The natural capital concept can guide decisions and assess environmental risk.

by Elisabeth Jeffries — After constructing a plant in an arid part of India, buildings materials manufacturer LafargeHolcim opted not to buy efficient water equipment. Instead, it helped local farmers move from flood irrigation to an alternative known as drip irrigation. This improved water access for both the farmers and the local community, and was the cheaper solution for the company.

 

While the project makes simple business sense, it nevertheless reflects a certain change of direction for LafargeHolcim in that it considered options not previously taken into account. The innovation involved the concept of natural capital – the ecosystems underlying business natural resource use. The company is one of 80 members of the Natural Capital Coalition (NCC), a diverse consortium influencing the creation of the Natural Capital Protocol, a management tool. 

 

Its aim is to use natural capital awareness to help guide decisions and assess environmental risk. This is rather more proactive than monitoring the environment around the site once a plant is built. It means considering the activities and value of land, water and plants, as well as the ecosystems they embody, in order to improve a company’s notion of risk. “Most businesses have some idea of where they make an environmental impact but very few have an idea of their dependencies. The Natural Capital Protocol will help them connect both, which is important,” explains Mark Gough, director of the NCC.

 

Companies might previously have measured impacts such as emissions in terms of tonnes of gas produced or spillage fines. However, Gough suggests they will probably not have considered the point of making the assessments. “They will probably not have integrated this into the management process,” he says. 

 

The protocol attempts both to harmonise previous natural capital approaches as well as better inform and improve decisions. It breaks some new ground in terms of consolidating existing practices and makes its mark as a concept and corporate responsibility tool. Coalition members range from Arup to Tata Power, and from Burberry to Shell. 

 

Natural capital could transform existing land asset figures, for example, by integrating the value of ecosystems services like photosynthesis, pollination or wetland retention. However, the protocol does not go nearly that far. “Companies adopting the protocol can opt to report, but they don’t have to,” says Mark Gough. A few have already attempted financial valuations, including sportswear producer Puma and Danish pharmaceutical company Novo Nordisk. 

 

In its innovative 2014 environmental profit and loss account, published with the Danish environment ministry, the company valued its water use for 2011 at €34 million. Greenhouse gases were estimated at €171 million and air pollution at €18 million. Each figure was split into the various tiers of the company’s supply chain and own operations. It included a natural capital component, stating: “if environmental costs relating to water consumption, greenhouse gas emissions and air pollution were to be internalised, Novo Nordisk would have to pay €29 million in 2011 for operational activities (core activities) alone.” 

 

Novo Nordisk’s efforts consist partly of an environmental footprint calculation based on corporate outputs. However, they also contain a natural capital component. Its valuation includes estimates of impacts on pollination services and carbon sequestration. 

 

Most corporations do not go that far, reporting only tonnes of polluting gases, for example. Valuations are fraught with difficulty because of the very character of natural systems, whose boundaries are hard to define and whose categories not discrete. “In conventional accounting, you know what to include and what to leave out. But you can’t measure natural capital without making subjective judgements,” comments environmental accounting expert emeritus Professor Robert Gray of St Andrews University, UK. Hence, natural capital numbers are bound to be open to criticism.

 

Assessing marginality is one of the natural capital accounting conundrums. Scientific uncertainties shroud ecosystem functioning, making it difficult to assess whether a given change is marginal and when thresholds are being approached or crossed. Many ecosystems do not react to disturbances in a linear way. This means their supply may appear relatively unaffected by increasing disturbance until they reach a cliff edge when a dramatic response occurs. It is not always possible to predict what species will do once their habitat is upset. Finally, an isolated ecosystem like a lake may play a different role than when part of a lake district. Effects are often uniquely local.

 

Some techniques have been refined, such as natural capital accounting on carbon emissions. To estimate the impact of glucose in Novo Nordisk’s products, natural capital experts Trucost calculated land use change effects in France. Temperate forest originally grew on the site supplying Novo Nordisk. Using standardised measurements, Trucost showed the impact on carbon sequestration from growing the crop in place today.

 

The protocol and natural capital accounting could help assess the different remediation methods of a closed plant or create zoning maps indicating which part of a landscape or river provides the highest ecosystems services. This could, for example, help determine whether to provide a new habitat for a species upstream or improve a completely different area to protect that same species. 

 

“Planning does take habitats into account, for example, and this can get used as a reason to refuse a new property development. But more often it doesn’t. Natural capital assessments embed this thinking more systematically into the process,” says Karen Ellis, Chief Advisor on Economics and Development at WWF UK, an NCC member.

 

Alternatively, companies might more effectively assess a new site using a stress test incorporating the longer-term natural resource risks of settling there. “It helps businesses better understand the risks of using natural capital in a whole landscape,” she says.

 

While the tool is initially meant for internal decision-making and investigation, it could evolve. “Ultimately we would like to get to the point where we have a single reporting tool and can make comparisons,” says Ellis. The Natural Capital Protocol demonstrates an acknowledgement that companies must control resource use more consciously, but it also helps justify continued activity and wins more public support.

 

Photo: Natural Capital Project