Gains or pains? Natural capital – and how to use it

‘Business is often unaware of its true reliance on nature… The new model for business seeks to integrate the real value of nature into its thinking’ – UK Government Ecosystem Markets Taskforce, Realising nature’s value

Nearly all businesses rely on natural capital in some form, yet its importance to business performance is often routinely under-appreciated and lost amongst all other metrics for performance routinely analysed by stakeholders, managers, and investors. 2016 has the potential to be an important year for the transformation of this kind of thinking to one that acknowledges, and even creates competitive advantage out of, the benefits of understanding the natural capital associated to businesses.

February marked the end of the consultation period for the draft Natural Capital Protocol – a business framework for applying a natural capital approach to specific strategic issues that identifies solutions to maintain, or even restore, the natural assets a business manages or relies on. Once finalised, the NCP will be launched by the Natural Capital Coalition, a business association of over 180 businesses including giants such as Wal-Mart and Coca-Cola. Embedding the approach is a bold and ambitious task, but a potentially significant step in the journey towards integrating natural capital and the ecosystem services it provides with organisational decision-making in the same way as financial capital is routinely integrated.

How can this approach benefit the bottom line?

The natural capital approach outlined by the protocol helps reframe our understanding of natural assets under management. Natural capital is commonly undervalued in decision-making as it is an invisible production factor if compared to the importance given to financial and manufactured capital.

                                                                                                                   Image © AECOM

Viewing business decisions through a natural capital lens can help provide the tools required to understand the dependencies of a business on the natural environment and the risks from environmental degradation. This understanding can help underpin strategies for mitigating these risks, or investing in enhancing the services the business depends on to improve performance. A positive consequence for society is that businesses may start to recognise and mitigate their externalities – the costs and benefits generated by a business that accrue to society as a whole.

This can benefit the bottom line in many ways depending on the context. To explain the benefits of adopting a natural capital approach we will look at three cross-business examples of how strategic problems can be viewed through a natural capital lens, and how this approach might produce better outcomes.

Operations

In the context of climate change and accelerating environmental degradation, the disruption of the ecosystem function can constrain business operations. Companies that have used the natural capital approach to enhance the ecosystem function on their land assets have been able to enhance their operational efficiency. For example, a leading UK utilities company found that it was able to achieve cost reductions by restoring the integrity of a wetland on its estate. The wetland restoration solution and its associated ecosystem service enhancement offered a competitive return on investment compared to ‘hard’ engineering options, and had the additional advantage of creating a suite of further benefits for the community.

Sales

Analysing product growth opportunities through a natural capital lens can reveal hidden insights that can promote sales. Identifying long-term natural capital trends can help stimulate innovation into products that mitigate these trends rather than exacerbating them. Combined with appropriate marketing, consumers can come to recognise these benefits and promote sales growth.

Many countries are experiencing environmental stress that affects consumers, with one important area being water shortage. A leading global consumer goods company evaluated its natural capital impacts with regards to carbon emissions and water, and identified that the majority of its impacts came at the level of consumer use. They focused specifically on India, a country with particularly water-stressed regions, and identified that development of a soap product that required less associated end-user water consumption could yield real benefits to local natural capital. They developed innovative hygiene products that required considerably less water use. Combined with a comprehensive nationwide hygiene education programme, this leader expects to drive an enormous regional sales increase whilst mitigating natural capital impacts.

Asset management

Understanding natural assets can also reveal unrecognised investment opportunities. For example, environmental markets are developing at a rapid rate and, although in most cases these are unable to deliver large returns given associated opportunity costs, in some cases they are starting to become more competitive with other conventional investments. A leading UK infrastructure company performed a natural capital assessment on a number of its non-operational sites with low development value, and identified that revenue from woodland planting through the Woodland Carbon Code (i.e. the UK forest carbon market) offered a competitive return on investment relative to alternative land uses. This way the natural capital approach allowed the company to identify a new revenue stream that was previously not considered, yielding benefits for both the community and the bottom line.

Next steps

The launch of the Natural Capital Protocol and the engagement of its high-profile membership indicate that the natural capital approach is gaining pace and influence in the business community. Emerging approaches linked to natural capital have been competing and winning industry finance innovation awards, such as the Future Finance awards. Organisations reorienting themselves based on these approaches are achieving competitive advantages, driving operational efficiencies, diversifying their revenue streams, and promoting sales. Business leaders are arriving at the understanding that sustaining long-term growth and shareholder value is inherently dependent on conserving the natural assets that their business depends on. But it is still early days in natural capital, and there are abundant opportunities for businesses across all sectors to establish themselves now as pioneers in natural capital, and reap the benefits of their leadership position for the decades to come.