Natural capital – the metrics that matter

Companies are looking for new metrics to improve their understanding of sustainability and engage investors, suppliers, colleagues and customers in conversations about what sustainability means for the future of the business. They also want metrics that integrate sustainability into strategic and operational decision making.

Natural capital valuation meets these needs by converting traditional physical metrics, such as tonnes of greenhouse gas emissions or cubic metres of water used, into monetary values. This helps companies understand the risks and opportunities of sustainability in business terms.

It’s a myth that ecosystem services are free. Someone, somewhere is paying for environmental impacts, whether it is through the health effects of air pollution or higher insurance premiums from flooding. Market failures mean that, all too often, the polluter does not pay.

But as climate change, water scarcity and land degradation get worse, governments will be forced to correct these market failures and internalize these costs. Natural capital valuation helps companies understand these risks and take action in a cost effective and timely way.

Natural capital valuation doesn’t just help companies understand environmental risks. It allows them to measure and communicate the savings and other benefits achieved by corporate sustainability programs. The most important step is to ensure that calculations of savings are robust and verifiable.

The Natural Capital Protocol will create a standardised framework for natural capital valuation. Trucost is a partner in the coalition of companies and environmental and economic experts which is developing the protocol and associated guidance. The NCP will be an important step towards enabling companies to value and account for natural capital as systematically as they do for financial capital.

Money is the universally recognised, systematic way of measuring value. Is natural capital valuation perfect? No. But we have to start somewhere.

Revenue at risk is a compelling indicator. Comparing a company’s natural capital costs to its annual revenue highlights its exposure to risk.

I see natural capital valuation increasingly being used to support the development of a strong and credible green bond market by measuring the environmental benefits of projects. In 2014, the market tripled in size with $36.6bn of green bonds issued. There’s a lot of interest from companies in using green bonds to fund renewable energy and sustainability programs.