Meet the world's first natural capital management system

This week, a company called Climate Earth is unveiling software that lets companies assess their natural capital impacts at a pretty granular level. It represents a major step forward in enabling companies to measure and manage the impacts of their operations and supply chains.

The Natural Capital Management System is a cloud-based software system that allows a company to map its organisational structure and accounting systems to a database of natural capital costs - that is, the financial value of a company's depletion of nonrenewable resources, and its emissions into the air, water and soil.

As the company explains: "Natural capital accounting is the process of placing a dollar cost on a company's natural capital in a way that is consistent and scientifically valid. A natural capital management system aligns those costs with financial costs and places them online in organizational and operational context."

The result, says the company, allows you to ask and answer such questions as: What is the natural capital consumed by my department? Is water or land use more critical? In what country and tier of the supply chain are these costs incurred? Which suppliers' supply chains are at risk? And what are my opportunities and risks at every tier in the value chain?

Those questions are becoming increasingly important in a world where resource constraints, climate change and other environmental issues can become risk factors, from supply-chain disruptions to price volatility of key commodities to the right to operate in water- or other resource-constrained areas.

Climate Earth isn't the only organisation seeking to help companies get a handle on natural capital costs. As I wrote recently, a half-dozen or more efforts are under way to create natural capital accounting methodologies. And companies such as Trucost have created a business out of benchmarking companies' natural capital impacts against those of their competitors and peers. (Trucost is a partner in GreenBiz Group's forthcoming project to create natural capital leadership rankings among publicly traded companies.)

But Climate Earth's software is, to my knowledge, the first product that allows companies to assess their own impacts, and to do so on a department, project, business unit or other level of detail - not to mention being able to assess suppliers and the products they offer. "Essentially we build a database," Chris Erickson, Climate Earth's founder and CEO, explained to me recently during a preview demo. "We download the customer's purchase data and their general ledger and chart of accounts. The chart of accounts is the accounting keys to how the company is organized and managed. That means, do they report by country, by product line, by business unit? We capture that management structure so that managers can see their natural capital consumption in the same way they see their own budget."

Next, Climate Earth uses global trade data to build a model of where the company's impacts occur, enabling the user to view natural capital valuations on a country-by-country basis.

"In addition to loading the checkbook data we take their chart of accounts, which is how the business is structured - who reports to whom and in what country and how they manage the business," says Erickson. "We use those codes so that we can push the natural capital and the costs down into the department just like they do. Any company that spends a billion dollars knows what department is spending those dollars because they have a chart of accounts that allocates the cost, and they assign responsibility to managers to manage those dollars. We do the same thing except we're just adding another layer of costs, the natural capital costs."

The result is a view of environmental impacts that can go far upstream, deep into a company's supply chain - even to a supplier's suppliers, says Erickson. "That gives us what I call a deep-dive view of their supply chain. You have to have the country data in order to put natural capital valuations on things like water, which is very local. But that's the other reason we use the big database: It is a big data challenge."

The Natural Capital Management System has been piloted by Webcor Builders, a California-based general contractor, whose clients include eBay, Lucasfilm, Oracle and Starwood. Webcor began using Climate Earth about five years ago to track Scope 3 supply-chain impacts for greenhouse gas reporting. But Webcor's customers had interests beyond carbon - things like the impacts of building projects on water tables and natural habitats, and the chemicals used in building products. "We recognised that if we could rapidly do greenhouse gas accounting, we could use some of those same metrics to look at other resources," Phil Williams, Vice President of Webcor Builders, told me.
"I was very intrigued because our clients were struggling with the very same thing we were, how to provide financial metrics - what's a pound of carbon worth?" said Williams. "So it was just a continuation of the process. We're doing a lot of work with Environmental Product Declarations, Health Product Declarations, Product Category Rules. In some respects, you can't do natural capital accounting until you have a good basis of what those environmental metrics are. As we were developing the environmental metrics, we saw it was a natural progression to come up with the financial metrics."

"When they build a building they set up a supply chain," says Erickson about Webcor. "It's really complicated with lots of parts. But their goal was to collaborate with their clients. They asked us to practice on a building they'd already built. They're now working with new clients to make this part of the early customer involvement."

Webcor is owned by Obayashi, a global massive construction company. Erickson sees great potential in rolling out his company's system to the larger enterprise, helping them answer questions such as, "If we're in the global construction business, what natural capital assets should we be concerned about and investing in, in order to preserve the longer-term viability of our business?" Says Erickson: "As we do multiple buildings for Webcor and potentially for other Obayashi buildings, we'll build up a larger-scale database that looks across all construction projects, so they can more strategically look at costs."

I asked Erickson why this kind of accounting system never had been done before. One theory, I posited, was that the field is so new that others may be sitting on the sidelines until natural capital accounting standards are developed in the coming years.

"There are a lot of people playing with natural capital valuation methodologies, and that seems to be moving along slower than I'd like," he responded. "But there are certainly lots of brilliant people working on it. We decided that we should make our system flexible to adopt to TEEB or whoever comes out with global standards. I think our contribution is bringing the modern systems world to this stuff, moving away from more of a reporting approach to systemization and a management approach."

This article first appeared at GreenBiz.com

Original Article http://www.businessgreen.com/bg/news/2300872/meet-the-worlds-first-natural-capital-management-system