Is natural capital accounting the next big thing in environmental sustainability? Are there frameworks/standards that we can adopt? Should we be developing issue or sector specific frameworks?
Businesses operate (and we live) in a world where resource scarcity is the new reality. Investors are trying to understand this risk, and what impact it might have on their portfolios. Businesses depend on natural resources (air, water, land and biodiversity) to deliver products and services to us (their customers). The same resources provide the environmental services (clean air, drinking water) that benefit society as a whole.
Valuing these natural resources is not simple, however organisations are trying to do this. Last year Trucost estimated unpriced natural capital costs at US$7.3 trillion relating to land use, water consumption, GHG emissions, air pollution, land and water pollution, and waste. The World Bank estimates that natural capital degradation costs $36bn to $124bn a year – equivalent to 2.6% to 8.8% of GDP.
Over the last year the CDSB Board and Technical Working Group have been working to expand its Reporting Framework to cover some of these wider environmental issues. The intention of the Framework is still to help organisations structure their reporting on environmental issues, within their mainstream reporting, in a way that enables investors to gauge the potential impacts on the organisations strategy, performance and prospects.
The Framework provides a structure for organisations to cover environmental issues against key elements of mainstream reporting;
- Current performance, historic trends, targets and future outlook
- Risks and opportunities
- Policies and standards adopted
- Management and governance
- Material issues, concisely and in a balanced way
Pragmatically, the expansion of the Framework from Climate Change has been drafted to include water and forest risk commodities (i.e. the drivers of deforestation). These account for around 80% of current estimated natural capital valuation. For both water and forest commodities we are just starting to see agreement on the standards, tools and techniques to use with valuation and there are references in the expanded Framework.
However, for most companies (with the exception of agriculture and industries like forestry and mining) the stocks of these natural capitals under company control, and of material significance, is likely to be a fraction of that under the control of their supply chains. In the UK for example, the mandatory Greenhouse Gas Reporting requirement, recognising the complexity of accounting for Scope 3 emissions, has included this as a voluntary option.
For me then, one of the questions to be answered is whether organisations and investors are looking for a generic framework to help with disclosure and understanding for all forms of natural capital. Or indeed whether specific industry/ issue based frameworks are more relevant. The latter, of course, risks increasing clutter in mainstream reports for very complex businesses.
The next phase of the framework development is to get the widest view from investors and mainstream reporters on the proposed increase in scope, alongside other technical aspects.
Having worked on sustainability reporting in the corporate sector for many years, I personally am keen to see the Framework developing in a way that makes sense for business, providing information in a useful way to its investors.
I would encourage comment on the consultation. The reporting landscape is ever changing and increased complexity is not helpful to any of us.
Ian Wood is a freelance sustainability consultant and member of the CDSB Technical Working Group. Ian spent many years at BT Group, he was responsible for producing its sustainability reporting, including Carbon Accounts. Contact Ian at email@example.com.