The prospects of Natural Capital Accounting (NCA) are capturing the attention of the sustainability community at large, and with good reason. In part one of our two-part interview with Thomas Odenwald, SAP's Senior Vice President of Sustainability, he explained the three angles from which the company is approaching NCA; here, he offers steps for implementation.
Dimitar Vlahov: This all sounds both promising and practical to me. What would you recommend the Sustainable Brands community to focus on in terms of specific next steps?
Thomas Odenwald: Not a day goes by without a new article on Natural Capital Accounting in the press. The discussion has great momentum and I applaud every new initiative, because it is much needed and it furthers our progress.
But we have to be really careful not to loose sight of the ‘Materiality’ and ‘Accounting’ aspects of these discussions. Here are some of my concerns:
- If Natural Capital Accounting is the process of placing a financial value on natural capital (water, air, soil, forests, and so on) consumed by a company’s business operations and considering these as an essential business asset: We have to embed it the same way we are embedding other (financial) value into our mainstream enterprise systems.It cannot be a ‘stovepipe’ approach resulting in a glossy publication without interconnection with the respective financial accounting system used at the core of the business. Sustainability functions continue to have low levels of engagement with key functional areas, and the lowest level is with corporate finance (BSR study). We have to understand how corporate finance works today and how natural capital can be embedded into existing processes. Otherwise we risk losing our audience and becoming invisible in future decision-making.
- I just read an article stating that it takes 12-18 months to generate an Environmental Profit & Loss (E P&L) report.You don’t have that time frame for traditional financial profit and loss reports. There has to be a better and faster way to make natural capital really relevant. At SAP we are offering CFO dashboards that show revenue and profit data in real-time on mobile devices. If the result of an E P&L cuts into your profit margin and you want to get the attention of the CFO on this, it has to be integrated into the dashboard at the appropriate time intervals. We simply need to bring the accountants and controllers into the discussion. Leverage their skills, their systems and their expertise to incorporate natural capital into their daily tasks. The CFO office can then make sure the operational results are part of the ongoing bigger strategy and decisions. Once we have a standardized framework and solid valuation data sets, the timeframe to generate Natural Capital Accounting (e.g. in form of an E P&L) has to be aligned with financial accounting.
Sustainable Brands 2014
- The lack of a standardized approach is still a big issue. We cannot have large corporations pick and choose what they want to report on when it comes to natural capital and the consumption of ecosystem services. Take this example: If you want to give your carbon emissions a monetary value, which ‘currency’ do you apply today? The Australian carbon price at 22USD a ton, or the European price at 5USD a ton, the California price at 14 USD a ton, or any other price? And how do we agree on the valuation of a certain ecosystem service in the absence of market prices? This is not easy and we have a long way to go.
The Natural Capital Business Hub now has a big list of various initiatives and efforts from a variety of organizations and industries. But it is extremely hard to benchmark and compare the different case studies. As long as that is the case, there is no ‘race-to-the-top competition’, as we have it for financial aspects. We need to find a way to allow investors and other stakeholders to compare apples to apples. Therefore we need an agreed upon methodology and standard that needs to be extended and evolved over time. I know this is been in the works by a number of organizations and will need more time to develop.
- My last point is the quality and integrity of data. A major global technology company just showed a case where for years the carbon emissions estimates for their aluminum usage were simply wrong, because they relied on secondary databases. A key way forward to offset such flaws is the use of ‘hybridization,’ where for certain high-impact spend categories the results are improved with primary data collected directly from suppliers, while gaps are filled through secondary sources such as Life Cycle Assessment (LCA) databases. But primary data have to have priority, to allow suppliers to differentiate themselves. For industries in which 80-95 percent of the footprint comes from their supply chain (see PUMA's E P&L), this aspect is extremely important. Only high-quality, reliable data sets can be synced with corporate finance data sets. Our business network approach with Walmart and TSC (The Sustainability Consortium) is a good example of how to leverage primary data and allow suppliers to differentiate and benchmark themselves.
DV: Can integration of NCA into enterprise business settings overcome these hurdles?
TO: We have to make it ‘non-disruptive.’ What I mean by that is that the capability (of NCA) needs to be embedded as an option into the mainstream systems (until we have regulations in place). And for the forward-thinking companies it needs to be as simple as possible to activate, configure and leverage that option. But the most important part is the integration into mainstream corporate accounting on an operational level as well as into the bigger reporting narrative on the strategy level. The new Integrated Reporting framework released by the IIRC could be a platform for the strategy narrative. It puts emphasis on natural capital, but also goes beyond — as sustainability does. We just teamed up with IIRC (International Integrated Reporting Council) to run a joint engagement initiative with SAP customers, and so far the feedback has been great.
DV: What research insights out there do you find most compelling in making and communicating the business case for all of this?
TO: If the ‘unpriced’ actual natural capital costs relating to land use, water consumption, GHG emissions, air pollution, land and water pollution, and waste are indeed roughly at US$7.3 trillion (TEEB study), then that’s a huge business case — and it’s not captured in any mainstream enterprise system today.
If 50 percent of company earnings are at risk from environmental externalities (see the UN Principles for Responsible Investment study), IT needs to offer tools and systems to measure, manage and mitigate. Financial services companies need to push for this kind of information in a structured way (ideally through new standards), and then businesses will react. We already see more and more investors actively looking for those data sets. If that continues to happen, more companies will follow (willingly or unwillingly), and sooner or later it will hopefully be easy enough for governments to convert best practices into much needed legislation.
I would like to encourage the community working on Natural Capital Accounting not to forget the importance of integration into mainstream systems in place today. It should not be an afterthought. One reason why some people recently stated we are ‘plateauing’ in our efforts is because of lacking integration of sustainability into mainstream thinking and mainstream processes.