A new briefing paper from KPMG, Fauna & Flora International (FFI) and ACCA (the Association of Chartered Certified Accountants) shows that:
- The definition of materiality is evolving to incorporate new issues, inclusive of more stakeholders, over greater time horizons
- Many regulators, standard setters and sustainability reporting bodies are developing their frameworks to incorporate new forms of the materiality principle
- The issues and risks related to natural capital more likely to be included as material business concerns
The briefing paper, Identifying natural capital risk and materiality, is an information guide for businesses interested in understanding natural capital as a business risk and a material issue. It is the first in a series of shorter briefing papers directed at business leaders, Chief Financial Officers and accounting professionals that follow up on the 2012 report Is natural capital a material issue? An evaluation of the relevance of biodiversity and ecosystem services to accountancy and the private sector.
Natural capital – the stock of capital derived from natural resources such as biodiversity, ecosystems and services they provide – is declining globally. Business operations that have negative environmental impacts can have high, but often unrecognised costs for organisations, investors and society.
Recent analysis estimates that global primary production and processing sectors (forestry, fisheries, agriculture, mining, oil and gas exploration, utilities, cement, steel, pulp and paper and petrochemicals) have unaccounted costs of US$7.3 trillion per year – mostly from greenhouse gas emissions, water use and land use.
The briefing paper outlines how changing definitions of materiality affect the boundaries of materiality assessments, enhancing interest in and justification for natural capital’s consideration in corporate materiality assessments in relation to the three key areas:
- The scope of issues that are material broadening to the environmental and social impacts of organisations, including those related to natural capital
- The stakeholder groups to be included when assessing if an issue is material, extending to bodies such as NGOs and local communities that are concerned about natural capital issues
- The timeframe over which business impacts are considered material, incorporating previously unaccounted medium- and long-term impacts and effects on natural capital issues
'Responsible investors are increasingly considering natural capital a material business concern and more and more want to see portfolio companies, particularly in high risk sectors, stay alert of how these -otherwise hidden- business risks might implicate their financial performance,' says Cecilia Repinski, Director of the Natural Value Initiative of Fauna & Flora International.
Incorporating natural capital issues in corporate materiality and risk assessments offers a range of benefits and value to companies: from better-informed decision making by an organisation and its stakeholders, to an enhanced and more comprehensive risk management process, to an increased ability to realise strategic opportunities.
To take advantage of these opportunities, companies are recommended to:
- Define materiality in a way suited to their business model
- Link stakeholder engagement processes to the identification of natural capital material issues
- Specify which natural capital issues are material to the organisation, and develop goals and strategies to manage these
- Connect identified natural capital material issues to their long-term risks assessment process
ACCA, FFI and KPMG work together in a unique partnership to raise awareness and improve the understanding of the accountancy profession’s role in accounting for natural capital.
Rachel Jackson, ACCA Head of Sustainability, said: 'Finance professionals within business have to look at the whole picture and natural capital is a fundamental part of that. Accountants need to acknowledge that natural capital can be a material issue and that they have a pivotal role in reducing business impact and dependence on it.'
Dr Stephanie Hime, Manager and Lead Specialist - Natural Capital, KPMG UK Sustainability Services, said: 'The changing focus of materiality analyses is the first step to ensuring that natural capital issues are included within corporate risk assessment and disclosures. The briefing paper seeks to provide information for businesses interested in understanding natural capital as a business risk and a material issue.'
- Natural Capital is the stock of capital derived from natural resources such as biological diversity and ecosystems along with geological resources such as fossil fuels and mineral deposits. It provides the ecosystem products and services that underpin our economy and inputs or indirect benefits to business. This report focuses on biodiversity and ecosystems, specific constituents of natural capital that give rise to ecosystem services. Geological resources are not considered as they are routinely included in market transactions and accounting practices.
- Materiality is a concept that recognizes that information, if omitted or misstated, can influence the assessments of the users of corporate reports. It defines the point at which information becomes relevant to report users. For example, the Global Reporting Initiative G4 Reporting Guidelines state: 'Relevant topics are those that may reasonably be considered important for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders, and, therefore, potentially merit inclusion [in reporting].