Five Ways CFOs Can Support Better Management of Natural Capital
We all know that society, economies, and businesses rely upon nature for survival. But do businesses’ understand the extent to which businesses depend on, and impact, natural capital? Do they know the status of these precious resources? How can CFOs and management accountants support better management of natural capital and ecosystems?
Natural capital—forests, air, rivers, minerals, oceans, land—is the bedrock of life and underpins all other forms of capital, including financial. Despite this, natural resources are being depleted at an alarming rate with a growing risk of severe consequences. We’re consuming 50% more natural capital than the earth can replenish and by 2030 we’ll need the natural capital equivalent of two planets. The decline in this capital base, if left unchecked, will wreak havoc on business and society.
But natural capital remains an elephant in the boardroom. It is absent from most corporate accounts and business decisions and largely ignored by investors as boards continue to focus on the short term, financial metrics, and narrow business boundaries.
A radical shift in mindset is needed if businesses are to adapt to the risks and opportunities that natural capital depletion presents. We need new corporate thinking that:
- identifies the critical dependencies and impacts companies have on nature;
- makes the connection between financial capital and natural capital; and
- integrates this information into decision making, strategies, business models, and reporting.
CFOs and their teams have a pivotal role in this transformation.
A new report, Accounting for Natural Capital: The Elephant in the Boardroom, from the Chartered Institute of Management Accountants (CIMA), EY, IFAC, and the Natural Capital Coalition includes five key recommendations for how senior finance leaders and management accountants can support the adoption of natural capital accounting in their organizations.
1. Raise natural capital as a strategic issue and make the business case for it.
- Engage with natural capital as a strategic, competitive, and financial issue at the board level and facilitate debate about how natural capital relates to your strategy, business model, performance outlook, and social licence to operate.
- Frame the risks and opportunities that underpin natural capital impacts and dependencies in robust business terms, including how and over what time frames they may have an effect on the business.
- Model business scenarios to facilitate dialogue around how these issues and uncertainties may unfold.
- Identify how natural capital impacts and dependencies can be incorporated into decision making at all levels so that the organization can respond to the opportunities and risks that these may pose.
Take the quick poll on what aspects of natural capital are most important to your organization.
2. Measure and value material natural capital impacts and dependencies.
- Explore the most appropriate methodologies and help shape evolving standards for measuring and valuing your natural capital impacts and dependencies. Value can be assessed through non-monetary metrics or in monetary terms.
- Define the scope or boundary of measurement and valuation, e.g. your organizational footprint, supply chain, or across the whole value chain.
- Engage with suppliers to better understand how the organization is impacting on critical natural resources and to identify risk “hot spots” in the value chain.
3. Embed natural capital considerations and information into business processes and systems to inform decision making and reporting.
- Prioritize those areas of the business where natural capital accounting will drive management action, such as strategic planning, risk and supply chain management, project and investment appraisal, governance and incentives, innovation, and operational management.
- Adapt business processes and systems to incorporate natural capital considerations and information so that these can be embedded into decision making and reporting.
- Integrate material natural capital issues in both management information and integrated reporting to external stakeholders.
4. Influence the global debate through links with international and professional organizations.
- Establish links with international and professional organizations that support the development of natural capital accounting, such as the Natural Capital Coalition’s project to develop a protocol for valuing natural capital, to ensure your views are represented.
5. Develop relevant skills to enable natural capital accounting with the same rigor as for accounting for financial performance.
- Build capacity in your team to enable natural capital accounting with the same rigor and discipline you would apply in accounting for financial performance.
- Forge relationships with stakeholders, relevant experts, and specialists in this rapidly evolving area.