Valuing Natural Capital: What Next and Why?

bee flower

Pavan Sukhdev, Geneva, 23 April 2014

Engage businesses and accountancy regulators in an international effort to redefine corporate performance and report it in a holistic way.

Earth Day, 2014: I’m on my way to Copenhagen, for the annual GLASA event (the acronym stands for “Global Leadership Award in Sustainable Apparel”). This year, it is an apparels industry symposium on valuing & accounting for natural capital.

Today, this sounds such a perfectly natural statement. After all, it is almost three years since Puma published the first “EP&L,” a cradle-to-gate valuation statement of its environmental externalities. And four years since TEEB (“The Economics of Ecosystems & Biodiversity”) published a business framework to value & account for natural capital. But how many of us, if asked five years ago, in 2009, could have predicted such traction for the idea that natural capital must not only be acknowledged as a foundation of business, but measured, valued, accounted for and reported to the public?

This is certainly progress, but two questions still bother me.

The first is whether all this progress (to use Marc Gunther’s words last month in The Guardian) is ‘breakthrough or buzzword’? Today, there are over fifty international organizations and projects with the words “natural capital” within their name. Hundreds of sustainability staff at major corporations are talking the talk. Natural capital is in fashion (in more ways than one, given the interest of the fashion industry) but will it get mainstreamed, the goal of TEEB?

The second question is whether this ‘natural capital eureka moment’ in the corporate world might cloud a wider and equally important issue, viz, the measurement, valuation, reporting, and even the notion of ‘success’ in the corporate world leaves a lot to be desired. Redefining success is a central concern for the B Team, for IIRC, the International Integrated Reporting Council, and others. It extends beyond the economic invisibility of natural capital in corporate management and accounting. It is about the inadequacy of today’s statutory reporting architecture to report the impacts of corporations on capitals that are not privately owned by shareholders, but by a whole universe of stakeholders.

Addressing these two questions needs us to recognize that business operates in a multi-dimensional world of natural, social, human, manufactured, and financial capital. It impacts not just private capital owned by shareholders (such as land, factories, cash), but private capital owned by other important individuals (such as the skills & health of staff — i.e. forms of human capital), shared capital owned by communities (local amenities; relationships with local residents and staff, etc. — i.e. physical and social capitals) and public capital owned by society at large (clean air; a stable climate; law & order including commercial contract enforceability; etc. — natural and social capitals). Today’s one dimensional approach which measures and reports changes to only shareholder owned financial capital in effect prioritises the financial goals of shareholders against a host of other interests of society and the planet. This is not only unsustainable, but also self-defeating: without sufficient social and natural capital, businesses cannot function over time.

Mainstreaming the initial uptake of natural capital valuation and reporting by business — from an initiative of few leading companies to becoming the norm for business in tomorrow’s world — will need guidelines and rules in place, as part of statutory reporting requirements to make sure it happens, but an integrated, holistic statutory reporting. Imagine an enhanced future three-dimensional version of today’s one-dimensional annual report and accounts…

I believe stakeholder reporting of this kind will redefine corporate success. We are used to managing what we measure, so a comprehensive report that measures impacts across natural, human and social capital will be more than just informative – it will be transformative. It could trigger a new stage in the evolution of today’s corporation into what I have called ‘Corporation 2020’: one whose goals are aligned to society and the planet, one which as a rule generates positive externalities while it makes profits.

In other words, both the questions that still nag me have the same answer: engage businesses and accountancy regulators in an international effort to redefine corporate performance and report it in a holistic way. My hope is that the ongoing efforts of The B Team, the many partners of the Natural Capital Coalition, the accounting majors, and others will coalesce, bear fruit and make this happen. But it needs to happen fast, before our current business model has pushed us past planetary boundaries.

System change usually happens by default, by design or by disaster. My sense is that we are out of time for creative destruction and other ‘default’ options to work. And we don’t want disaster. So let us throw in our collective energies for change the third way, design. Let us redefine corporate performance, beginning but not ending with measuring and reporting our impacts on natural capital.

About the author

Pavan-Sukhdev1 Pavan Sukhdev is the founder & chair of GIST Advisory, a consulting firm specializing in valuing & managing environmental impacts and dependencies at all levels – national, provincial, business and personal. A career banker, Pavan took a sabbatical from Deutsche Bank from 2008 till 2010 in order to deliver the environmental projects “TEEB” and the “Green Economy Report” for UNEP’s Green Economy Initiative. Pavan was appointed Study Leader of TEEB in early 2008 by the EU Commission and Germany (the first funders of TEEB) whilst still working full time at Deutsche Bank.

This blog post is part of a series produced by The Huffington Post and The B Team community to help articulate a new vision of The Future of Business. To see other posts in the series, click here. For more information about The B Team, click here.

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