How Natural Capital Is Shaping the Future of Business

How Natural Capital Is Shaping the Future of Business
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In my last blog I described the trend toward businesses reexamining and accounting for "natural capital" -- idea that natural resources, ecosystems, climate, etc. are not just "externalities" separate from capital, but a crucial asset that businesses depend on. There are still divergent views on how to define and value natural capital, but the dialogue about it opens a window onto the fast-emerging future of business.

Last month the Rainforest Alliance held a summit with corporate leaders on natural capital at London's RSA. Speaking at the event, Inder Poonaji, Head of Sustainability at Nestlé UK, called for a common understanding of what natural capital is, how companies measure it, and how they assess their impacts. This can be contentious; some may argue valuing nature as "capital" moves us further away from the intrinsic value of the natural world. What's a beautiful view worth, or the value of a spiritual connection with nature? What's the economic value of biodiversity, or local and indigenous peoples' rights? Yet not placing a tangible value on them runs the risk of their being treated as if they were dismissible or disposable. A common understanding of natural capital and its value should take full account of the social and environmental dimensions of economic activity.

Summit participants discussed the necessity, and apparent contradictions, of "pricing externalities in," i.e. including social and environmental impacts of their operations in their pricing. Alastair MacGregor is the COO of Trucost, which quantifies and prices natural capital dependency for companies. He points out that to provide those services, you have to defy basic economics. When demand rises, supply is supposed to rise to meet it, establishing an equilibrium that sets prices. Demand for natural capital is rising very rapidly, but supply can't rise with it without destroying those resources. For all sorts of natural resources and ecosystem services, supply is falling as demand rises. How can you determine a price for them if their demand and supply curves are growing apart and don't intersect?

Current economic models can't answer that question, so we need new ones that can. A rational way to compare the value of extraction vs. conservation of resources could help guide economic activity. One group of researchers estimated the value of the Canadian boreal forest, if left ecologically intact, at US$3.7 trillion, and the value of the ecosystem services it provides at US$93.2 billion - two and a half times the value of the resources extracted. Yet extraction continues, and natural capital loss accelerates.

Including natural capital in their analysis could help business go beyond just monitoring their negative environmental impacts, and start making informed, data-driven decisions about how to achieve positive ones. In one case discussed at the summit, a commodities supply company assessing its performance through a natural capital lens for the first time discovered that it was vulnerable to potential supply disruptions and deficits which could cut profits in half. Trucost produced a report identifying natural capital risks to business which found profits in some high-impact sectors would be wiped out entirely if the costs of these environmental damages and unsustainable uses were factored in.

This sort of realization could motivate deep change in business decisions and outcomes. It could also motivate businesses to tap their power to work with consumers, suppliers and staff towards a new idea of value. Consumers have long been conditioned by business to think of value as low prices. But 50 years ago "value" meant something else: quality, performance and durability for which consumers were willing to pay. Today, consumer profiles are shifting rapidly, with "aspirationals" and "global vocalists" making up about 39% of the global population and counting. They're known for connecting their values to their lifestyle choices and purchase decisions, and would relate to brands that offer natural capital as part of their value.

But for natural capital to work on macro- and micro-economic levels, governments have to work with it, too. They need to bring values like civic purpose and public good into the indicators they use to measure progress. Today, natural capital isn't even part of GDP calculations, so GDP can grow even as climate change and biodiversity loss cause the commons to shrink. The Economics of Ecosystems and Biodiversity (TEEB), a series of studies commissioned by the G8+5, is an important example of quantifying natural capital in ways that can be reintegrated into government analysis and decision-making.

In fact, for natural capital to be integrated into the economy, we need a cross-sector approach that connects businesses with each other and with consumers, governments, NGO and academic research, all working together towards common understanding and methodology.

We also need to consider the combined impact of economic activity on whole landscapes, beyond individual commodities markets or supply chains. It won't help much for a food company to work with supplier farms to make them more sustainable if meanwhile a neighboring virgin forest is getting clear-cut or a nearby factory is polluting local water supplies. To keep whole landscapes viable, we have to bring those sectors together to cooperate on their combined impacts.

This vision for a common, collective approach to natural capital is already starting to emerge from leading-edge sustainability efforts, and it may be where the future of corporate leadership itself is headed. New studies by Coca Cola Enterprises, Aviva Investors and KPMG all see a need for and a trend toward pricing environmental and social externalities back into company operations and capital markets. The Coca Cola study argues that millennials - who are the corporate leaders of the future - have an even stronger affinity for transparency around social and environmental impacts and pursuing defined social and environmental purposes for business than the sustainability-minded corporate leaders of today. That combined with shifting consumer profiles, rising global population and demand, and growing environmental and social impacts is bringing about a sea-change in how we perceive and create value in the 21st century.

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