Natural Capital Valuation: Why it Matters

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.

Part 1: What is natural capital valuation?

The environmental and social impacts of business on natural capital could cost the economy as much as $7.3 trillion per year, calculates Trucost, an environmental data firm that identifies environmental risk. As the pressures of resource scarcity, raw material price volatility, pollution, and climate change intensify, progressive companies are beginning to consider nature more seriously.

Companies are using natural capital valuation as a tool to reduce their impact on the environment and inform mainstream business decisions that save money, reduce risk, drive positive change, and pave the way for more innovative, robust business models. By monetising their environmental impacts, sustainability leaders are bringing natural capital to the attention of senior executives in the universal language of business.

Making meaningful comparisons between fundamental impacts such as carbon emissions, water consumption and air pollution is challenging. Each impact is measured differently, making comparisons problematic. By attaching a financial value to the respective impacts, it becomes easier to gain an overall perspective.

For example, an environmental profit and loss account (EP&L), a monetary valuation of a company’s environmental impacts (from raw material to product disposal), is designed to mirror financial accounts. It acts as a strategic overview, enabling companies to determine how much their business costs the environment, and compare this with revenue and profit. For example, PUMA’s first EP&L identified that its business operations cost the environment €8m, and its supply chain cost the environment €137m (94% of its total impact). While this did not affect the company’s net earnings, it pushed the brand to collaborate with partners throughout the supply chain to reduce its environmental footprint.

Next week, we will explain why it is necessary to make natural capital a mainstream business issue.