Natural capital comes of age

As pressure grows on our resources, companies must learn how to manage, measure, report and disclose on natural capital.

Awareness is growing of the dependence of business and society on the world’s natural resources – its ecosystems in the form of forests and oceans, for example, as well as its fossil-fuel deposits. With that awareness comes a growing sense of the need to manage and protect the world’s natural capital; once it’s gone, it’s gone.

National governments are increasingly looking at how to assess and preserve their natural capital. Supported by global coalitions such as Wealth Accounting and the Valuation of Ecosystem Services, countries such as Botswana, Costa Rica and the Philippines have taken steps towards accounting for their natural capital such as water, forest and mineral resources.

Understand and manage

For businesses, the challenge is to understand and manage – or reduce – their impact and dependency on natural capital. This requires the development of strategies underpinned by measurement, valuation and reporting. Current developments in this arena include the work of the Natural Capital Coalition (NCC) to draft a harmonised framework for valuing natural capital to enable better measurement, management, reporting and disclosure. Called the Natural Capital Protocol, the framework is intended to be a starting point from which future standards could be developed. The draft protocol has two parts: firstly, a high-level guide for C-suite executives, particularly CFOs, to explain both the business benefits from managing, accounting for and valuing natural capital, and how they can apply natural capital valuation in business; and secondly, a more detailed document aimed at practitioners in business, policy, consulting and research which addresses topics such as materiality, and techniques and tools for valuing natural capital. Alongside the protocol, two sector-specific supporting guides are being developed for agricultural commodities used in the food and drinks sector, and the clothing sector. The protocol will be pilot tested, with a view to finalisation by December 2015.

Important step

The development of the protocol is an important step in the evolution of natural capital accounting and reporting. It is international in scope, supported by stakeholders from a range of backgrounds but all striving for the same outcome – better natural capital management and preservation.

This collaborative approach is essential for ensuring that the final protocol has maximum buy-in and that it complements other initiatives, not least the International Integrated Reporting Council’s Integrated Reporting Framework, which contains a natural capital strand. These need to be harmonised in order to avoid creating a confusing reporting landscape for businesses – one they would then ignore.

The need for harmonisation appears to be accepted by the NCC and the Natural Capital Declaration (NCD), a finance-sector initiative – supported by ACCA – to integrate natural capital considerations into loans, equity, fixed income and insurance products as well as in accounting, disclosure and reporting frameworks.

The NCD has established four working groups focused on understanding, integrating, accounting for, and disclosing and reporting on natural capital. It is collaborating with these working groups in order to avoid duplication and ensure consistency in approaches. The NCD is also seeking the participation of investors, encouraging them to ask more questions about natural capital impacts and management.

Another international development of note is the proposed expansion of the scope of the Climate Disclosure Standards Board’s climate change reporting framework to include water and forest commodities. The scope expansion reflects the growing interest among investors and others in organisations’ use and management of natural capital, as well as their greenhouse gas emissions.

ACCA’s role ACCA is contributing to the international debate on and developments of natural capital accounting and reporting. We are, for example, working with KPMG and biodiversity conservation organisation Fauna & Flora International (FFI) to improve understanding of the accountancy profession’s role in accounting for natural capital. The second in our series of joint briefing papers, Business and investors: providers and users of natural capital disclosure, provides a rationale for reporting on corporate impacts and dependencies on natural capital, including examples of current practice in reporting by companies such as Nestlé (on palm oil), Coca-Cola (sugar) and Unilever (soya).

Future pressure

Even if businesses don’t take the initiative to investigate natural capital accounting techniques now, they will almost certainly need to do so in future due to investor pressure, regulation or customer demand. Some businesses are, however, already setting themselves challenging goals and developing strategies through which they can become ‘net positive’; rather than simply neutralising their impact on natural capital, they seek to have a positive impact on biodiversity.

Innovation and creativity by companies in their approach to natural capital is welcome, enabling an evolutionary process through which the best approaches to measurement, management, accounting and reporting can emerge. Also welcome are the many initiatives highlighted here.

It is important, however, that business and other efforts are supported by governments and regulators so that they feed through into public policy. Only when natural capital reporting becomes integrated into other business requirements will it truly have come of age.

 

This article first appeared in ACCA's Accountancy Futures journal, issue 9, September 2014.