Bloomberg BNA — Companies are starting to consider the value of natural resources in making business decisions, a practice that will become increasingly important as those resources become further constrained, corporate representatives say.
The practice, called natural capital accounting, is a way for companies to accurately assess and manage risk, maintain their social license to operate, manage or lower operating costs, and secure a competitive advantage, the representatives say.
Increasingly scarce resources, growing competition for those resources, and population growth are some of the factors prompting companies to look at valuing and protecting natural capital, said Denise Knight, sustainable agriculture director for The Coca-Cola Co.
Companies like Coca-Cola are working one-on-one with organizations such as The Nature Conservancy (TNC) and the World Wildlife Fund to assign a monetary value to natural resources, such as clean water, and the services they provide and then use these calculations in making business decisions. Efforts to establish standard methodologies across companies or industries for conducting natural capital accounting are under way, but still in the early stages.
Coca-Cola Invests in Local Watersheds
Coca-Cola set a goal in 2007 to replenish all water it uses in finished beverages by 2020. To meet its goal, the company invests in projects to restore watersheds, improve local water use practices to reduce consumption, and other activities, earning watershed credits verified by outside consultants that are then counted against the volume of water consumed in the company's bottling plants. By the end of 2013, Coca-Cola will be replenishing 42 percent of the water it consumes, or 67 billion liters (17.7 billion gallons) of water per year, according to the company.
The act of assessing the value of water in addition to the direct cost of the resource is a relatively new practice for the company, Knight said. Coca-Cola is working to understand natural capital accounting and methodologies used to implement it, she said.
The company is working with TNC to determine which projects—such as improving agricultural practices, conserving local water resources, or planting trees—return the most water to watersheds, said Michelle Lapinski, the organization's director of corporate practices.
Companies Pay Into Water Funds
Coca-Cola is also working with the World Wildlife Fund to set up water funds that collect fees from local water users such as Coca-Cola, distilleries, and paper processing mills. The money is used to restore natural systems that produce and filter water upstream, Lapinski said. WWF personnel manage and distribute the funds.
Coca-Cola was also one of the first companies to declare to the Securities and Exchange Commission that water issues pose a material risk to its business, she said. “The company understands its significant dependency on natural capital, [and] for business reasons needs to secure that source,” Lapinski said.
Coca-Cola's water replenishment practices can lead to a lower cost of production, in part because replenishing water may be less expensive than transporting it and treating it, Knight said. Using funds to plant trees upstream, for example, filters the water naturally and reduces the need for water treatment centers. The practice also enables the company to maintain its reputation in the community, enabling it to do business in the future, Knight said. “Maintaining that social license to operate is priceless,” she said.
Coca-Cola is currently working to identify three river basins globally where it will work with local policymakers, agricultural users, and other partners to consider the value of upstream water, Knight said. “You're going to see more and more companies looking at this seriously,” Knight said.
Dow Plants Trees to Meet Air Regulations
Another company engaged in natural capital accounting is The Dow Chemical Co., which entered into a five-year partnership with TNC in 2011 to assess the value of natural resources at three company sites, including Dow's largest facility, located in Freeport, Texas. The company produces 44 percent of its U.S. products and 20 percent of its global products at the site.
The Freeport area is subject to drought, so TNC worked with Dow to improve forecasting models to see how climate change might impact future water supply, Lapinski said. The models are helping the company decide whether it needs to partner with local policymakers or upstream agricultural users to ensure it has a continued water supply, she said.
The site is also subject to limits for emitting certain air pollutants, so TNC and Dow performed a cost-benefit analysis of using scrubbers or doing large-scale restoration of trees to meet the air quality standards, Lapinski said. Researchers found that it was less expensive, but still effective, to restore forests to meet the standards.
Dow is currently working with a state environmental agency to win its approval of the plan and is identifying tracts of land where restoration work would be performed, Lapinski said.
The Freeport facility is located on the Gulf of Mexico. Storm surges have caused saltwater to contaminate the company's freshwater supply, which led Dow to consider building a sizable levee. Dow and TNC found that the best solution is to build a smaller levee while also investing in maintaining wetlands, Lapinski said. Researchers noted that while a levee depreciates in value over time, a wetland appreciates.
“What was really powerful [from this study] is these companies can start having a way to quantify and monetize these assets,” Lapinski said. Dow is also doing natural capital work in Brazil.
Other Companies Taking Action
Other companies doing work on natural capital include Disney, MillerCoors, Xerox, and Puma.
Disney has committed to fund 6,000 acres of reforestation projects by 2015, not only to lower the company's net carbon emissions but also to protect watersheds and habitats that wildlife and communities depend on, according to the company. The company plans to conduct a pilot study to quantify the ecosystem benefits and services, beyond cutting carbon emissions, of its reforestation efforts by 2015.
“These goals are rooted in the recognition that a healthy environment is essential to Disney's long-term success,” the company said in a statement, noting that its business operations rely on natural resources. Part of Disney's motivation in engaging in natural capital accounting is to enhance its brand reputation, said Sissel Waage, director of biodiversity and ecosystem services for Business for Social Responsibility (BSR), a corporate sustainability research and consulting group.
