Why more companies are measuring their natural and human capital

Companies that report on their natural, social and human capital impacts and dependencies can benefit from their disclosure in numerous ways. These include maintaining an operating license, being positioned as a supplier of choice, enjoying resilient supply chains, pleasing investors and retaining the loyalty of customers.

Yet the challenge for many businesses is deciding which sustainability reporting standards to adopt. Aside from the IIRC framework, there are the GRI sustainability reporting standards, the Climate Disclosure Standards Board disclosure system and the framework provided by the Task Force on Climate-related Financial Disclosures, to name just a few.

“Which is best?” ponders Gough. “I don’t think I’m in a position to answer that. But from our perspective, the key thing is, what is the information being used for? How are people accessing it and how do you make sure they get the information they need in a timely fashion?” He believes that, while disclosure is important for driving transparency, it doesn’t always lead to change, and he doesn’t expect to see mandatory disclosures for natural capital introduced any time soon.

Yet it is encouraging that the importance of natural capital as a key dependency for business is increasingly being recognized through channels such as the Dow Jones Sustainability Index and the EU’s Non-Financial Reporting Directive. Daily is also optimistic that the coming decade will bring a revolution in the way natural capital is reported on. “We’ll get the ability to monitor natural capital in real time in lots of different ways,” she says. “I imagine we will see much more reporting across ecosystems, landscapes and production systems, and along coastlines and cities.”

While some companies have begun to focus on sustainability, plenty are still lagging behind. So what is stopping them valuing their natural, social and human capital? There are many reasons, apparently. These include the perception that the process is complex and technical; the difficulty of finding consistent data inputs; and a fatigue with standards in general, which makes businesses unwilling to make additional voluntary disclosures. “One of the key barriers we face is a lack of understanding about potential benefits,” explains Gough. “Also, we’ve been working with a lot of sustainability and risk teams, but we’re aiming to engage more with CFOs.”

To overcome these barriers, the Natural Capital Coalition is focused on addressing misunderstandings and creating an enabling environment that will allow the natural capital movement to really take off. “There’s a big piece we can do to explain the benefits, challenges and where this fits in with what other people are doing,” Gough explains. The Coalition is also producing a Finance Sector Supplement to provide guidance to the banking, insurance and investment sectors on how natural capital can inform investment decisions, and it is embarking on a data project to identify what information should be used as natural capital input data.

While businesses’ awareness of their reliance on natural, social and human capital is growing, it is clear that they need to do more to measure and value their impacts and dependencies. “It’s a matter of survival,” says Daily. “The companies that survive are going to be the ones that move quickly in this area and build capacity. There’s been an assumption over the past decade that what we see today will still be there in the future. That’s not true any more.

Over the past decade, The Dow Chemical Company, based in Michigan in the US, has become increasingly attuned to the business risks posed by the loss of healthy ecosystems and declining biodiversity. In particular, it relies on a plentiful supply of clean water for its manufacturing operations, and on clean air to create a healthy environment for its workers and their communities.

“As we started thinking more about the impacts and the dependencies we have on ecosystem services, such as clean water and pollination, we realized that we needed to value them more comprehensively in our decision-making models,” says Mark Weick, Lead Director, Sustainability and Enterprise Risk Management at Dow. “We knew we needed to value nature differently when we were evaluating capital projects or new production facilities, developing new products or business models, or even making real estate decisions.”

In 2015, Dow launched seven 2025 sustainability goals, one of which is to value nature. “It’s a decade-long goal to gain US$1b in business value by doing projects that are good for business and better for nature,” explains Weick. To meet this goal, the company looks at the decisions that it might have made had it not valued natural capital and ecosystem services; compares those with the decisions that it made when it did value them; and works out the difference in the value. “We’ve already collected US$160m in value toward that US$1b in the last couple of years,” Weick reveals.

A member of the Natural Capital Coalition, Dow reports on its sustainability performance using GRI standards. “We consider those to be the gold standard for sustainability reporting,” Weick says. “They meet our stakeholder needs very comprehensively. We find that the investor community is looking for shorter and shorter reporting, while a lot of our external stakeholder audiences, including NGOs, are looking for more and more information in a format that hasn’t lent itself yet to what I would call an integrated report.”

Dutch healthtech company Philips has been scrutinizing its environmental and social impact for decades; it started measuring the carbon footprint of its factories in the 1990s. Its focus has expanded to the environmental impact of its products during their entire life cycle, as well as the sustainability of its suppliers. That includes whether they hold appropriate licenses, source raw materials in a responsible manner and meet acceptable labor standards.

“We want to improve the lives of three billion people a year by 2025,” explains Simon Braaksma, Senior Director of Group Sustainability at Philips. “If our vision is to make the world healthier and more sustainable, then we won’t be credible if we don’t address those topics within our own company.”

Philips is committed to being carbon neutral by 2020. Its US factories already leave a zero carbon footprint, since they run on 100% wind energy. Frans van Houten, Philips’ CEO, also wants the company to do more to apply the principles of the circular economy by reusing materials, refurbishing equipment and moving away from selling equipment in favor of long-term strategic partnerships with different ownership models.

Philips has published annual reports that integrate financial and nonfinancial performance since 2008, using the IIRC’s framework. It also applies the principles of the Natural Capital Protocol and plans to adopt the Social & Human Capital Protocol.

Its 2017 annual report includes an Environmental Profit & Loss account that highlights the hidden environmental costs associated with the company’s activities and products. It reveals that, in 2017, Philips had an environmental impact of €7.2b, of which €200m (3%) was directly caused by its own operations – mainly energy consumption at its factories. Meanwhile, the company earned 60% of its income from green revenues (products and services that meet specific environmental criteria, such as energy efficiency) and recycled 80% of its operational waste.

The biggest audience for Philips’ sustainability information is its own employees, although customers, suppliers and financial analysts take a keen interest as well. And investors, Braaksma says, “are often of the opinion that a company with good sustainability performance has a better chance of long-term success than a company that doesn’t pay any attention to sustainability.”

The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.