Natural Capital Accounting (NCA) is an emerging methodology in the private sector, aimed at measuring the dependency and impact of companies on natural systems. NCA helps in quantifying the value of usually intangible assets from nature (such as water, pollination, etc). NCA allows mitigating risks but also identifies opportunities to reduce costs, innovate and become more resilient.
Despite being a praised concept, the approach still faces challenges at its early development stage. This is the reason why we interviewed more than 30 executives, of which two thirds are working for private companies — including Natura, Nestlé, Olam, Holcim, Engie, AkzoNobel, DuPont Nutrition, Kering (which recently made its Environmental Profit & Loss methodology public to encourage wider adoption) and Cementos Argos — and the remaining third for consultancies, to identify trends and future development needs for the Natural Capital Accounting approach. While all interviewees have a basic understanding of NCA, two thirds have used this method in projects. Of the latter group, most have applied it at a corporate level, covering supply chains in particular, and at a site level.
Now: The observation round
For those having applied NCA, their company’s executive board was often cited as the driver for exploring this approach, as well as the department in charge of sustainability. External drivers do not currently seem to be present. The stated objectives of those studies were mostly exploratory, to support corporate strategy, but also for risk identification and mitigation (physical as well as reputational and other risks). It is not yet used as a tool for cost savings, brand reputation and market access, although some companies already use it for this purpose, in particular early adopters.
The future: Finding its place outside the sustainability department
Very few interviewees have doubts about the future of NCA; most respondents see it as a key resource for company management, although complementary to existing tools used by sustainability managers. Businesses needs metrics for management, in particular to prioritize investments based on ROI calculations and for current risk assessment approaches. NCA, with its easily communicable financial results, is easier to integrate into existing financial metrics than other sustainability metrics, such as CO2 or water use, for example. However, it still needs to find its place in companies’ toolkits, even though sustainability executives seem convinced it will become mainstream.
Show me the business case
When evoking the future development needs of NCA, standardization work is seen as critical by almost all interviewees. The Natural Capital Coalition is currently addressing this point. However, according to the private sector, the next big priority is to strengthen the business case of NCA. It seems that there is a clear need to prove the concept and its business value. Companies and in particular sustainability executives can grasp the concept of this approach pretty easily and can imagine its value, however the gap between the theory and practice still remains. Andrew Prosser, from Capitalactiv, states: “Something that may have a strong logic for sustainability practitioners is still a long way from making sense to most other people in the business."
On the other hand, consultants put more priority on technical aspects such as databases, valuation methods and management tools. These are definitely critical areas to develop NCA, but given the level of maturity of the approach, companies are first looking at the business case to get internal traction. There is no doubt that the approach brings interesting information and insight, however the mechanism by which it can change the course of action still needs to be invented. Which decisions can be influenced by NCA, by whom and how? These are the questions that are still not adequately addressed in the private sector.
The remaining challenges
NCA is again an emerging approach in the private sector, which is being developed in a fairly short period of time. The lack of available and reliable data and methods (after its standardization) is certainly the next topic to address within the NCA community and the Natural Capital Coalition. “The Natural Capital Protocol aims to help businesses build considerations of nature into their decision making. To achieve mainstream uptake though we also need to focus on the role of data in natural capital assessments and the enabling policy environment,” said Mark Gough, Executive Director of the Natural Capital Coalition.
However, interviewees highlighted the lack of internal support (and thus business cases), and even more importantly the lack of adequate knowledge and training, which is currently a limitation in the deployment of NCA. Consultants clearly underestimate those barriers, although there is no doubt that knowledge transfer can become a priority in the short term with the wide choice of experts in the NCA community.
At the heart of informed decision-making
When exploring where NCA could provide the highest added value for companies, a vast majority of companies and consultants/NGOs indicated that cost-benefit analysis was where they see the highest value (see figure below). It was followed by corporate strategy, and only after risk assessment, internal awareness raising and reporting.
The graph below shows the topics identified by interviewees for which NCA brings the most added value:
Get it out of the hands of sustainability professionals!
When asked for their advice in making NCA a mainstream tool, interviewees had quite different points of view, focused either on methodologies, business cases or development process. However, two of the most straightforward comments were “get it out of the hands of the sustainability professionals” and “make it practical.” If we want decision-making to be influenced by NCA, we must put a simple, concrete and robust tool in the hands of financial and operational executives.
NCA is still facing challenges, although its use and acceptance are growing. We are in the early days and hope to see more business cases published, showing the value of NCA for the private sector, as well as knowledge development and sharing. It is critical if we want to use Natural Capital Accounting in our daily decision-making.
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Published Aug 1, 2015 6pm EDT / 3pm PDT / 11pm BST / 12am CEST