Resource scarcity is becoming increasingly important to companies. They are looking for a strategic way of evaluating environmental risk and assessing the impact it might have on business operations. Our ability to account for these environmental assets and their rate of depletion (commonly referred to as stocks and flows) is variable. In a limited number of cases such as fossil fuels our thinking is already advanced, albeit significant challenges remain.
Natural capital accounting isn’t solely about managing risk; it is about looking at the opportunity to transform a business and its business model,looking at how the business operates and delivers a new type of growth for the future viability of the company.
For many companies, the natural capital under direct company control is typically a tiny fraction of that under their indirect influence (e.g. via supply chains). The impact on natural capital comes largely from a company simply using the resources it needs to run its business. Understanding the impacts of commercial decisions is where companies need to become better informed in order that the consequences of actions can be better managed.
As a result, all companies would benefit from measuring their impacts on natural capital more effectively. In doing so, they will better understand which impacts and which natural resources and services are strategically important to their businesses in the short and long term – and so be able to focus on them. Over time we will see companies make radical changes to their environmental accounting for resource use along their entire value chain.
Companies that embrace natural capital accounting are likely to come to grips with the major challenges and opportunities earlier –at lower cost– than companies which continue to operate under a business as usual formula.
This article gives an overview of the process of including natural capital value in company accounts. Natural capital and the services it provides are fundamental to the well-being of businesses and society. Neither its value nor the services it provides are well represented within our economic accounting system.
Like other forms of capital, natural capital requires investment, maintenance, and good management if it is to contribute fully to increased output and prosperity. There can be risks as well as potential business opportunities related to how a company manages its existing stocks of natural capital. Supply chains, for example, can be adversely affected by climate change if natural resources become scarce or unavailable. The inclusion of those potential financial impacts can help the company prepare for, and potentially avoid, the adverse consequences of asset reduction.
Business operations that have negative environmental impacts can have high but often unrecognized costs for corporate operations, investors and society. Including natural capital values on the corporate balance sheet affords a company the ability to factor the value of natural assets into its decision-making process by calculating the true environmental impact of operations to determine whether it is operating at a sustainable level or at a loss.
Natural capital accounting is a tool that can help measure and manage the full extent of a country’s natural assets and we now have internationally agreed methodology for natural capital accounting at the national level: The System of Environmental-Economic Accounting (SEEA).
Many companies are making the case for natural capital accounting to better understand the potential financial risks associated with overusing or stressing natural ecosystems. Rudimentary research released in 2013 by Trucost and GreenBiz suggests that the average per-company cost of environmental impacts is about 3.66% of revenue for U.S. companies and 3.76% of revenue for global firms. The impact on net income is even more profound — 41% for U.S. companies and 52% for global firms, according to Trucost’s estimates.