Natural Capital Valuation: A Mainstream Business Issue

Applying natural capital valuation in mainstream business practices

The global economy depends on the preservation of natural resources. Yet the majority of businesses have not traditionally placed a high enough financial value on natural capital – the products and services they derive from nature. Here, we consider how to apply natural capital valuation in practical terms – both within business operations and across supply chains – and explore how data management can help to put natural capital at the heart of core business practices.

Read Part 1 of the series here.

Part 2: Making natural capital a mainstream business issue

Once an organisation has a clear view of the risks its environmental impacts pose to its business, there are multiple ways of applying those findings.

Putting a ‘real time’ price on water and carbon

Many companies apply a ‘shadow price’ internally. This is a real-time estimate of the financial value of natural capital impacts that can then be factored into operational costs. It gives businesses an idea of the ‘true cost’ of their impacts and provides an incentive to act.

Some 150 businesses including Microsoft and Dow are using a shadow price for carbon, according to the Carbon Disclosure Program (CDP). By factoring in an ‘internal’ price for carbon on impacts from electricity use to air travel, Microsoft has embedded the cost of carbon into its financial systems. In this way, it can also judge the relative potential of emissions reduction projects. Its shadow price is reinforced by an internal carbon fee incurred by the business divisions responsible for generating emissions associated with specific impacts.

By adding a shadow price to water consumption, companies can close the gap between the true economic value of water and the price they are paying for it. Assessing water scarcity in specific locations, the amount of water used by individual facilities and the value of the water to the business and community can help to inform thinking on how water constraints may affect business growth and whether to expand in water-scarce regions.

Managing supply chain impacts

Companies can use natural capital valuation to assess the environmental impacts of their supply chains with greater accuracy. This can amount to 80% of the impacts for the food and beverage sector, according to Trucost. Identifying hotspots helps businesses manage risks more effectively, make cost savings, and reduce impacts.

Best practice suggests that companies should conduct a risk assessment to identify which environmental impacts are most material to their business. Comparing these risks in financial terms enables a clearer understanding. A company can then take steps towards building a more resilient supply chain. This could mean requesting detailed environmental data from suppliers or providing training to high risk suppliers. Similarly, companies could build natural capital questions into supplier audits, informing purchasing decisions and improving supplier sustainability.

Designing products with natural capital in mind

Integrating natural capital considerations into product development can help companies to make progress in cutting their impacts. Some businesses are building on their lifecycle analysis data by converting impacts into monetary values, making LCA findings more accessible to senior executives.

In addition to comparing different impacts, companies can also consider individual impacts in relation to resource availability. Water, for example, is more valuable in arid regions compared to water-rich regions.

Measuring natural capital risks on an ongoing basis

Integrating natural capital valuation into core business practices is fundamental to managing environmental risks on an ongoing basis. In future, advanced data management tools, will enable businesses to see the costs associated with their environmental impacts at the touch of a button. In this way, decision-makers can view the monetary value of environmental impacts alongside business performance, and analyse the impact of natural capital risks on profitability.

Whereas an EP&L provides a snapshot in time, data management software helps companies to analyse their natural capital impacts on a regular basis – in a consistent and verifiable way. They can then begin the fundamental transition from monitoring negative impacts to driving progress towards a more sustainable future.