Trucost’s research for the TEEB for Business Coalition, Natural Capital at Risk, estimates the environmental externalities of business are costing the global economy around $7.3 trillion a year, equivalent to China's GDP in 2011.
The report Natural Capital at Risk identified the risk of these costs being internalized on company balance sheets by natural events, regulation and customers. However, where there is risk there is opportunity. The report also highlighted opportunities for companies to gain competitive advantage by using this intelligence to optimize their operations and supply chains.
For example, we identified that:
Wheat farming in Northern Africa has a natural capital cost of water that is thirty times greater than in Eastern Asia.
Cattle ranching and farming in Southern Asia has a natural capital cost of land use that is sixteen times greater than in Northern America.
Understanding the problem – and solving it
Traditional ‘single parameter’ metrics for water (cubic meters) and land use (hectares) provide an indication of the scale of natural capital dependency or impact, but would fail to identify the example optimization opportunities highlighted above. Natural capital valuation provides deeper insight due to its ability to factor scale alongside critical environmental parameters, such as regional water scarcity and ecosystems services provided by land.
In this way, natural capital valuation tells you how big your problem is – and helps you to devise strategies to address it.
Placing a financial value on environmental impacts, as PUMA and parent company Kering did when they developed the world’s first environmental profit and loss account with the support of Trucost and PricewaterhouseCoopers, is particularly useful in helping companies to embed environmental considerations within business strategy.
Fig 1: PUMA Environmental Profit and Loss Account
Trucost is now working with many companies to help them apply natural capital valuations to their business models in order to help them reduce their environmental and social impacts where it counts, adapt to resource constraints, meet changing customer demands, tap into new sources of revenue and be prepared for future regulatory constraints. We provide data that can be incorporated directly into existing financial and operational systems to identify the net benefits of different technologies, procurement strategies or product life cycles.
Three billion new middle class consumers by 2030 will cause demand to continue to grow rapidly, while supply will continue to shrink. The consequences in the form of health impacts, water scarcity and lost ecosystem services will create tipping points for action by governments and societies.
Companies best positioned to compete in the future will be those that are able to decouple growth from unsustainable dependency on vulnerable ecosystems. Natural capital accounting enables companies to do just that by identifying opportunities to optimize operations, supply chains and product portfolios in line with natural resource availability and environmental cost.
Against a backdrop of increasing regulatory and natural resource pressures, fuelled by population growth, companies that act now to develop low carbon, resource efficient technologies and services will be the successful companies of the future.
What is valued, is managed.