The use of natural capital accounting is quickly revealing the revenue risks associated with the usage of natural resources in global operations and supply chain. With impact valuations assigning monetary values, the issues of water and land scarcity, air pollution, waste, greenhouse gases (GHGs) and biodiversity are of great concern.

Libby Bernick is Senior Vice President for North America at Trucost, a company that helps businesses understand how they depend on natural capital to grow revenue. Trucost measures and puts a monetary value on the environmental risks and resources in supply chains and investment portfolios. Businesses use this information to develop more sustainable business models, grow revenue, and manage financial risk from environmental issues (such as climate change regulations or water scarcity). In her role, she has overall responsibility to drive revenue growth and provide exceptional service delivery for investor and corporate clients. She sets the global strategy and priorities for the business.

What is natural capital and why do companies need to measure it?

Natural capital refers to the goods and services nature provides for businesses to grow revenue. The reference is to commodities valued by the market like forests, trees, and timber for example.

If we stay with the example of a forest as a commodity. There is a cycle that is accounted for with natural capital accounting.

Forests filter water and air. They regulate water flow and reduce air pollution. Forests provide views for tourism and hospitality companies. Forests offer many benefits beyond the timber they supply.

The business challenge is in what is left after the resource is used. The absorbing of air pollution is not priced by the market, however companies tend to use this service without accounting for it in measured terms. The rate of this usage because it is unaccounted for is rapidly growing. This puts a tremendous burden on the forest as a natural capital resource. That resource may not always be there or available in the future.

Businesses need to understand the how and why of natural capital so they can continue to grow company revenues.

Revenue growth is priority number one for all companies. How are revenue growth and natural capital connected?

Our mission is to help businesses grow by enabling them to understand how they depend on natural capital to grow their revenue. When we work with clients we talk about their revenue growth trajectory, the strategy they will use to implement it, and how to uses resources more efficiently.

The goal is to remove the dependencies and supply chain risks from the business portfolio and do it in a way that doesn’t add new risks and dependencies.

One example would be from a company in the U.K. called Utilyx. Their forward thinking approach to energy distribution has provided the ability to use biomass as a fuel source instead of buying power from the grid. They measure and understand the net positive benefit of their solution compared to the grid and communicate it in monetary terms to the required financials and consumers. Utilyx understand how they rely on natural capital, qualify the data, and translate it into business terms.

Incorporating natural capital costs into strategy and planning is a new concept for many companies. Why do companies need to incorporate natural capital accounting into their management and reporting practices?

In the past, natural capital costs were external to the business. Today, these costs need to be internalized. We know that some natural resources are becoming scarce. The growth rate of the current level of environmental pollution is not sustainable.

Outside influences are driving the need for transparency and depending on where a company operates, it is being asked to pay these costs now.

To give an example, water is viewed as cheap by many companies. Incorporating the costs of water conservation into a facility up until now was not necessary. By looking at public disclosures, we’ve discovered many companies are experiencing revenue loss and an increase in operating costs due to water scarcity. There is a direct correlation between the increased operating expenses and the demand for natural capital.

Are there tools to help uncover the risks associated with the use of natural capital and how does this provide better decision making criteria?

Over the past 15 years, we developed a suite of tools and data sets to quickly identify and efficiently model how corporations view commodities, suppliers, and product categories. These tools enable companies to understand where the risks and hot spots are in the supply chain. By understanding this companies can develop alternate strategies, incorporate sustainability into procurement contracts, and integrate new management practices to reduce risk to enable better sourcing practices.

Because our clients vary, we have a number of different ways to use the models and databases. Investors, academic researchers and universities, and corporations all access our data.

When leveraging our databases, it’s common that they all access the same data but do so in different ways. The heart of our company is in the databases. We maintain a large number of databases that look at environmental conditions, for example, water scarcity and natural capital costs around the world.

We also maintain a Trucost environmental register, which is the world’s largest database of corporate data and environmental impacts. There are over 4800 companies representing 98% of listed equity worldwide. The databases are used in a variety of ways to help understand the environmental impacts on supply chains and commodities.

