Putting natural capital analysis into practice

26th July 2016


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Author

Janet Young

Businesses can learn how to get the benefits from natural capital assessments in a report by Trucost.

July saw the launch of the Natural Capital Protocol – a standardised framework for businesses to identify, measure and value their impacts and dependencies on the environment.

By valuing natural capital, companies can manage natural assets in the same way as financial capital. It enables firms to truly integrate sustainability into business decision making.

Trucost wrote the official sector guides to support the Natural Capital Protocol’s implementation in the food and beverage sector and the apparel sector. We have been working with companies and financial institutions to understand natural capital impacts and dependencies for 16 years, and we were honoured to contribute to the Natural Capital Protocol and develop the sector guides in collaboration with many others.

Now the challenge is to build a critical mass of companies using natural capital analysis. To raise awareness of the benefits, Trucost published Growing Business Value in an Environmentally Challenged Economy. It discusses how companies can better manage environmental risks to their businesses and identify opportunities to benefit from the transition to a low-carbon, circular economy using the insights provided by natural capital tools.

Illustrated by business case studies, the report considers issues such as how environmental constraints could lead to raw material price volatility.

Food retailer General Mills commissioned Trucost to quantify natural capital risks across its value chain including agriculture, ingredient production, packaging supply chain, product production, distribution and consumer use. We found that two thirds of the company’s carbon footprint and almost all of its water use came from agriculture. The insight led General Mills to focus its efforts on sustainable sourcing.

Investors are increasingly asking companies to disclose how they are managing environmental risks. The report looks at how resource constraints could disrupt operations and impair asset value.

Louis Vuitton Moët Hennessy (LVMH), the luxury products group, was concerned that exposure to water scarcity would affect its ability to operate, damaging profitability. To help it understand these risks, Trucost created a region-specific water risk map across the entire value chain which identified where the cost of water might increase as a result of water availability and regulatory pressure to increase water tariffs. This enables LVMH to prioritise risk management where it matters most and strengthens the business case for investment in water efficiency.

Aside from the risks, companies are asking how they can benefit by expanding green products and gaining access to green investment markets. The report discusses how investors are seeking companies that are creating products that will help drive the transition to a low-carbon, resource efficient economy.

Clothing and accessories company Eileen Fisher wanted to demonstrate the benefits of its commitment to sources 100% organic cotton and linen by 2020. Working with Trucost, it found that organic cotton has natural capital costs benefits 2.5 times greater than conventionally grown cotton. By 2015, Elieen Fisher sourced 88% of its cotton and 72% of its linen from organic sources, putting the company well on its way to meeting its commitment.

The report shows companies how natural capital analysis can help them benefit from circular economy business opportunities.

Dell is one of the first technology companies to integrate recycled plastic into new products such as its OptiPlex 3030 all-in-one desktop computer. The recycled plastic comes from used electronic equipment recovered through Dell’s own global take-back and ‘closed-loop’ recycling scheme.

Dell wanted to demonstrate the potential benefit of scaling up closed-loop recycling. Research conducted by Trucost showed that Dell’s current usage of closed-loop plastic has a 44% greater environmental benefit compared to virgin plastic, equivalent to an annual saving to society of $1.3 million in avoided environmental costs. The main benefit came from the reduced human health and ecotoxicity impacts achieved by closed-loop recycling of plastic instead of disposal.

If all of Dell’s plastic was supplied by closed-loop recycling, the environmental benefit to society would increase to $50 million per year. If the entire computer manufacturing industry switched to using closed-loop recycled plastic, the environmental benefit would increase to $700 million per year. Dell’s net benefit analysis helps make the case for increasing the use of closed-loop recycled plastic both within its own business and across the industry.

The report highlights just some of the ways in which leading companies are using the insights provided by natural capital analysis. Quantifying the unpaid cost of environmental impacts and integrating them into decisions helps companies make progress towards achieving sustainable growth and profitability. As awareness of these benefits grows, Trucost expects to see natural capital analysis become a mainstream part of business decision making.

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