Eco-friendly accounting must become the norm so that externalities, positive and negative, are assessed
Businesses need to start evaluating their impact on the surrounding natural capital, in order to account for and manage potential risks to sustainable operations arising from depletion of resources.
Natural capital represents the combined value of all biodiversity — life-forms, flora and fauna — and all ecosystem services such as natural provision of food and water, natural habitat, purification of air, and so on. Businesses draw natural resources such as wood, water, oil, vegetables, fish and more from the ecosystem to sustain their ever-growing operations, depleting or consuming the planet’s limited resources.
However, companies’ current accounting practices do not factor in the cost of natural or environmental resources consumed. It’s the same case with broader growth indicators such as gross domestic product (GDP).
It is important for businesses to understand the depletion of natural capital attributable to them, that is, what and how much impact on the surrounding biodiversity and ecosystem has been caused by them, so that they can take measures to minimise it.
Organisations can do this as part of their social responsibility activities as well. Following the latest amendments in the Companies Act, companies with qualifying attributes are required to spend at least 2 per cent of the average of three years’ net profits on CSR projects since FY 2014-15.
Few corporations in India have taken up biodiversity and ecosystem conservation-based CSR projects. Companies must work with and within communities to build capacity for economic valuation of natural resources at the lowest organisational level, for example, local panchayats and block-level institutions. They must also try to ensure that local institutions are the owners of the valuation process and its results.
For responsible organisations it becomes immutable to use this economic valuation to analyse risks to the ecosystem and biodiversity from their operations. They must then develop a framework to minimise impact through conservation measures and restore its lost value. The benefits accruing to organisations from biodiversity and ecosystem conservation projects are both tangible and intangible.
They ensure long-term business sustainability by securing consistent availability of nature’s services and critical natural resource inputs such as wood, oil, non-timber forest products (honey, cotton, silk, fruits and nuts, vegetables, fish, medicinal plants, bamboo), agricultural products, water, minerals, etc.
Operating costs are lowered as a result of drawing support from the ecosystem and using naturally available material and resources.
They have a better standing with regulators, stakeholders and society at large, and compensate nature for disturbance to land and wilderness caused by the company’s operations, apart from paying back to the source of all raw materials: natural capital.
Forests, inland wetlands, oceans, marine and aquatic life-forms, flora and fauna are all part of biodiversity. It’s this biodiversity which underpins the proper functioning of ecosystem and ensures the delivery of ecosystem services.
Ecosystem conservation
There is a growing demand for measurement and monetisation of ecosystem services and species conservation value — the value that accrues from conserving the natural ecosystem. The value of seafood or the value of potential tourism revenue of a biological park can be considered rudimentary examples of species conservation value.
Several non-market and market-based valuation techniques and instruments have evolved. For example, in Australia, the conservative value for each living whale shark is calculated at (Australian) $2,82,000.
According to a 2013 report commissioned by The Economics of Ecosystems and Biodiversity (TEEB) for Natural Capital Coalition, it is estimated that the top 100 environmental externalities cost the global economy around $4.7 trillion a year. This is measured in terms of the economic impact of greenhouse gas emissions, loss of natural resources, loss of nature-based services such as carbon storage by forests, and climate change and air pollution-related costs such as crop losses and impact on health.
With the growth of economic valuation of the natural ecosystem, concepts such as ‘biodiversity offset’ are gaining prominence. For instance, a company creating disturbance to the natural capital in one area as part of its business operations may choose to compensate for it by investing in restoration of similar resources elsewhere.
Government acts
Countries across the globe are interested in formulating a standard high level methodology for ecosystem based economic valuation.
In India as well, efforts are on to widen the scope of national policies and programmes from traditional socio-economic benefits to a broader recognition of and impact on natural capital.
The ministry of environment and forests formally initiated a study in February 2011 wherein the minister reiterated the commitment to developing a framework for green national accounts, facilitated by TEEB India.
The study targets action at the policymaking level, at the business decision level and on creating awareness among citizens.
Recently, based on the principles and practices of India’s National Programme for Organic Production, Sikkim became India’s first fully organic State. Organic cultivation strike a harmonious balance within the complex series of ecosystems and leads in subsistence of agriculture, biodiversity conservation and environmental protection.
What must companies do?
As the erosion of natural capital gathers pace, some Indian companies have come forward to associate with global standards and declarations such as Natural Capital Declaration, Roundtable of Sustainable Palm Oil, Rain Forest Alliance, Equitable Food Initiative, Bonsucro Production Standard, Principles for Responsible Investment, etc.
But growing dependence on natural capital is still overlooked in the vast majority of corporate decisions, strategies and accounts. This long-standing issue warrants concerted effort and action from companies that are liable to the natural capital. The time is right to speak the language of natural capital and raise it as a strategic and competitive issue to make a business case for it.
The writer is Leader (Sustainability) at PwC
