By Nigel Topping
Natural capitalists and financial capitalists don't often come face to face, but the World Forum on Natural Capital will bring these two groups together. Of course, some are members of both communities. What will happen?
But let’s assume that the natural capitalists have a shared mission to accelerate corporate behavior change to create an economy that runs within environmental limits. What then are the key tools natural capitalists must acquire and deploy for success? I propose three above all – translation, pragmatism and stamina.
We’ll begin with translation, for without this nothing is possible. The ability to translate from natural capitalism to financial capitalism is essential if the two groups are to communicate and grow the overlapping community of believes in both.
I spent the first 18 years of my career running factories and manufacturing businesses so the acid test of any piece of natural-to-financial capital translation for me is ‘would the average plant manager be able to immediately understand why this is a business issue to invest time in?’ I see three categories which can attract attention – cost, risk and valuation. Let me give three examples to illustrate what I mean.
With regards to climate change, we spend a lot of time defining the measurement rules and pursuing the disclosure of GHG emissions. This is the language of natural capitalism. Necessary but not sufficient.
Stern converted this language into economics at the macro level in 2006. A recent report published by CDP and WWF with analysis from McKinsey (The 3% Solution) has translated the science of a two degree global warming target into sector-specific emissions reduction opportunities, by showing how the required reductions could be made profitably using existing technology and with returns on investment higher than the average returns achieved by businesses today.
Once the translation has been made, the ordinary user can throw away the original GHG reduction science and focus on using the document in their primary language (investing to generate $190 billion of net savings by 2020 in USA alone). The translator doesn’t need to force the new reader to learn the source language - thank goodness!
A second category of argument focuses on risk. When CDP started to work on water disclosure back in 2008, we thought that the main issue would be the lack of water pricing, we were concerned that since this key externality was effectively free for major industrial users, they wouldn't care about its limits. It turns out we were wrong, and we quickly learned that water management requires holistic thinking and an understanding of a complex set of risks around license to operate, regulatory change and reputational concerns. There is now growing understanding that companies need to demonstrate world class levels of water stewardship to mitigate this basket of risks.
Recent research by CDP and Eurizon Capital (Metals & Mining: a sector under water pressure) translates the ecological problem of declining fresh water availability into the language of risk which investors and miners can understand – noting for example that ‘detrimental impacts are already being felt and over 90 percent of respondents report exposure to substantive water risks that have the potential to impact their business now or within 5 years.’
A third and increasingly powerful argument looks at the valuation models used by investors. This can draw on cost and risk data but most promising at the moment are valuation arguments based around the over-valuation of fossil fuel reserves (see the excellent Unburnable Carbon report produced by Carbon Tracker, or the recent Economist article presaging the end of big oil for just this reason). Again, this is a great example of translation.
Take the global policy consensus of a two degree limit to warming, convert that into a carbon budget, compare that to the carbon embedded in disclosed fossil fuel reserves and then calculate how much of those reserves (and hence the company valuation) risk becoming ‘stranded’ i.e. unburnable. Just last week the Smith School published an equally well translated report on Stranded Assets in Agriculture.
The different languages that exist between natural capitalists and financial capitalists need to become one and the same.
We need to engage with business and finance at scale, not to keep on pointing to the isolated success of a few pioneers and kid ourselves that this is anything approaching adequate progress – we all know that all indicators are still going in the wrong direction at the global scale.
Nigel Topping is Chief Innovation Officer at CDP. He will be speaking in the ‘Natural Capital in the Supply Chain’ stream at the inaugural World Forum on Natural Capital.