Report Urges Accounting for Natural Capital’ Depletion
Accountants should take the lead in assessing the impact on their companies of the depletion of natural resources, recommends a new report.
The report, from the Chartered Institute of Management Accountants, Ernst & Young, the International Federation of Accountants, and the Natural Capital Coalition, argues that accountants should account for “natural capital” to determine the risks to businesses that depend on increasingly scarce resources such as clean water, timber and minerals.
The true cost to society from the impact of business activity on natural resources is generally not reflected in corporate accounts, a situation made even riskier by the assumption of infinite resources underpinning most economic and financial accounting. Despite its importance, natural capital is largely ignored by companies and their investors as boardrooms continue to focus on short-term management decisions and priorities.
“Natural capital depletion will certainly become one of the most prominent business concerns in the 21st century,” said CIMA head of sustainability research and policy Sandra Rapacioli in a statement. “However it is still an elephant in the boardroom as business leaders continue to focus on short-term pressures and treat natural resources as if they’re infinite. Accounting for natural capital issues isn’t easy, but just because it’s hard doesn’t mean it shouldn’t be done. We are calling on finance professionals to take action now and incorporate natural capital considerations into strategic planning and business decisions, before the regulatory axe falls. They have the skills and oversight to show the connections between natural capital, commercial opportunity and business risk, and ultimately, financial performance.”
Finance professionals, especially those in leadership roles, have an important role to play in helping navigate their organizations through the challenges and opportunities created by the depletion of natural resources.
“Sustainable economies depend on sustainable organizations,” said IFAC CEO Fayez Choudhury. “Accounting for natural capital must be something the accountancy profession increases its focus on to help organizations respond to the risk posed by climate change and environmental externalities that affect organizational, market, and societal sustainability. Accountants, many of whom are in leadership roles in their organizations, play a pivotal role in preparing their organizations to embed considerations of natural capital in their decision making.”
The report outlines the main steps that accountants and other finance professionals should take to help their companies integrate natural capital considerations into their decision making, resource allocation planning and reporting, so they can adapt to growing competition for scarcer natural resources.
“In an increasingly resource-constrained world, it will become as important for an organization to account for its natural capital dependencies and impacts as it is for its relationship with its financial capital,” said Steve Lang, a partner in EY’s climate change and sustainability services practice. “Natural capital is no longer an abstract issue, but one which is reflected across a range of business priorities: in revenue growth through new opportunities, in margin management through rising input costs, in organizational reputation through risk management, and in operational and supply chain stabilization and efficiency programs. Accounting for natural capital goes to the very heart of how companies create value; our profession has a unique role to play in enabling businesses to manage value in this broader sense.”
Organizations that respond quickly by taking the opportunity to innovate and manage their risks are expected to outpace their competitors. The report highlights several companies that are taking a proactive approach, including Coca-Cola, Dow Chemical and Kingfisher. The report argues organizations that ignore the problem will suffer from rising costs, risks to their supply chains and damage to their corporate reputations.
“Many of the economic costs and benefits of sustainability impacts and dependencies have been largely invisible in business decisions to date,” said Dr. Dorothy Maxwell, executive director of the Natural Capital Coalition. “Valuing these externalities financially enables a more pragmatic understanding of the risks and opportunities they present to the business. The message this report sends is very clear: that businesses that fail to adapt in a world of increasing sustainability pressures and scarce resources will lose competitiveness as the value of these resources is realised through tighter regulation, consumer choice and limited supply.”
The report recommends a number of ways for accountants and other finance professionals to galvanize their organizations:
Raise natural capital as a strategic issue and make the business case for it in the boardroom;
Measure natural capital inputs and impacts; value these where appropriate;
Integrate natural capital into decision making;
Engage in the debate around natural capital and business; contribute to the development of the Natural Capital Protocol; and
Develop skills for natural capital accounting in teams.
For further information, the report is available at www.cimaglobal.com/naturalcapital.