Natural Capital: What gets measured gets managed

nature and man join handsDuring our MBA we learn the principle, attributed to Drucker, “what gets measured, gets managed“. Watching the nightly news, we learn that biodiversity is rapidly diminishing. Biodiversity is not measured in our statutory financial statements. Is there a link? The United Nations Environment Program Finance Initiative (UNEP FI) seemed to think so and in 2010 started the global conversation about the interconnectedness of biodiversity and finance. As a result the Natural Capital Declaration (NCD) was launched in 2012 at the Rio+20 Summit (The declaration 2011).

The Natural Capital Declaration (NCD) is a pledge from a growing number of enlightened Finance Industry organisations; including banks, investors and insurance companies; to integrate Natural Capital into financial products and services; such as loans and equities; and to develop global standards for Natural Capital accounting, disclosure and reporting. What gets measured gets managed.

What is Natural Capital?

The Earth’s inventories of air, water, soil, flora and fauna are collectively called Natural Capital. These assets provide a myriad of ecosystem goods and services (Table 1) that form the foundation of our economy. Some ecosystem goods and mostly all ecosystem services are environmental externalities of our financial accounting systems.  Yet without these ecosystem goods and services, our economy would collapse and humanity would cease to exist (Mulder & Clements-Hunt 2010).

Table 1. Examples of Ecosystem Goods and Ecosystem Services

Ecosystem “goods” include
•    food
•    construction material
•    medicinal plants
•    wild genes for domestic plants and animals
•    tourism and recreation     •    maintaining hydrological cycles
•    regulating climate
•    cleansing water and air

Ecosystem “services” include
•    maintaining the gaseous composition of the atmosphere
•    pollinating crops and other important plants
•    generating and maintaining soils
•    storing and cycling nutrients
•    absorbing and detoxifying pollutants
•    providing beauty, inspiration, and recreation
(NZ Government 2013)

What is not measured gets mismanaged.

Nature is given no monetary value in our economy and hence we have squandered it.  For instance the World Business Council for Sustainable Development (WBSCD) estimates the value of pollination to agriculture is US $190 billion per year. Where do we account for this in our statutory financial statements? A recent report by The Economics of Ecosystems and Biodiversity (TEEB 2012) estimates the value of environmental externalities is US$7.3 trillion per year.

PUMA case study

Have you started to imagine what your organisation’s financial statements would like if you accounted for Natural Capital? PUMA did.

In 2011 PUMA, with the support of PricewaterhouseCoopers, created its inaugural Environment Profit and Loss Statement. Ecosystem goods and services were valued at  €145 million i.e. €51 million from land use, air pollution and waste along the value chain and €94 million for Green House Gas (GHG) emissions and water consumption (PUMA 2013, Godelnik 2012).

“The unprecedented PUMA Environmental Profit and Loss Account has been indispensable for us to realize the immense value of nature’s services that are currently being taken for granted but without which companies could not sustain themselves,” said Jochen Zeitz, Executive Chairman of PUMA and Chief Sustainability Officer of PPR.

PUMA is the global leader in developing a viable framework to identify, value and report on the Natural Capital it uses along its supply chain. As a result PUMA is able to focus its continuous improvement on embedding sustainability practices into its strategic and operational processes and has inspired other organisations to start looking at this important issue of Natural Capital.

What is Australia doing?

Forty-three CEOs from financial institutions around the world have now signed the NCD (Signatories – financial institutions 2012). Cameron Clyne, the CEO of the National Australia Bank, became the first Australian signatory on 8 December 2011. To-date he is still the only one. This raises the question; why?

“NAB recognises that all companies are dependent on ecosystem services, either through their supply chains, around their operating sites or via their customers. We see that managing natural value includes the economic valuing of ecosystem services and the natural environment – that is, recognising impact and dependency on biodiversity and ecosystem services and accounting for them within traditional business frameworks and the way we do business. This is important for the sustainability of our business and economic systems. NAB has been investigating these issues and is starting to explore how we can review our business models. And for these reasons National Australia Bank endorses the Natural Capital Declaration.”  Cameron Clyne, CEO

Business Case:  Risks and Opportunities

The inaugural World Forum on Natural Capital will be held in Edinburgh, November 2013. This forum will provide a space for business leaders from around the world to collaboratively explore the risks and opportunities associated with Natural Capital (World Forum on Natural Capital 2013).

Emerging risks are highlighted as:
•    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 risks as the issues become more widely understood
•    fines, associated with increasing regulation, for businesses that are unprepared
•    water scarcity and quality affecting business operations in various supply chains

Emerging opportunities are highlighted as:
•    considerable growth of sustainably sourced commodities
•    better decision-making for long-term business viability
•    a positive response from consumers
•    competitive advantage for early adopters
•    the creation of new markets based on valuing the services – and not just the products – provided by nature
•    a better outcome for business and the planet

Conclusion

If you are an Australian business leader, this maybe the first time you have heard the terms Natural Capital, Ecosystems Goods and Services and environmental externalities. The references below provide links to more information.

The services Nature provides have to-date been given no monetary value in our economy or statutory financial statements. Out of sight, out of mind. As a result we are losing our biodiversity, our Natural Capital, our Ecosystem goods and services, at an alarming rate due to mismanagement.

Let’s start making the global discussion around Natural Capital and Ecosystem Goods and Services a more vocal, local discussion in Australia so that we, as business leaders, can make a difference.  Our very survival as a species depends on our Natural Capital.

What gets measured gets managed.

References and further reading:
Godelnik, R 2012, Puma’s new natural capital accounting framework receives a thumbs up from experts, Triple Pundit, Viewed 17 August 2013, <http://www.triplepundit.com/2012/12/pumas-new-natural-capital-accounting-framework-receives-thumbs-experts&gt;.

Mulder, I & Clements-Hunt, P, 2010, Demystifying materiality: Hardwiring biodiversity and ecosystem services into finance, UNEP FI CEO Briefing, viewed 17 August 2013 < http://www.unepfi.org/fileadmin/documents/CEO_DemystifyingMateriality.pdf&gt;.

NZ Government, 2013, Examples of ecosystem goods and services, Ministry for the environment, viewed 17 August 2013, <http://www.mfe.govt.nz/publications/waste/wastewater-mgmt-jun03/html/table-a-1.html&gt;.

PUMA, 2013, PUMA completes first environmental profit and loss account which values Impacts at €145 million, viewed 17 August 2013, <http://about.puma.com/puma-completes-first-environmental-profit-and-loss-account-which-values-impacts-at-e-145-million/?lang=en&gt;.

Signatories – financial institutions, 2012, UNEP FI & GCP, viewed 17 August 2013, http://www.naturalcapitaldeclaration.org/financial-institutions&gt; .

TEEB, 2012, Making nature’s values visible, The economics of biodiversity and ecosystems, viewed 17 August 2013, http://www.teebweb.org&gt;.

The declaration, 2011, UNEP FI & GCP, viewed 17 August 2013 http://www.naturalcapitaldeclaration.org/the-declaration/.

UN, 2013, System of environmental-economic accounting, United Nations, viewed 17 August 2013, <https://unstats.un.org/unsd/envaccounting/seea.asp&gt;.

World Forum on Natural Capital, 2013,  What is natural capital?, WBCSD et al, viewed 17 August 2013, <http://www.naturalcapitalforum.com&gt;.

Leave a Reply