DM: National accounting systems to support ‘Beyond GDP/GNP’ metrics are
already being implemented in over forty countries by policy makers. This
provides the foundation for future policy tools, for example, natural asset
pricing, resources targets and taxation, to be developed. New markets driving
carbon reductions, conservation of biodiversity, water, forests and sustainable
investment are growing opportunities.
The increasing number of country’s
requiring mandatory sustainability reporting is a further driver for increasing
financial and non-financial accountability. There are also many initiatives
focusing on standardising business metrics for “Natural Capital Accounting”.
However, until regulatory or market incentives require action, using these
metrics is only a voluntary exercise.
TW: What is your one take away message?
DM: Simply put – societies,
business and our economies depend on healthy and functioning natural systems
and the resources and services they provide. This is our natural capital and
just like financial and other forms of capital it is in our interest to preserve
not deplete it.
Dorothy
Maxwell PhD is Director of The Sustainable Business Group and author of the new book Valuing Natural Capital – Future Proofing Business and Finance
(Dō Sustainability, April 2015)
She will be speaking at Innovation Forum's London conference next week on: The Measurement and Valuation of Corporate Sustainability – does it all add up? How to put hard numbers on sustainability risk – and quantify opportunity. 29th-30th June, 2015, London
100 executives from leading companies, investors, NGOs and business schools will gather to debate the area under the Chatham House rule.
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