Natural capital: the next generation of CSR?

With the World Forum on Natural Capital taking place this week, AECOM's Petrina Rowcroft explores how leading figures in the field are helping to shape the emerging dialogue around how we can better account for the value of natural capital.

Business heavyweights attending the event include Sir Richard Branson, who will be leading a roundtable discussion with young natural capital leaders. With such high-profile support, it could be argued that attention to natural capital is finally moving beyond the confines of businesses’ sustainability departments. Yet in reality, while many businesses may be aware of the topic, natural capital is still rarely a boardroom issue.

This is somewhat surprising, given the risks and opportunities natural capital can bring to UK organisations. For one, many businesses are highly dependent on nature to carry out their day-to-day operations. Ignoring natural capital and the valuable ecosystem services it provides could have major implications for their bottom line and business continuity.

edie explains: Natural capital

Having a strategy in place for natural capital can also help prepare companies for future regulatory changes, as well as help achieve compliance with environmental legislation. Crucially, incorporating natural capital strategies can also deliver direct cost savings.

While some companies have taken steps to develop a greater understanding of natural capital, many have yet to adopt business practices that embed the value of natural capital into everything they do.

Research published earlier this year by AECOM and the Joint Nature Conservation Committee (JNCC) highlights this point. We investigated the motivations and constraints to engaging in the natural capital agenda among three business sectors: agriculture, forestry and fisheries; electricity supply and distribution; and retail.

There was, however, little evidence of organisations taking a systematic approach to valuing their impacts and dependencies on natural capital across their operations or identifying opportunities to benefit from the natural capital they own or manage. This suggests that many businesses are missing out on the economic benefits that natural capital can offer. Under these circumstances, it is hardly surprising that action on natural capital is often limited to so-called ‘eco-efficiency’ measures, such as energy and water saving that generate obvious cost savings.

When nature calls

While businesses are certainly keen to take action, many feel overwhelmed by the plethora of approaches and tools that have emerged over recent years and are not sure where best to focus their efforts. The Natural Capital Protocol, which will be released for consultation at the Natural Capital Forum and is due to be launched by the Natural Capital Coalition next July, should go some way to helping organisations with this. An ambitious project to develop a harmonised framework for understanding and valuing dependencies on natural capital in business decision-making, the protocol will deliver a much needed guide for companies.

At the moment, it is possible that companies are holding back from implementing natural capital strategies as they are reluctant to embark on an approach that may then differ from what is set out in the protocol. However, in practice there is unlikely to be one tool suitable for all organisations and different sectors will require different approaches. This was highlighted in recent practice notes on natural capital aimed at two specific sectors: electricity supply; and agriculture, forestry and fisheries. The notes, published last month by AECOM and JNCC, recognise that there isn’t a one-size-fits-all approach to natural capital.

Given that organisations operate in very different ways, it is clear that approaches to natural capital will need to vary. Some companies may have a lengthy supply chain but operate from one relatively contained site and have a very low local impact. Others may have much larger landholdings or operate across multiple sites.

Winds of change

For those with a large supply chain, impacts on natural capital have traditionally been seen as a form of reputational risk. Businesses operating in the wholesale and retail sector for example could face negative repercussions if they engage with suppliers that source raw materials, such as timber, fish and palm oil, from unsustainable sources.

Despite the heavy focus of businesses in the retail sector on the impacts of their procurement practices on reputation, there are signs of change. Some organisations are starting to look more widely to consider the impact that increasing regulation or diminishing stocks could have on their operations. In response to such concerns, some retailers have begun to take action.

Asda, for example, reviewed the risks posed to its global fresh produce supply chain by climate change. And Kingfisher recently reported that it aspires to create more forest than it uses. As an interim step, the multinational retailing company pledged to have 100% responsible sourcing of timber and paper in all its operations by 2020.  

Companies in the electricity supply sector are also at varying stages in addressing natural capital concerns. While some are only just starting to come to terms with the concept, others are far more advanced in their thinking and practice.

National Grid, for example, recently worked with AECOM on a pilot programme aimed at evaluating how its operational and non-operational landholdings could be put to better use. AECOM developed a tool to identify and assign natural capital values to help facilitate informed investment decisions that would secure optimal social, environmental and economic returns. The tool was used to look at the present value costs and benefits over a 30-year period, and a formal business case was then developed.

Risks and rewards

This approach worked very well for National Grid, as it operates across numerous sites in the UK. Through this pilot study, undertaken at two sites in South Yorkshire and Derbyshire, AECOM and National Grid found that an estimated £9,000 of natural capital improvements could be made per hectare on the land they assessed, driving a benefit-to-cost ratio of 8:1 over 30 years. Taken across the 2,000 hectares of National Grid’s estate that may be suitable for making natural capital enhancements, this could deliver in the region of £18m of additional value from company land that is currently underutilised.

Other companies may be waiting for recommendations in the protocol next summer before taking any steps. But surely now is the time to start putting forward the business case for natural capital and gaining buy-in from a wider business audience? That way, come July, it will be much easier to start implementing a natural capital strategy.

It is vital that finance departments and CEOs are involved in discussions from the outset and are informed about the risks and rewards associated with natural capital. After all, incorporating natural capital into business decisions is crucial to reducing risk and realising value. Discussing the topic with stakeholders unfamiliar with the subject can be a challenge, but it’s one that needs to be overcome in order to truly optimise the value from organisations’ natural assets.

It’s also worth noting that while the protocol is likely to provide very useful advice to companies, it may initially only focus on some sectors. And with plenty of guidance and support already available, there is no need for organisations to put their natural capital strategies on hold.

Confusion surrounding the best approaches to natural capital make this week’s World Forum in Scotland more timely than ever. It’s still early days in terms of companies in the UK embedding systematic natural capital accounting approaches in business operations. But with a push for finance team buy-in and by developing a tailored approach to natural capital, the opportunities to reap environmental, social and financial benefits are there for the taking.

Petrina Rowcroft, associate, climate change and ecosystems, AECOM

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