Natural capital depletion will leave businesses dangerously exposed

As we become increasingly aware of our reliance on natural resources, which are dangerously thin from the demands of a growing and more prosperous global population, businesses are facing a stark choice – adapt or fail.

A new report launched today by CIMA, in collaboration with EY the International Federation of Accountants (IFAC) and the Natural Capital Coalition, calls for finance professionals to take action and lead the change to prevent their organisations failing in today’s ever changing environment.

Accounting for Natural Capital: The Elephant in the Boardroom highlights how, despite its importance, natural capital is largely ignored by investors as boardrooms continue to focus on short-term management decisions and priorities. The true cost to society from the impact of business activity on natural resources is not reflected in corporate accounts, a situation made all the more urgent by the fallacious assumption of infinite resources that currently underpin our economic and financial accounting.

Finance professionals, especially those in leadership roles, have a vital role in helping navigate their organisations through the challenges and opportunities which the depletion of our natural resources will create.

The report outlines the key steps professional accountants and others in financial leadership positions should help their companies to take in order to integrate natural capital considerations into decision making, resource allocation and reporting, and to adapt to growing competition for ever more scarce natural resources.

Organisations that respond swiftly, embracing opportunities to innovate and manage their risks, will thrive. Some of these companies that are taking a proactive approach, including Dow Chemical, Kingfisher and Coca Cola, are highlighted as examples in the report. Organisations that do nothing will suffer from rising input costs, risks to their supply chain and reputational damage.

Sandra Rapacioli, Head of Sustainability Research and Policy, CIMA, said: 'Natural capital depletion will certainly become one of the most prominent business concerns in the 21st Century. 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.'

Steve Lang, Partner in EY’s Climate Change and Sustainability Services, said: 'In an increasingly resource-constrained world, it will become as important for an organisation to account for its natural capital dependencies and impacts as it is for its relationship with its financial capital.

'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 organisational reputation through risk management; and in operational and supply chain stabilisation and efficiency programmes.

'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.'

Fayez Choudhury, CEO, IFAC, said: 'Sustainable economies depend on sustainable organisations. Accounting for natural capital must be something the accountancy profession increases its focus on to help organisations respond to the risk posed by climate change and environmental externalities that affect organisational, market, and societal sustainability.

'Accountants, many of whom are in leadership roles in their organisations, play a pivotal role in preparing their organisations to embed considerations of natural capital in their decision making/'

Dr Dorothy Maxwell, Executive Director of the Natural Capital Coalition, said: 'Many of the economic costs and benefits of sustainability impacts and dependencies have been largely invisible in business decisions to date. 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 ways in which finance professionals can galvanise their organisations are set out below. For further tips, advice and case studies, the report is available at www.cimaglobal.com/naturalcapital

  • Raise natural capital as a strategic issue and make the business case for it in the boardroom
  • Measure your 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
  • Develop skills for natural capital accounting in your teams