The prospects of Natural Capital Accounting are capturing the attention of the sustainability community at large, and with good reason. Keen to drill down into the topic with key players in the SB community, we sat down with Thomas Odenwald, SAP's Senior Vice President of Sustainability, to get his perspective on the implications and applications of this crucial movement.
Thomas Odenwald: I’m following the ongoing discussions with great interest. Our customers understand that resource scarcity already is or will soon become the biggest obstacle to business success. They expect SAP to help them. We are looking at Natural Capital Accounting in three ways:
- The ‘Risk Management’ angle: Natural capital is still to a large extent ‘externalized’ and not tracked in enterprise systems in the same way we track enterprise resources such as costs, material, labor. This creates a risk for organizations and therefore needs to be prioritized as a material issue. Natural capital needs to be embedded as a key risk KPI and then tracked, so that companies are prepared when abrupt ‘internalization’ occurs in the form of natural disasters or new regulations. A recent report states that in the last years the profits of the apparel industry were impacted by up to 50 percent through droughts causing rapid internalization because of cotton price volatility. This risk is currently not fully captured in existing GRC (Governance, Risk and Compliance) systems and business planning cycles. The main idea is to start assessing and valuating dependencies and impacts on ecosystem services as part of a company’s overall risk management strategy. If it is the case that ‘50 percent of company earnings could be at risk from environmental externalities’ (source), this needs to be reflected in every enterprise business system. But we have seen a few great examples in our own customer base where this has been accomplished within the GRC system.
DV: You paint a compelling picture. What benefits could an expanded accounting system such as you describe offer to companies that embrace it?
TO: Increasingly, natural capital has implications on long-term business performance. Since 80 percent of a corporation’s assets are currently not reflected in financial statements, corporate performance is affected significantly — whether it is known or unknown to the organization. So linking natural capital and corporate value impacts the bottom line (via costs) and the top line (via share price and brand value). It is already common business practice within our customer base to manage valuation prices in multiple currencies and valuations (the process is called material ledger or special purpose ledger); these processes collect information on all company business operations (such as movements of materials and goods) in the system over a certain time period to calculate and re-evaluate performance. Then the material stock account is reconciled with the accounts in financial accounting. Natural Capital Accounting should operate the same way in my view. The key is to re-evaluate the existing system transactions and enhance them with natural capital or ‘externality’ cost valuation. This allows all stakeholders to have an expanded, more accurate view of the overall financial impact of the organization in a familiar context. The process has been there all along, we just haven’t used it in the context of natural capital.
Part two ...