Natural Capital Accounting – Measuring the true cost of doing business

Date: 13/04/2015

On an almost daily basis we are experiencing new and often innovative ways of understanding and communicating the impacts of products and business operations to a broader audience. Going beyond the traditional sustainability domain is a wonderful development for this most complex and necessary discipline, why? It brings in different thinking, dimensions and perspectives, different parts of the ‘system’, to create a holistic, long term, adaptable (and dare I say it, sustainable) solution. The common business metric across all organisations (even non-profits) is financial. Using financial measurements is key to gaining broader support from across the organisation, and beyond.

Scale of the problem
The costs of pollution, ecosystem depletion and health impacts have grown steadily over the past five years and now exceed $1 trillion per year for U.S. companies — equal to 6.2 percent of national GDP — and almost $3 trillion for global companies . If or when businesses have to pay these costs, they would more than wipe out their profits.

What is Natural Capital Accounting?
Natural Capital Accounting (NCA) fits very well with Life Cycle Assessment (LCA), because its scope is broad, covering more than just carbon accounting. Water, land use, waste outputs and pollutants are included. The scope of raw material goes beyond just the materials type and considers where they are sourced. This includes everything from energy, water, metals, minerals and agriculture products and reflects the extraction, process and distribution mechanisms employed. The key benefit is quantifying these dependencies on natural capital and putting a price against it. The NCA is flexible and can be applied to a product, a site, a region or on corporate level, depending on the need of the business.

Determining the value of the impact
The recognised leaders in the field of NCA, Trucost, has developed a methodology to profile and account for environmental impacts across a range of areas from products, operations and supply chains.

The process works as follows:
1. Analyse company data
Trucost initially analyses financial information from sources such as FactSet or Dun & Bradstreet to establish the business activities of an organisation and then apportions its revenues to those activities.

2. Map company data
Using this information, the environmental profiling model can calculate an organisation's direct and supply chain environmental impacts.

3. Incorporated reported data
At this point, things get really interesting. Trucost enhances its data model by incorporating reported environmental data obtained from public sources such as annual reports and websites. Where environmental reporting is not available, Trucost draws on sources of proxy information such as fuel use or expenditure data, which can be converted into emissions data. Analysts standardise reported figures to ensure that the data covers the total operations of a company and that the impacts are categorised according to acknowledged reporting standards.

Each analysed company is then invited to verify or refine the environmental profile Trucost has created. Trucost analysts validate and authenticate any amendments or further disclosures made by the company. These additional disclosures are exclusive to Trucost and further augment their data.

4. Prioritise environmental impacts
Once the environmental and social impacts have been calculated and a full understanding of the organisation has been acquired, Trucost generates reports on an organisation's impacts and assesses which areas need to be prioritised to reduce impacts.

Quantifying environmental and social impacts in financial terms
Trucost also converts quantity data into financial values. The price applied to each impact is formulated by an academic panel and derived from environmental and social economics literature. The price reflects the damage each environmental or social impact causes and the consequential costs borne by society. This standardised, quantitative and complete data can then be used to assess risks, opportunities and relative environmental performance against peers and across sectors.

Applying to your LCA
The Trucost methodology evaluates standard impact assessment (LCIA) which are then added as a weighting methodology to CML, ReCiPe, TRACI and the ILCD/PEF recommended environmental impacts.
This enables the LCA practitioner “one click” access to understanding the impact in financial terms (NCA) of their LCA model.
Examples of global organisations excelling at NCA are illustrated by sports goods manufacturer PUMA, 2013 report here and Danish pharmaceuticals company Novo Nordisk, 2014 report here.

For more information check out the upcoming webinar LCA and natural capital accounting (NCA) in product design – the business case, here.