The embedded carbon, water, waste and pollution were calculated for generic products in each category; no brand has been harmed in the generation of these metrics.
Now for the hard part: we then calculated the “natural capital” cost of each of these. For carbon we used the social cost. For water, a local issue, we correlated the volume of water required to produce the raw materials with local scarcity by gathering data on the location of production and pricing water accordingly.
The analysis indicates that, on average, the true cost of a block of cheese should be 18% higher than the retail price, breakfast cereal should be 16% more expensive and fruit juice 6% more. Water is the most significant natural capital dependency for all of the products. Unsurprisingly for breakfast cereal wheat is the biggest draw on water in the supply chain. For fruit juice it is orange production and dairy cows make cheese production a thirsty business. Cheese is the most carbon intensive product and fruit juice the most wasteful.
This analysis illustrates the scale and type of natural capital cost for each of these products, on average. We should, however, raise a note of caution – clearly there will be significant variation when it comes to analyzing specific products and brands. To illustrate how some of these differences could arise we analyzed the variation in water use and scarcity across the top 10 production locations of each product to demonstrate the scale of risk and opportunity. The natural capital cost of using water is driven mainly by water availability at the production site, as well as by the type of water consumed and a range of other factors. For example, areas with high rainfall and less competition for resources will have lower water costs than sites with scarce supplies and over-abstraction. So, in order to highlight the optimization opportunity we assumed that production was switched from the worst to the best production location of a key commodity and analyzed how this would alter the result overall. The biggest variation was found in breakfast cereal where the gap between the lowest and highest water cost relative to retail price was a 54%. The variation in exposure to water costs for products sourced from different locations was 14% for cheese and 8% for fruit juices.
Clearly it is not possible to switch large areas of production overnight or make an instant “land grab” to reduce future risk from natural capital costs.
However, depletion of natural capital leads to depletion of the resources we rely on. The problem is an information gap – most businesses have limited knowledge of the impact of their production on natural capital. This information is needed if we are to satisfy increasing consumer demand without destroying our ecosystems. Companies can use natural capital valuation as a tool to embed natural resource considerations within everyday product and procurement decision making alongside other considerations such as cost and quality. Over time it will be possible to re-define how and where products are made in order to optimize value chains for natural capital. Understanding how low risk sites are managing resources could lead to improvements in production at high risk locations, while maintaining supply chain continuity. An understanding of natural capital risks can lead to changes in design – for example is it possible to substitute water intensive raw materials to reduce natural capital risk?
Whatever the business strategy, natural capital valuation provides a framework to identify risk from natural capital costs and opportunities to optimize business strategies in line with natural resource availability — because what is valued is managed.
Richard is Chief Executive of Trucost Plc, the leading provider of information and research on corporate environmental efficiency. Richard has advised various UN bodies and governments on environmental reporting and ecosystem services and has led groundbreaking projects including developing the world’s first Environmental Profit and Loss account for PUMA, valuing the environmental externalities of the world’s 3,000 largest companies for the UN Principles for Responsible Investment, and producing the UK Government’s Environmental Reporting Guidelines for Business. Richard is also an adviser to the Global Reporting Initiative (GRI) and The Economics of Ecosystems and Biodiversity (TEEB) coalition, a judge of the Guardian Sustainable Business Awards and a regular public speaker on environmental matters.