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What Business Wants from Natural Capital Accounting

macgregor-alastairThe development of a standard approach to natural capital accounting passed an important milestone in July with the publication of the draft Natural Capital Protocol Principles and Framework. It was produced by the Natural Capital Coalition – a group of companies and other important stakeholders including Trucost.

There’s increasing awareness that the natural resources and ecosystem services that business depends on are being used unsustainably, threatening growth and prosperity. Natural capital accounting is becoming popular as a way for companies to understand and reduce these impacts and dependencies.

Many different approaches to natural capital accounting are available, potentially creating confusion in the marketplace and limiting adoption. To ensure natural capital accounting is robust, credible and delivers real benefits for business, the NCC is developing a standardized framework or protocol. The ultimate aim is to allow companies to value and account for natural capital as systematically as they do for financial capital.

The protocol takes companies through a four-stage process to frame, scope, measure and value, and apply natural capital accounting to their business. Underpinning this process are the principles that it should be relevant, rigorous, reliable and consistent. The process will answer questions such as: how is natural capital important to my business? What is the objective of my assessment? What is the appropriate scope to meet the objective? What impacts should I measure and how do I measure them? What do the results mean for decision making?

Alongside the draft protocol is an interesting and insightful report produced by consultants EY on behalf of the NCC on what business wants from the protocol. It’s been important right from the start to engage companies in the development of the protocol. It’s vital that it meets their needs; otherwise they will not use it.

The report is based on interviews with around 80 companies involved in the development of the protocol. The group included firms in the consumer goods, construction, apparel, finance, and food and drink sectors. Most had at least a basic awareness of natural capital, while others had considerable practical experience.

The key attributes that interviewees want the protocol to have are that it should be accessible, setting out the process in simple and clear language. It should be flexible, with a principles-based approach rather than a rules-based approach, so that it can be used to meet the needs of different business activities. Companies also want it to be aligned with existing initiatives such as the (IR) Integrated Reporting framework and Global Reporting Initiative’s G4 guidelines.

The protocol should also convey credibility by being based on peer-reviewed scientific data and developed in partnership with business. It should enable companies to understand the strategic, commercial, financial and operational relevance of natural capital in a self-explanatory way without the need for external support.

Perhaps the most important insight from the interviews is that companies want to use natural capital accounting to facilitate improved decision making and to unlock value in the business. External reporting, while important, should not be its primary purpose.

This is a very welcome finding. It shows that the potential for natural capital accounting to integrate sustainability into core business activities is being understood. Companies don’t just want another reporting tool to communicate the benefits of environmental improvements to stakeholders — they’re far more ambitious than that. They want a practical tool to inform the strategic direction of the company and to help make decisions that drive long-term value. These include assessing risk and return from capital expenditure and investments in joint ventures, determining the location of a new sites and production capacity increases, and developing innovative new products.

Trucost is playing its part to ensure the protocol adds value for business. We are leading the development of guidance for the apparel, and food and beverage sectors, which will apply the protocol’s principles and processes to the specific needs of those industries. For example, companies in the apparel sector could use natural capital accounting to design new clothing lines that will increase sales while cutting risks. Drinks companies could identify opportunities to improve water and energy efficiency while investing in expansion at key sites worldwide.

The next milestone is the start of the NCP pilot program, in which companies will test the protocol and sector guides on a project within their business. This phase runs from October 2015 to February 2016 and will be supported by further consultation launched on 23 November 2015 at the World Forum for Natural Capital.

Alastair MacGregor is the chief operating officer at Trucost. He oversees Trucost’s operations and corporate services business, and manages the Trucost partner network. He has led several large bespoke projects including the Natural Capital Coalition’s seminal study on natural capital accounting, Natural Capital at Risk: The Top 100 Externalities of Business. Prior to joining Trucost, he worked for 10 year as an investment manager.

This article was republished with permission from Trucost.

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