Natural capital in practice

Transcription

1 Natural capital in practice Rosie Dunscombe and Ian Glover BUSINESS WITH CONFIDENCE icaew.com

2 The importance of accounting for natural capital Figure 1: Five Capitals Diagram (AECOM) Natural Capital Natural assets (e.g., air, water, land, habitats) that provide everyday resources including timber, agricultural land, fisheries and clean water as well as services such as air and water filtration, flood protection and pollination for crops (otherwise known as ecosystem services ). As demand for natural capital outstrips supply, key business risks no longer exclusively relate to traditional economic issues. Consequently, traditional financial accounts are increasingly failing to communicate all the risks and opportunities that a business might be exposed to. By accounting for the real value of natural capital, businesses can better understand and communicate these risks and opportunities, enabling more informed decision-making and a more resilient business model. Case Study: National Grid National Grid is in a unique position to contribute through our property portfolio and a network of energy assets. Ian Glover, Environmental Sustainability Manager National Grid has an extensive property portfolio and network of energy assets across the UK. As such, it has a unique opportunity to make a positive contribution to natural capital. In recognition of this, National Grid s Environmental Sustainability Strategy has the target of delivering sustainability action plans at 50 sites by However, a key challenge for National Grid was how to make the business case for investing in natural capital when its benefits are often economically invisible. 2

3 Project aims This project aimed to translate the value associated with National Grid s land into something tangible to recognise and internalise this value and therefore make it accessible to decision-makers. More specifically, it aimed to value the natural capital on National Grid s sites and understand how this value might change under different land management options. National Grid could then use this data to inform investment decisions to secure improved social, environmental, and economic returns. The core approach followed the steps outlined in Figure 2, which align with stages three and four of the Natural Capital Protocol. 1 This involved first quantifying the natural capital on National Grid s sites, assessing and valuing the ecosystem services generated by this natural capital, and then identifying and evaluating options for how these values might be enhanced. This information could then be used to develop informed management decisions through, for example, presenting a cost-benefit analysis that incorporated natural capital values and ultimately, where possible, captured derived financial value (using, for example, the Woodland Carbon Code or innovative payments for ecosystem services schemes (PES)). Figure 2: Project approach overview Outputs In close co-operation with National Grid, AECOM developed an ecosystem services valuation tool. Using the tool, site managers can rapidly identify the range of ecosystem services associated with a site, the potential for existing services to be enhanced or new ones provided, and the monetary values that might be attached to these services. Where market-based monetary values were not available, non-market values were sourced. In order to maintain the integrity of the tool, only robust, peer-reviewed figures, widely used in the broader field of environmental economics, were incorporated. Air quality services, for example, were quantified using rates of pollution drawdown attributable to different vegetation types from the literature, and applying Defra pollution damage cost guidance to derive an economic value. The tool was designed to have a simple, accessible user interface and outputs, enabling high-level comparisons of the values associated with different land management scenarios. To maintain the balance between robustness and practicability, the tool focused on 10 habitat types and 12 ecosystem services, which cover the typical types of habitats found on National Grid s sites. This made the tool easier to apply, without compromising the integrity of the analysis produced. Figure 3 illustrates the type of outputs generated when considering varying levels of forestation, different types of forestry, and varying degrees of grassland cultivation. 1 The Natural Capital Coalition launched its draft Natural Capital Protocol in November The final version is due for launch in July

4 Figure 3: National Grid/AECOM tool valuation report Figure 4: National Grid/AECOM tool natural capital stocks and flows output 4