We use a selection of models as well, some publicly available, others are proprietary. The EEIO model allows us to measure and quantify commodity flows across an economy.

What are some of the common environmental metrics and impact valuations provided by the tools?

Metrics and impact valuations are based on what is most important and material to the business. A top down systems view and a short list of 3-4 metrics to focus on is the simplest way to start.

There are 6 high-level areas to focus on: greenhouse gas emissions, water use, air pollution, land and water pollution, land use/biodiversity, and waste.

Let’s talk about a few of these.

A lot of businesses start by looking at greenhouse gas emissions in relation to the benefit of their products and services. Most businesses emit greenhouse gas emissions or GHGs through the use of fuel or energy. GHGs are a bio-product of that activity.

Some companies have programs to counteract the amount of emissions they release. We worked with an integrated packaging company which generated emissions through the packaging created and yet, offset those emissions by maintaining forests and using sustainable sourcing practices. They create GHGs and offset the carbon with sustainability efforts.

Water is another area of serious concern. Most people and companies see water use as a community resource. However, water is not priced according to its availability. Where water is most scarce, the price does not dramatically differ from where it is in abundance. For example, in California the price of water might be $1 per cubic liter, this is an area of water scarcity. This price is nearly the same as in areas of water abundance such as New York and Pennsylvania.

The market has failed to price water according to its true value to the business.

We worked with a company called Ecolab to help develop a tool called the Water Risk Monetizer. This tool helps companies take into account the full value of water and account for scarcity risk in decision making. The tool puts monetary value on the risks so that the business can use the information for better decision making purposes.

With land use/biodiversity there isn’t an agreed upon way to measure, making consistent metrics difficult. Conservation International in conjunction with Natura and Monsanto are working on programs to understand the impacts and benefits of land use and biodiversity. Recent projects included the study of sustainable soy and palm oil production in Brazil. The analysis determined the benefits of monoculture over multi-culture practices. The results demonstrated a three times greater benefit with sustainable practices. The challenge is to quantify a net positive return.

What recommendations do you have for companies who want to incorporate natural capital accounting into their existing programs and frameworks?

Many companies have collected information to build upon and aren’t starting from scratch. We see the program as a 4 step process.

• Step 1 is to determine the scope of the analysis and try to understand the business decision that needs to be informed by the data that will be collected.
• Step 2 is to measure the environmental performance in physical terms by looking at what is most material to the business.
• Step 3 is to value the impacts in monetary terms by mapping the costs and benefits to the company.
• Step 4 relies on communicating and embedding the information collected into the company’s decision making framework.

It is important to determine how the business growth strategy relates to natural capital usage and availability. Natural capital risks need to be quantified, measured, and mitigated as part of the corporate strategy. Key decisions to think about include how the natural capital data relates to the existing sourcing model, whether or not the data aids the decision regarding where to expand the business, and where the strongest opportunity for revenue growth lie. Natural capital accounting is a new business process for many companies and understanding the value of the data will inform a company’s future growth strategy.

Bio:

Kelly Eisenhardt is Co-Founder and Managing Director at BlueCircle Advisors, an environmental compliance and sustainability consulting and training firm based in Massachusetts (www.bluecircleadvisors.com.)  In her role at BlueCircle Advisors, she is responsible for providing business intelligence, strategy and implementation of environmental, social and governance (ESG) risk programs.  Her experience aligns well with her client’s needs for technology, compliance, and sustainability expertise by helping companies create and manage their corporate environmental and social responsibility programs.

To contact Kelly Eisenhardt, send emails to kelly.eisenhardt@bluecircleadvisors.com or follow her on Twitter @KelEisenhardt.  For more information about BlueCircle Advisors and the company’s products and services, please visit www.bluecircleadvisors.com, on Facebook at BlueCircle Advisors, on Twitter @OurBlueCircle, and on the LinkedIn group at the BlueCircle Advisors group.