To say that human beings have a disproportionate impact on the planet is quite an understatement. Together, humanity represents just 0.01% of all living things on Earth by weight, yet we have been responsible for the loss of 83% of all wild mammals and half of all plants, according to a World Economic Forum report.
We are slowly recognising the damage we have done and are taking steps, through initiatives such as the Paris Agreement, to protect the natural systems that support our existence. The stakes are high, and nowhere more so than in the business world. Natural capital is material to many organisations, and the World Economic Forum estimates that 50% of global GDP depends on it. A resilient business, then, is by definition one that manages its dependency and impact on nature effectively.
‘Reducing natural capital footprint may mean stopping certain low-margin, more polluting product lines’
Responsibility for the financial wellbeing of an organisation falls largely on the shoulders of professional accountants. A new ACCA report aimed at business leaders, Professional accountants: Changing business for the planet, argues that accountants’ responsibility for sustainable value creation makes natural capital management very much their business.
However, formulating and executing a natural capital strategy is likely to be a new experience for many professional accountants. The Changing business for the planet report – the first of a series of practical guides to natural capital management (separate reports for performance managers, corporate reporters, and auditors and assurers will follow) – explores the factors and processes required to set and implement natural capital management strategies.
The report splits the journey into three stages:
- knowing where you want to go (achieved by understanding your organisation’s natural capital risks and opportunities, which involves connecting the value chain to its areas of natural capital dependency and impact), and identifying your strategic options to get there
- putting in place a sustainability governance framework, building the business case for the necessary funding, and developing natural capital capability within the organisation
- communicating progress to stakeholders
The four Rs
The report provides practical examples to illustrate the key steps in each stage and outlines the latest thinking in natural capital management strategies. For example, it suggests using the 4Rs framework to help generate potential ideas for strategic options:
- Remove: stop an activity, or replace it with alternatives that will achieve the same outcome (such as replacing plastic packaging with recyclable material)
- Reduce: lessen negative impact by taking only what is necessary or using natural capital that has already been damaged
- Restore: repair the negative impact – for example, by regenerating what has been lost
- Reimagine: create an innovative transformation to remove, reduce and restore, or create new value
The report recommends accountants appreciate and balance the trade-offs between the six interconnected capitals (financial, manufactured, intellectual, human, social and natural) for all strategies, especially when reimagining the business.
‘Reducing natural capital footprint may mean stopping certain low-margin, more polluting product lines,’ it states. ‘Financial capital may benefit, from cost reductions in the short term and higher profit margins on green products in the longer term. But this could be at the cost of human capital, as staff working on these discontinued product lines may lose their jobs.’
Sustainability trailblazer
It suggests that the mindset of a sustainability trailblazer, advocated by ACCA, can set a professional accountant apart. This means thinking beyond the immediate organisation and focusing on where the greatest difference can be made. The report provides the example of palm oil producer SDP, which is sharing its innovations with its peers – including its development of genome research that could enable palm trees to increase yield quality and quantity – so that the entire sector can work together to reduce its environmental impact.
Natural capital strategy should be underpinned by good governance and corporate reporting, including organisation-wide processes and accountability for natural capital at all levels of the organisation. The report explains that setting out roles and responsibilities clearly, and connecting natural capital issues across the organisation (so risks and opportunities are part of discussions across functions and at all levels) and with external stakeholders are core to establishing the right processes and systems.
Companies with a stronger focus on material sustainability issues tend to outperform their peers, especially during an economic downturn
Engaging with stakeholders on natural capital issues helps to develop education and mutual expectations, and can change mindsets, the report says. It also advocates the use of green finance to implement natural capital strategy.
The report sets out the scale of work that must be done to form and implement an effective natural capital strategy. But it is work that could pay dividends. Research by investment management company BlackRock shows that companies with a stronger focus on material sustainability issues tend to outperform their peers, especially during an economic downturn. ‘This suggests,’ says the report, ‘that an integrated approach to management, where the drive for short-term financial profit is balanced with stewardship for key value-creating capitals, does pay off.’
