Natural Capital in Business Planning: Challenges and Opportunities
Natural capital—the world’s stocks of natural assets that include soil, air, and water—provides us with a great deal of services essential to human life and, increasingly, to companies’ bottom lines. Traditionally, business managers’ primary concerns have focused on financial, human resource, and information management, and production processes, strategy and marketing. Today, however, companies must also pay attention to the use and cost of natural resources, the cost of waste production and disposal, and the environmental impact of their resource use, outputs and waste. These physical dimensions of sustainability are an increasing percentage of a company’s cost structure and can no longer be ignored. The incorporation of natural capital into routine decision-making (in government, non-profit, and private organizations) is needed to enable the continued and productive use of our natural resources, as well as long-term economic growth.
Last week, the U.S. Department of Commerce and the Earth Institute hosted the Natural Capital Business Roundtable to discuss this growing topic, bringing together an intimate group of business, government, and non-profit leaders. This invite-only event, the third in a series of four regional roundtables organized by the Department of Commerce, provided opportunities to hear, share, and understand core business concerns such as supply chain resiliency, corporate image, and cost savings in the context of the unique challenges faced by industries here in the coastal Northeast. Dr. Holly Bamford, Acting Assistant Secretary of Commerce for Conservation and Management for the National Oceanic and Atmospheric Administration (NOAA), provided a keynote address and said of the event: “Around the globe, large companies are looking towards reducing climate and extreme weather risk using natural capital solutions. And so are the other members of the communities in which they operate – including local government and local businesses. That’s why we have to approach natural capital from a community-wide perspective. The Department of Commerce Natural Capital Business Roundtables bring business and the environment together to learn, build new partnerships, and develop a sustainable strategy into the future.”
Businesses from key local industries, such as finance, reinsurance, and infrastructure, engaged with the Department of Commerce, the New York State Department of Environmental Conservation, regional environmental organizations, and academic experts to discuss the value and the challenges of incorporating natural capital into business planning. While there was a sound consensus that natural capital has value to businesses, the question that frequently arose from all parties was: How do you value an asset? Like the term sustainability, “natural capital” has numerous definitions, and its value may be implicit, explicit, a benefit, or a cost. Depending on the industry, monetizing the value of natural capital may mean considering a factor of risk, or may mean a demand by consumers.
With so many definitions and methods of valuation, making the business case for natural capital to executives and shareholders can be difficult. Persuading people who are used to evaluating financial returns of the value of natural assets (returns from which may only be felt long-term) requires real-world examples and case studies for people to understand the benefits, issues, and how it applies to their company. This is one of the reasons the Department of Commerce initiated the Natural Capital Business Roundtable, as it showcased companies doing innovative natural capital work, such as Bloomberg LP, Bechtel Infrastructure, Encourage Capital, and RenaissanceRe, and demonstrated how to apply those strategies within other businesses.
As companies struggle with how to value natural capital and explain its importance, it’s clear that the private sector cannot make the sustainability transition by itself. As participant Eric Sanderson from the Wildlife Conservation Society said, “To get these things to go to scale, there must be some governmental mechanism to create the market and to assign value.” The public and private sectors play important, often complementary roles, and so this transition requires a public-private partnership between a creative and competitive private sector and strong government leadership and resources. In hearing and discussing the information needs and resources that would assist businesses in incorporating natural capital into key decision points, the Department of Commerce offered tools, suggestions, and a new governmental outlet for businesses to harness.
Moderator Satyajit Bose, a Columbia lecturer in economics and Associate Director of Columbia’s M.S. in Sustainability Management Program, likened the current state of natural capital standards to the U.S.’s history of accounting standards. In the 1920s, accounting standards were undefined and allowed a great deal of inconsistencies and irresponsibility in financial reporting, ultimately resulting in a major financial crash. Generally Accepted Account Principles, or GAAP, said Bose, “were developed in response to a crisis. Hopefully, we won’t need a crisis like that to come up with similarly accepted natural capital and sustainability standards.”
Ultimately, comprehensively integrating natural capital into business models and strategic decision-making will require a consensus on its definition and common standards, but also an acceptance of the uncertainty of the field. In economics, indicators such as GDP can be very uncertain and change with new knowledge, yet they are still frequently used in making decisions across all sectors of the economy. The Roundtable attendees noted that we are holding ourselves to a higher standard with regard to uncertainty within sustainability and natural capital; why not utilize what we do know to make decisions now, and adjust as we gain more information? While the field of natural capital should still strive for improved accuracy, we must move forward with incorporating natural capital into business planning if we are to seriously address the increasing threat of climate change and other environmental impacts to our businesses and communities.