Time to include ‘Natural Capital’ in Accounting
Natural capital accounting is the attempt to ‘financialise’ the use of natural resources and ecosystem services, and let the ‘invisible hand of the market’ (Adam Smith) apply its well-known instruments.
A recent report from TEEB concluded that
‘…..the primary production and primary processing sectors analyzed in this study are estimated to have unpriced externality costs totaling US$7.3 trillion’.
[Note: In economics, an externality is a cost or benefit which results from an activity or transaction and which affects an otherwise uninvolved party who did not choose to incur that cost or benefit’ – Wikipedia]
Therefore by definition, up until today, these ‘externalities’ – and in this case the sum of US$7.3 trillion – are not accessible to the market and not captured in todays enterprise systems. READ.AGAIN.NOT.CAPTURED.IN.TODAYS.ENTERPRISE.SYSTEMS. The majority of environmental externality costs in the above study are from greenhouse gas emissions (38%) followed by water use (25%); land use (24%); air pollution (7%), land and water pollution (5%) and waste (1%).
Natural capital accounting is seen as a way for companies to internalize their environmental impact within their entire value chain, but equally important, a way to identify risks and mitigate.
There are currently two ways of forcefully driving ‘internalization’ of these costs. One option is legislation, where government regulations mandate accounting. The other one is events like natural disasters, which causes ‘instant internalization’ catching organizations by surprise through volatility of commodity pricing. Example from the study shows that profits of apparel industries were impacted by up to 50% (!!) through cotton price volatility in recent years.
A described in my recent Q&A session with Sustainable Brands, a smarter, more proactive way for organizations would be to start treating ‘externalities’ as enterprise resources. Applying the same concepts we apply to existing enterprise resources like labor, material, costs, etc. And as a consequence, apply the same enterprise resource planning and accounting methodologies and concepts we do today with ERP (Enterprise Resource Planning) systems. This guarantees the application of familiar, integrated and harmonized methods to measure, plan, and account for these externalities in the existing business context.
Natural capital accounting, resource scarcity and volatility are issues that businesses must tackle with strategy and therefore needs to be linked to core business practices and processing. It already is and becomes an increasingly essential part of business continuity, risk management and resilience. And it allows the decoupling of business growth from resource constraints and environmental impact, which is of highest priority for maximizing shareholder value.
Natural capital accounting as part of an extended ERP system is a key enabler for resource efficiency and strategy, and serves as a basis for integrating business strategy and sustainability.
‘First of all, we challenge the ‘R’ in ERP, the resources. Instead of just managing material, money and human resources, we said why can’t we manage all resources….and create opportunity for bilions of people everywhere……’ [Jim Snabe, Supervisory Board, SAP SE].
SAP is and should be part of the discussion. We have an obligation to help our customer base to decouple their growth aspirations from environmental impact.
Among other activities in that context:
– We recently had a well-received panel discussion with members of TATA, Trucost and SASB at Sustainable Brands’14 in San Diego
– Q&A with Dimitar Vlahov, Director of Content Development at Sustainable Brands: Integration is Key – SAP’s Thomas Odenwald on Natural Capital Accounting