Natural Capital Valuation Helps Investors See Sense

Unilever is widely seen as a leader on environmental and social responsibility. Its Sustainable Living Plan, launched in 2010, sets out a blueprint for sustainable growth including a target to halve its environmental impacts by 2020 while doubling the size of its business.

The Anglo-Dutch consumer goods company was one of the first to look beyond simply reducing carbon, water and waste at its own operations, towards the contribution it could make by sourcing its raw materials from sustainable sources and creating greener products.

Unilever’s reputation is due in no small part to its chief executive Paul Polman publicly championing sustainability, most recently at Davos where he talked about the need for a binding agreement on climate change and ending poverty in developing countries.

But the company recently came under pressure from investors concerned about poor sales performance. Responsible business is all very well, they say, but some are concerned that Polman seems to care more about the environment than he does about them.

Those that understand sustainability often have a hard time convincing investors and even their own company colleagues that it makes good business sense, especially in a world obsessed with short-term profits at the expense of long-term prosperity. Natural capital valuation can strengthen the hand of those that want to prove the business case for sustainability. It provides a way to measure the benefits of a company’s sustainability program, as well as the practical tools to implement it. It also gives an accessible overview of a company’s sustainability performance in the context of its financial performance.

Getting the full measure

Many efficiency programs will save money by cutting waste and energy bills, but that’s only part of the story. Pollution has a wider cost to society in terms of ill-health, water scarcity and extreme weather. Companies are increasingly having to pay these costs through tighter regulations, supply chain disruption and higher insurance premiums. By putting a monetary value on these impacts, companies can measure the total value of sustainability initiatives to their business. This shows investors that sustainability is not just about the money you can save now. It’s about avoiding future costs by understanding and anticipating risks to the business.

Practical tools

Companies need ways to put natural capital valuation into action. There are several tools to do this, such as Ecolab’s Water Risk Monetizer which companies can use to identify sites at risk from water scarcity. It calculates a price for water that reflects its real environmental value in the location it is used which can inform decisions such as where to increase production. Using this tool, a company can show investors that it is avoiding reputational damage caused by conflict with local people over water resources.

Investors need to understand that sustainability is also about identifying business opportunities in a rapidly changing world. Many of these opportunities will come from helping people live more sustainable lives. Natural capital valuation can provide tools to help companies design greener products and services, and then communicate their benefits to customers.

Reporting the results

Natural capital valuation enables companies to create an overview of sustainability performance in a way that is accessible to investors. Several companies have produced an environmental profit and loss account which shows the net impact the business has in monetary terms. It highlights risks and opportunities that drive a company’s long-term business strategy. This could be a stepping stone towards fully integrated financial and sustainability reporting.

Investors need to understand that it is not an ‘either or’ choice between sustainability and profitability. The only successful companies of tomorrow will be the ones with business models that combine both.