How Is Natural Capital Assessment Being Used?

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In 2016 a coalition including environmental NGOs, companies like Burberry and Coca Cola, government agencies and investments and accounting organizations published the natural capital protocol. This is a toolkit, meant to help businesses measure and value the natural services they rely on and their natural capital liabilities, which include the environmental damage that may result from their operations. It was also meant to help businesses use and report these values. So who is using this tool and why? Bill Rayhill helped to develop it and now consults for the private sector, helping companies do natural capital assessments. So there was no one better placed to discuss the business case for natural capital assessment. How the protocol’s authors hoped businesses would use this tool, how businesses have actually used it so far, and what their reasons have been for doing so.

Una Jefferson: What is natural capital assessment and what is the intent behind it?

Bill Rahill: Natural capital until recently was largely academic. As part of Rio +20 in 2012, the private sector and the financial sector decided that natural capital deserved a much more central position in business and financial sector decision making. This led to the establishment of several initiatives, the most central one being the natural capital coalition or the NCC. One of their big products is the natural capital protocol.

So natural capital is the underlying capital that supports human life and development. It’s the air, the land, the water, and also all the services that are provided by this natural endowment on which a business depends on. Its an analytical approach to questions around how we use natural resources.

Una Jefferson: Is natural capital protocol a kind of a toolkit for businesses to use? A set of procedures?

Bill Rahill: The natural capital protocol is in fact a tool kit. What I would say though is that the natural capital protocol remains a complex instrument tool. The more sophisticated businesses have more capacity and resources to make good use of it. Part of the future for the natural capital and natural capital protocol is to find ways to simplify the tool to make it a lot more accessible, especially for the developing countries.

Una Jefferson: What types of businesses have adopted the natural capital protocol or have undertaken natural capital assessments?

Bill Rahill: The protocol has found a lot of potential users. It’s been downloaded thousands of times but the extent to which it’s actually been used is hard to assess definitively.

But what we know is that there is a large and growing community of practice around natural capital. A large number of companies have found it useful and are using it in different ways. An important part of the protocol is the requirement to scope out your analysis. So you can define very precisely how you would like to use the principles of natural capital assessment.

The early adopters of the protocol have been companies that have either experienced challenges in their supply chains or that have done sufficient work around vulnerability of their supply chains and have decided that they need to go beyond basic environmental and social assessment approaches to understand the dependencies within their natural capital context.

A lot of companies in the Agri sector have found use in natural capital protocol. Also companies with luxury products have found it useful as their buyers want to understand where the products come from. So the companies have to dig deeper in the analysis of their supply chains and dependencies as they try to implement ways to reduce the footprint of their operations across the entire supply chain.

Una Jefferson: What’s the common link between the luxury products and agricultural products?

Bill Rahill: They’re both trying to address very similar issues. They’re trying to manage risk in their supply chain, in their value chain.

In the Agri sector, if you think of coffee or tea, it really is a question of trying to keep the industry alive in environments where the ability to produce these types of commodities is changing rapidly. There is increase in competition for resources.

An area common to both Agri and luxury products is water. There is an increased variability in water availability due to climate change. So both are trying to better define the dependencies of their supply chains to reduce their risks.

Una Jefferson: The protocol provides a framework for gathering information. Who is this information for? In the initial stages of putting together the protocol, while you were interested in the reporting aspect, companies weren’t as they just wanted to use the information for internal decision making. Do you think that there is a prospect for a move towards disclosure as well as internal decision making based on natural capital assessments in the future?

Bill Rahill: In the early days of natural capital, a lot of the discussion was very much around natural capital accounting. The approach principles being studied were often linked to accounting principles as well. For example, how do you value and build up your balance sheet, your assets and so on.

A number of companies in the developing countries were concerned by the prospect of putting down a total value of all the ecosystem services. They were concerned for a variety of reasons. One important one was that the tax man could knock at their door and ask for all kinds of payments on those assets. What we really want companies to do is to make better decisions on the basis of a better understanding of their natural capital base —the ecosystem services that are provided by the natural capital base, how those ecosystems services are distributed, the benefits and so on.

The idea is really to help develop information that is supported by data and evaluation that can feed decision making at the highest level. Now the practitioners in this space are from all kinds of different practices, all the sciences, biologist and engineers, economists and so on. But you want to produce information that will really work its way up into the c suite and to the chairman’s office to be able to help make decisions that will really transform the business into a much more sustainable business.

Una Jefferson: Some reporting initiatives gained a fair amount of traction,  for example, the global reporting initiative. Why do you think there is less interest in the idea of natural capital accounting than there was in the global reporting initiative?

Bill Rahill: I think natural capital accounting has a home. It’s very much in the realm of the public sector. A number of countries have had a different elements of natural capital accounting already part of their national systems of identifying and valuing assets and so on. Indonesia is a good example. There are a number of countries that are currently working with the World Bank as well that are developing these types of systems. So very much natural capital accounting has found a home. It’s largely in the public sector.

But having said that, I think there is no doubt that some private sector companies are interested.

I’ve seen is a fairly sharp divide between what’s happening in the US or perhaps what is not happening in the US and what is happening in Europe. Certainly, in the North American context, disclosure is very legalistic. You typically will largely disclose only what you have to disclose. You’re very careful about what you disclose. Whereas in Europe I think there’s a much more progressive view of disclosure. There isn’t that same sense of potential liability associated with disclosure.

But a growing number of companies are seeing value in disclosing the improvements they’re making in their use and dependencies on natural capital. As the practice continues to develop, there will be increased standardization on how the protocol is applied and the valuation is done. It is an evolving practice and I think we should be careful not to jump to conclusions, positive or negative based on early disclosures related to natural capital.

Una Jefferson: There’s just been a supplement to the natural capital protocol for the finance sector. To what extent will financial actors use natural capital accounting to identify risks in their investment decisions in the near future?

Bill Rahill: One of the very interesting developments around natural capital is that the financial sector was very much at the table early on. Whereas around sustainability and risk, the financial sector became concerned after the rest of the world, but in this particular case the financial sector was very active through the natural capital declaration right after Rio plus 20.

The view is that natural capital provides another avenue for the financial sector to better understand the risk profile of borrowers, assets and equity as well. As the practice around natural capital continues to grow and there is more consistent information in the marketplace, I think the financial sector will be an important user of that information.

One of the questions we often get is if the financial sector is looking to just finance fewer projects to walk away from risk? The answer is absolutely not. I think the financial sector wants to be able to identify risks and also identify those companies that are managing their risks effectively. On that basis, they’d be able to adjust their pricing more effectively based on actual measurable risk, including risks related to natural capital. So I think in this space around natural capital, there’s certainly something for the financial sector as well to strengthen its sustainability practices.