The Business Case for Natural Capital: How Investing in the Environment Pays Off

Nature plays a crucial role in the economy, providing a range of renewable and non-renewable resources. While we use resources like timber for production or food for consumption, nature also offers ecosystem services like water filtration and erosion control, which benefit both society and the economy simultaneously. Value therefore lies at the heart of the natural capital concept. Assessing the value of changes in our natural capital and the services it provides is fundamental to deciding how and where funds should be spent to restore, maintain, and manage the natural environment

Natural capital is a crucial factor for businesses, particularly food and agri-businesses, which depend heavily on healthy soils, water availability, and pollinators. Any negative impact on these elements can lead to productivity loss and price volatility.

There is a need to look beyond the traditional accounting perspective and to create a holistic assessment of the value of natural capital which combines and values the ecosystem, biodiversity, natural resources, and environment.

Some elements of natural capital have a measurable value, for example aggregates used by construction companies are bought and sold creating a measurable value. Other elements of natural capital, for example clean air, flood control and woodland walks etc, may lack market prices or have poorly reflected values. This type of natural capital, often called public goods, often do not have recognised or measurable value using traditional accounting methods but are crucial to the function of society.

Whilst making investment decisions based on market prices is reasonable for private institutions, relying solely on market prices to guide decisions about natural capital may not be optimal for wider society and the protection of your environment and resources.

Some businesses have started recognising their responsibilities for mitigating their environmental impacts and their need to make positive contributions to biodiversity conservation activities. M&S states that “Biodiversity is essential in maintaining our quality of life and a healthy environment. The continuous decline in biodiversity has serious consequences and its protection and enhancement is essential if we are to achieve a sustainable future.” Toyota in its sustainability report mentions its involvement in the Earth Summit, Convention on Biological Diversity (CBD), Nagoya Protocol and Aichi Targets. Exxon, Glencore, and Volkswagen have also begun stating their obligations in their respective company reports and formally accepting responsibility for how their operations affect biodiversity-rich zones and impact the flora and fauna found on their sites of operation.

These companies are taking a much wider view of the Environmental, Social and Governance aspects of their operations, seeking to establish the impact of businesses on all capital types, from natural to social capital.

Without transformative changes in our economy and the way we do business, trends such as global declines in species populations are expected to continue through to 2050 and beyond. It is therefore imperative that all businesses aim to understand their impact on the natural environment and take steps towards positive actions that outweigh any negatives ones resulting from business operations.

This may all seem very theoretical and difficult but in reality simple steps can be taken by any business.

Incorporating sustainability into business strategies and decision making processes will rapidly change mindsets encouraging leaders to understand the impact of decisions and to see ways to eliminate or mitigate harm. As well as practicing responsible resource management by reducing resource consumption, minimising waste generation, and promoting recycling and re-use. This can involve implementing energy-efficient technologies, reducing water usage, or simply reducing waste by improving processes.

Furthermore, engaging in sustainable sourcing and supply chain management by procuring raw materials and products from suppliers that adhere to sustainable practices. This can include verifying that suppliers comply with environmental regulations, adhere to sustainable forestry and agriculture practices, and promote biodiversity conservation. Additionally, promoting biodiversity conservation and ecosystem restoration by supporting initiatives such as reforestation and habitat restoration projects, and incorporating biodiversity considerations into land-use planning and development decisions.

Finally, companies can take simple practical steps such as encouraging employees to car share, reducing travel, encouraging reusable drinking cups etc. these steps will also serve to educate employees, raising awareness about the importance of sustainable practices and protecting natural capital. These actions will also benefit the companies. A research paper published in the Journal of Business Ethics found that employees are more likely to stay with a company that has a strong commitment to ethical values. The study surveyed employees at several companies and found that those who perceived their company as being more committed to ethical values were more likely to stay with the company.

Environmental, Social and Governance (ESG) reporting can be used by companies to demonstrate how effective their stewardship of natural and social capital is. ESG reporting provides transparency by disclosing a company’s environmental, social, and governance performance, allowing stakeholders to assess its impact on the planet. Many larger companies are now engaged in ESG reporting as part of their sustainable efforts. But ESG can be used by all businesses, large and small. By identifying a range of measure to collect and then developing a framework of how the data is collected and by whom, even small companies can start to measure their impact on natural and social capital.

There are many practical steps businesses can make to help mitigate their impact on natural capital. Reducing greenhouse gas emissions through strategic decisions like implementing energy-efficient technologies and investing in renewable energy sources is one effective approach. Additionally, promoting sustainable transportation options such as carpooling, biking, walking, or public transportation, implementing recycling programs, using reusable products, and looking for products made from sustainable materials are all actions that can be taken at a more basic level. Encouraging employees to turn off lights and electronics when not in use and participating in community clean-up events are also impactful ways to contribute to environmental sustainability.

Those who play the game can not only increase their understanding of how valuation can help make better business decisions, but it can also give them confidence to explore the business trade-offs that can be informed by valuation. Natural capital valuation is a useful tool for companies that seek to create sustainable business practices. By understanding the true value of natural assets to their business and incorporating them into operational decision-making, companies can build a more risk-resilient supply chain, create more sustainable products, and make informed decisions on investments, divestments, and expansions.

Where Now Consulting Ltd is a consultancy and business advisory firm that specializes in facilitating business transformation and growth. By partnering with our clients, we aim to enhance their overall business performance. Our team consists of professionals with diverse skill sets ranging from sales, operations to finance, allowing us to provide a comprehensive approach to support our clients. Whether your business requires a new growth strategy or is going through a crisis of strategy, profitability, or liquidity, Where Now Consulting is committed to being your partner for future success.