MillerCoors is working to improve business practices to protect freshwater, according to TNC. TNC is working with a MillerCoors supplier in Idaho to create best practice farming techniques that conserve water without impacting productivity. The project can then serve as a model for other beer producers, TNC said.
SABMiller, MillerCoors' parent company, is also partnering with TNC to start water funds in Colombia, Ecuador, Peru, and Panama.
Quantifying Carbon Emission Reductions
Xerox is working with TNC to establish a methodology for quantifying carbon emission reductions from improved forest management that can be used by other companies in the paper industry. The tools will lead to a more sustainable paper supply chain and also support local communities, the company says.
Puma published its first corporate environmental profit and loss (EP&L) account in 2011, valuing the annual environmental impact of its business at about $191 million. The company is scheduled to publish another one soon.
“It's a risk assessment for them,” said Richard Spencer, head of sustainability for the Institute of Chartered Accountants in England and Wales. “There is a huge political risk here that [the EPL] is proxy for,” he said.
For example, governments could start regulating water availability in areas where cattle are being bred for Puma's products, which could threaten the availability of leather. Cattle farming and leather tanning are some of the most water-intensive processes in the company's supply chain, according to the EP&L. Puma's EP&L gives the company an estimate of its water impact in these areas so it can conserve water resources or acquire water elsewhere, he said.
Making Business Case for Valuing Natural Resources
In the past, outsourcing operations to developing countries meant lower costs for companies but also created social and environmental costs, said Richard Mattison, chief executive officer of Trucost, a research and consulting organization that helps businesses measure and manage their environmental impact. These factors have not been previously been included on the balance sheet of a business.
“Historically, that has been fine, but we are now facing certain constraints related to ESG [environmental, social, and governance] issues,” Mattison said.
In a recent report, Trucost estimated that the top 100 environmental impacts of companies across primary production and primary processing sectors around the world cost the global economy $4.7 trillion annually.
In the past, natural resources were fairly inexpensive for businesses, but that has changed since 2000, Mattison said. Resources are becoming scarcer due to climate change as well as population growth, and this trend will only increase.
Middle-class consumers are projected to increase by 3 billion between now and 2030, Mattison said. Businesses will experience a resource crunch as they try to meet that extra demand, which will lead to sharp price increases for natural resources, he said.
Forward-thinking businesses are looking at their supply chains and procuring materials that are sustainable and less expensive over the long term, he said.
Need to Avoid ‘Surprises.’
Waage said companies have previously taken natural capital for granted and failed to understand the risks they face related to the decline of natural resources. She said companies will have “inevitable surprises” if they don't start valuing natural resources.
A beverage company like Coca-Cola, for example, should look at demands on water over time, the future availability of water, and potentially stranded corporate assets if sufficient water is not available, she said. That way, they are better prepared for a “shock to the system,” such as a drought, Waage said.
One company in the extractive sector, which Waage could not name due to a nondisclosure agreement, told BSR that it is gaining a competitive advantage by analyzing ecosystems and including the information in work proposals. It helps the company's clients understand the environmental impacts of a project, Waage said.
And if a government agency initiates a regulatory action related to the environment, companies like Puma and Dow will be in a much better position by showing that they have invested in environmental assets, Waage said.
Accounting Methods in Works
Twenty-four companies agreed at the U.N. Conference on Sustainable Development in June 2012 to develop a methodology for natural capital accounting.
To determine the value of natural resources, partnerships like the Natural Capital Project have developed accounting methods, said Mary Ruckelshaus, the project's managing director.
Dow, Coca-Cola, and other companies use these methods to make decisions about natural capital. The project is a partnership among WWF, TNC, the University of Minnesota, and Stanford University.
Researchers assign a dollar value to a forest, wetland, or other natural resource for the services it provides, such as water filtration, protection from flooding or storm surge, carbon storage, or species protection. Then a company or community can decide whether to preserve vegetation for its coastal protection benefits instead of building a seawall, or protect a wetland to preserve natural water filtration instead of building a water treatment plant, Ruckelshaus said.
Innovation Phase Under Way
Currently, natural capital accounting is in the innovation phase. Spencer of the Institute of Chartered Accountants in England and Wales called it a “headless chicken race” with lots of ideas for how to measure the value of natural resources and include it on corporate balance sheets. He noted it took 150 years to get commonly agreed-upon global accounting standards.
In the future, more companies may start building natural capital into their own management systems, or it may be included in international financial reporting standards, he said. Or countries could decide to regulate it, Trucost's Mattison said. Spencer agreed, saying if governments started charging for water, for example, companies would be forced to internalize those costs and would begin accounting for water.
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said accountants play a central role in both making the business case for natural capital accounting and providing information to help businesses determine their impact on natural resources and the value of natural resources to their business.
“The accountancy profession has a central role in this area, not only by applying accountancy skills in measuring and reporting these impacts, but also in a leadership role as business leaders and advisers, helping the wider business community understand why these issues are so important and incorporating the information into decision-making,” he said in an email to BNA.
Consumers could be another driver for businesses to adopt natural capital accounting, Business for Social Responsibility's Waage said. If consumers were able to screen products for their environmental sustainability, such as by using an iPhone app to map the destruction of natural resources used to make a product, it could impact corporate behavior, she said.