5 The tool has now been put into practice across a number of National Grid sites, monetising and tracking changes in stakeholder values. To date, this analysis has transitioned into action at several sites, where monetising value has helped decision-makers to identify land management options that optimise natural capital value. Furthermore, the tool provided evidence for the business case leading to approval for the associated capital investment. The tool is now being routinely used by four business divisions, including Corporate Finance, which would previously not have been involved with environmental initiatives. Monetising National Grid s natural capital has drawn together a multi-functional range of internal stakeholders, translating environmental management into a key issue for even non-environmental business units and putting it at the center of organisational decision-making. Opportunities and challenges Using this tool to value natural capital has proved to be the key to unlocking new value and to improved stakeholder engagement. It has enabled a visibility of value which has not been recognised in the past. This allows National Grid to definitively demonstrate the value of a natural capital approach to senior management and the corporate property management team in order to gain approval for the natural capital investment required to meet its sustainability target. This required significant engagement as well as workshops and communication of the approach during its development. Natural capital is not generally traded in the marketplace or ascribed a price and the resources/ services it provides are consequently often regarded as free. 2 The challenge presented by adopting a natural capital approach is therefore not only the cultural shift but also the significant technical challenge of sourcing appropriate values for natural capital. As new and innovative valuation methodologies are developed, the uncertainty associated with valuing services decreases and services that previously could not be valued can then be added to the tool. AECOM and National Grid are continuing to work together to improve the tool iteratively and recent methodological innovations have allowed enhancements to the accuracy of valuing services such as pollination and air quality regulation. Nevertheless, regardless of the academic rigor that may support it, the valuation of natural capital incorporates an element of subjectivity and gaps in the science base add to the uncertainty associated with any values derived. Transparency in the valuation method, rather than a black box approach, is therefore critical. Values attributed to natural capital incorporate not only the value realisable to the business (i.e. value that can be converted into profits) but also values arising to society (e.g. health and wellbeing of local communities). This can be a challenge when undertaking a cost-benefit analysis, where costs may be incurred by the business, but benefits are experienced externally. However, natural capital markets can provide opportunities to capture this value through additional revenue streams (e.g., through emerging payments for ecosystem services schemes; leasing of grazing land; the Woodland Carbon Code; the emerging biodiversity offsetting market, etc.). The challenges to adopting a natural capital approach are, however, not insurmountable. Whilst front end investment is required to deliver longer-term benefits, modelling these over a 30-year period for National Grid clearly demonstrates the net gain. These values should not, however, be adopted blindly especially given the limitations detailed above. The National Grid/AECOM valuation model helped National Grid to highlight where certain management scenarios required a trade-off between different types of natural capital. The more these scenarios were investigated on a practical level, as well as using the valuation model, the clearer the trade-offs and practicalities of adopting the proposed approaches became. The benefits experienced by National Grid far outweigh the challenges and ultimately, as the science base, corporate engagement and market experience grow, the natural capital tool can be refined to reflect new and greater opportunities. A more-resilient business model The natural capital approach offers a model for both communicating to decision-makers in their own language and integrating the value of natural capital in corporate decision-making. For National Grid, it allows incorporation of natural capital impacts, dependencies, risks and opportunities into their evaluation of the costs, benefits and trade-offs of different land management options. This communicates a more complete picture of the risks and opportunities that National Grid is exposed to through its land assets, enabling more informed decisions and a more resilient business model. 2 This natural living infrastructure delivers services worth between US$21-72 trillion a year (Nellemann, C., E. Corcoran (eds) Dead Planet, Living Planet Biodiversity and Ecosystem Restoration for Sustainable Development. A Rapid Response Assessment. United Nations Environment Programme) 5

6 Key messages: Recognising natural capital can help businesses to make the most of land assets and provide multiple benefits adding new and shared value. Gaining buy-in from senior stakeholders will be critical to incorporating natural capital into business decisions. Translating the intrinsic value of nature into monetary terms is only one way to tackle this institutional challenge stakeholder engagement and collaboration is key. A transparent approach helps to engender trust in figures being open about current assumptions and the robustness and traceability of data is crucial. There is tension between the accuracy and completeness of natural capital assessments, requiring judgement as to whether inclusion or exclusion of less robust valuation figures will better serve the users of this information. There are a number of innovative mechanisms and incentive schemes to help realise value. Realising value can be challenging, but these challenges are far from insurmountable. ICAEW TECPLM /16 6