The dangers of over-extending financial capital are front of mind for many Board directors today as they seek growth without risking long-term viability. But ask most Boards to assess the natural wealth of their business, and the risks posed by its depreciation, and a less than confident answer might be expected.
All businesses depend on and impact ‘natural capital’. This is a term used to describe all aspects of the natural world that provide benefits to people. Many organizations do not fully appreciate their relationship with natural capital, and therefore are missing out on opportunities for improved performance or failing to address potentially significant risks.
What is natural capital?
The term ‘natural capital’ refers to the ‘stock’ or ‘inventory’ of physical attributes in the natural world such air, land, water, flora and fauna, and the direct and indirect ‘services’ that these provide. These include ‘provisioning’ services (production of food and water purification), ‘regulating’ services (carbon sequestration and coastal resiliency), ‘supporting’ services (nutrient cycles and crop pollination) and ‘cultural’ services (spiritual and recreational benefits).
The total global amount of natural capital continues to decline as cumulative levels of exploitation and pollution exceed some environmental tipping points. Most of what remains, and many of its related benefits, are undervalued even though they have the potential to impact every organization. Proactive management of natural capital provides opportunities, whereas a lack of management generates risks, ultimately impacting on shareholder value. Utilizing natural capital to improve business performance and the environment is surely a win-win that every good corporate citizen should strive for.
How can natural capital affect your business?
Amongst all the issues competing for attention at Board and management level, the opportunities and risks associated with natural capital deserve serious consideration. Businesses are one of the main consumers of natural capital and changes in stocks of natural capital can have profound effects. The United Nations Environment Program for Financial Institutions study estimates that over 50% of current company earnings may be at risk from changes to the environmental cost base.
How should business respond?
Any business seeking to benefit from the natural capital approach must start with a solid understanding of the dependencies and impacts that they and their value chain have on natural capital including the services it provides.
We advocate a robust materiality assessment to ensure focus on strategic risks and opportunities such as business continuity, growth and profitability. A programmatic approach can then be adopted to delivering specific natural capital enhancement opportunities for which quantifiable returns on investments can be calculated and monitored. This can be delivered at a range of levels including:
As the global stock of natural capital continues to decline, such consideration will increasingly affect corporate decision-making and business value. While the challenge of including natural capital into the process may seem daunting at first, the short and long term benefits are clear.
The Natural Capital Coalition, which Arcadis plays an active role in, published its Natural Capital Protocol on 13th July 2016 which provides an excellent example of a business-based framework for assessing, demonstrating and managing opportunities and risks using the natural capital approach.
To read more about the impact of natural capital and to find out more about the risks and opportunities across the whole value chain - from raw material production, transport and energy transmission to manufacturing and then to the cities - download our briefing paper below.
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