Edie explains: Natural capital

It's vital to business operations, yet is ignored on the balance sheet of the vast majority of companies. In the latest edie explains, we find out what natural capital really means, and what your business should be doing about it.

What is natural capital?

Natural capital refers to the elements of the natural environment that provide valuable goods and functions such as clean air, clean water, food and recreation.

Each year, the planet produces up to $72trn worth of ‘free’ goods and services that are essential to a well-functioning global economy. This is all known as the ‘natural capital’. 

Why is it so important?

The financial benefits athat nature offers are not typically bartered and sold in the marketplace, so their value is exceedingly hard to price on corporate or government financial statements.

As a result, this ‘natural capital’ has largely been left unaccounted for in business decisions and market transactions. 

Successive global governments have reportedly allowed a large natural capital debt to build up, endangering economic growth as well as public and environmental wellbeing, according to the Natural Capital Committee (NCC)

How does natural capital affect my business?

Around the world, dwindling freshwater supplies, increasing air pollution and deforestation are perhaps the most obvious examples of diminishing natural capital. In the UK, particular issues include water stress, soil degradation and a loss of biodiversity – all of which can have a profound effect on businesses.

Asda, for example, found that extreme weather events such as the recent UK floods have a direct impact on 95% of fresh produce stocked in its stores, with food sourcing, processing and transportation all facing an growing threat from environmental issues.

A 2013 report titled ‘Natural Capital at Risk: The Top 100 Externalities of Business’ estimates the world’s primary production and processing sectors are responsible for ‘environmental externalities totalling US$7.3 trn annually.

What are the business risks associated with natural capital?

As naturally-produced goods and services are compromised or lost altogether, companies could experience:

Supply chain disruptions
Forced switches to costly alternatives to traditional inputs
New regulatory and legal risks
Higher costs of raw materials as they become increasingly scarce
Increasing difficulty securing finance or higher costs of capital for companies with high impacts and dependencies on natural capital.
Reputational harm as the issues become more widely understood
Water scarcity and quality affecting business operations in various supply chains

Is natural capital just about mitigating environmental risks?

No. A recent report from the Cambridge Institute for Sustainability Leadership, sponsored by major corporations including Mars, Nestle and Asda, found that preserving natural capital could have a positive effect on businesses bottom line. By sustainably managing their interactions with the environment, UK businesses can benefit from reduced input costs and enhanced brand reputation, the report claims.

How can my business improve its impact on natural capital?

Natural capital-friendly actions can be as simple as a water-reduction initiative, or collecting more empirical data on the links between biodiversity and certain commodities – but 85% of UK firms have no such plan.

A great way to start is by valuing your effect on natural capital. 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. The Monitizer calculates a price for water that reflects its real value in a specific area which can inform decisions such as where to increase production.

The Corporate Ecosystem Review (ESR), produced by World Resources Institute and WBCSD, also helps managers develop strategies for managing business risks arising from their company’s dependence on natural capital.

Brad Allen

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