How Including Natural Assets in Financial Decision Making Gives Companies a Competitive Edge

Environmental managers are increasingly realizing that limited natural resources and increased competition for these resources directly affects business. It’s in their best interest to properly value natural resources upon which they depend — and do a better job managing these assets.

A 40 percent global water supply shortfall by 2030, for example, represents a $63 trillion risk to businesses. And a report by Chartered Institute of Management Accountants estimates we are using 50 percent more natural assets each year than the earth can replenish.

To help businesses include so-called “natural capital” in their decision-making processes, the Natural Capital Coalition developed a framework to identify and measure their impacts and dependencies on water, forests, minerals and other natural assets. The Natural Capital Protocol launched in July.

Over the past 18 months more than 50 companies including Coca-Cola, Dow Chemical, Shell and Nestlé have been testing the Protocol. Ten tested it in-depth. Dow Chemical, for example, used it to assess water-use opportunities and risks in site-specific locations.

The Cambridge Institute for Sustainability Leadership (CISL), a member of the Natural Capital Coalition, led the testing program.

“The business decisions the [pilot testers] were exploring ranged from considering new opportunities to assessing or screening for the most material natural capital impacts and dependencies,” said Gemma Cranston, CISL senior program manager.

Some testers used the results from the pilot to improve the environmental footprint of their supply chain and make better purchasing decisions.

“Dow Chemical was particularly interested to identify where they have financial impacts or dependencies upon natural capital,” Cranston said.

A new report from CISL details these tests and says the businesses involved saw immediate uses for the Protocol. Sixty percent of respondents said that piloting the Natural Capital Protocol made them more confident in engaging industry stakeholders around natural assets.

Companies said the Protocol helped them understand where their most significant impacts and vulnerabilities related to natural capital exist, Cranston said. “Interface explained that this provide them with a clear focus for driving improvements for their company’s impact.”

And Yorkshire Water found its biggest benefit from doing a natural capital assessment was in assessing options for new investments. “They found that having estimates of the monetary value of different services delivered by a site can be a highly empowering internal and external engagement tool,” Cranston said.

To coincide with the Protocol’s launch, Trucost published a report that shows how how companies can use natural capital data to grow business value.

Companies should understand the extent to which their revenue targets may be constrained by rising natural capital costs through regulation, social pressure and resource shortages, Trucost says. The report says corporations should consider:

• How could environmental constraints lead to raw material price volatility?
• How could resource constraints disrupt operations and impair asset value?
• How can I capitalize on expanding green product and green investment markets?
• How can I benefit from circular economy business opportunities?

General Mills is one of the companies the Trucost report highlights. The global food retailer commissioned Trucost to quantify natural capital risks across its value chain including agriculture, ingredient production, packaging supply chain, product production, distribution and consumer use. It quotes Steve Peterson, General Mills director of sourcing and sustainability.

“Really, the sustainability game is upstream from us,” he says. “Two-thirds of our total product carbon footprint resides upstream with our suppliers, primarily within agriculture. Ninety-nine percent of our water footprint resides there. That’s why our focus in the next couple of years is around supplier sustainability and sustainable sourcing.”

As natural resources become increasingly scarce, and global regulations move companies toward a low-carbon economy, expect other companies that want to remain competitive to follow suit.