Naturalandsocialcapitalaccountinganintroductionforfinanceteams.pdf

NATURAL AND
SOCIAL CAPITAL
ACCOUNTING
An introduction for finance teams
By the A4S Chief Financial Officer Leadership Network

1

The A4S CFO LeAderShip neTwOrk

The Prince’s Accounting for
Sustainability Project (A4S) was
established by hrh The prince of wales
in 2004 to convene senior leaders in
the finance, accounting and investor
communities to catalyse a fundamental
shift towards resilient business models
and a sustainable economy.

The A4S Chief Financial Officer
Leadership Network was launched by
hrh The prince of wales at St James’s
palace in december 2013. The network
brings together a group of leading
CFOs from large european businesses
seeking to embed the management of
environmental and social issues into
business processes and strategy.
we believe it is the first grouping of
its kind globally.

The network has worked on a number of
projects during 2014 including looking at
natural and social capital accounting, the
subject of this guide. The outputs from all
of the projects are available on the A4S
website www.accountingforsustainability.
org.

The project team would value
feedback on this guide from other
organisations working in this area.
Please send any comments to:
[email protected].
gov.uk Designed by

NETWORK MEMBERS

The following CFOs were network
members during 2014:

Scott Longhurst Anglian water*

Lucinda Bell British Land*

Evelyn Bourke Bupa

Carol Fairweather Burberry Group

Pierre-André Terisse (co-chair) danone

Alan Stewart / Paul Friston
Marks and Spencer*

Andrew Bonfield national Grid*

Susan Davy pennon Group
(South west water)*

Rolf-Dieter Schwalb royal dSM

John Rogers (co-chair) Sainsbury’s

Gregor Alexander SSe

John Lelliott The Crown estate*

Jean-Marc Huët Unilever

Russ Houlden United Utilities Group*

Richard Mayfield walmart eMeA
(ex Asda CFO)

Liz Barber Yorkshire water*

*These companies are members of the network’s
natural and social capital accounting project.

http://www.accountingforsustainability.org

http://www.accountingforsustainability.org

mailto:[email protected]

mailto:[email protected]

2

COnTenTS
Summary ………………………………………………………………………………………………………. 4

why is natural and social capital relevant to business? ……………………………………… 5

what is natural and social capital accounting? …………………………………………………. 8

what terminology do i need to know? ……………………………………………………………… 9

key areas to consider – a summary ……………………………………………………………….. 10

Overarching principles……………………………………………………………………………………11

Types of metrics …………………………………………………………………………………………… 13

To monetise or not to monetise? ……………………………………………………………………. 14

Step 1 – Match the approach to the decision ………………………………………………….. 15

Step 2 – Undertake the evaluation …………………………………………………………………. 17

Step 3 – incorporate the results into your decision ………………………………………….. 21

where are you on the journey?………………………………………………………………………. 23

The role of finance teams ……………………………………………………………………………… 24

Useful terminology for finance teams …………………………………………………………….. 25

Acknowledgements and references ……………………………………………………………….. 26

Top tips ……………………………………………………………………………………………………… 27

inTrOdUCTiOn FrOM The A4S
CFO LeAderShip neTwOrk
Today the world consumes 50% more than
the planet’s natural resources can renew
every year. This overconsumption continues
to gather pace and presents a significant
challenge to how businesses need to operate.
Businesses are constantly responding to
change but in to do this successfully,
and protect their long term financial
performance, businesses need to adapt to
supply changes of natural resources and
invest in their supplies of social skills.

As CFOs, we cannot ignore the risks to our
businesses from shortages or dislocation of
both natural and social capital. we therefore
have an important role and responsibility in
broadening the scope of decision making so
that it results in better long term outcomes for
our businesses and for the societies in which
we operate.

To date, traditional accounting methodologies
have focused on financial metrics. natural and
social stocks have not often been reflected in
commercial decisions.

whilst financial metrics will continue to be an
important indicator of business performance,
we now also need better visibility of our natural
and social resources and to understand the
impacts they may have on our future business
viability.

This guide serves as an introduction for
finance teams on how to align finance thinking
with long term environmental and societal
trends. it provides a framework to embed this
into your decision making.

i hope that you will find this guide helpful and
i would like to thank the A4S CFO Leadership
network team for their insights and experience
in creating this.

Lucinda Bell, Chief Financial Officer
British Land

“Whilst financial
metrics will continue to be

an important indicator of business
performance, we now also need
better visibility of our natural and

social resources and to understand
the impacts they may have on our

future business viability”

Lucinda Bell, British Land

3

FOrewOrd
it is with great pleasure that i introduce this
guide to natural and social capital accounting
and how businesses can increase their
understanding of these issues to improve
decision making and management reporting
within their business, thereby adding
commercial and societal value.

ShaRiNg OuR ExpERiENcES Of
accOuNTiNg fOR NaTuRal aNd
SOcial capiTal

in developing this guide, members of the
group have shared their experiences of
how they have identified material natural
and social capital issues to drive decision
making, improve reporting or to manage risk
and uncertainty. The team includes financial
professionals and sustainability experts and
whilst this guide is primarily for a finance
audience, it provides insight for sustainability
professionals on how they may engage
effectively with their finance teams on
these issues.

whilst our group is made up predominately of
utility, retail and consumer goods businesses,
the principles outlined in this guide are
applicable to all sectors and geographies.

ThE ROlE Of fiNaNcE TEaMS

Finance teams are involved in many strategic,
management and operational decisions where
natural and social capital issues may influence
the outcome. As a result, finance teams
have a crucial role in creating value through
supporting the integration of natural and social
capital accounting in their organisation.

OvERaRchiNg pRiNciplES aNd a
STEp By STEp guidE

A key element of this guide has been to
identify six principles which can be applied
when considering how and when to embed
natural and social capital issues into decision
making. These principles are based on the
experiences of member companies.

we have also developed a simple three
step process that you may find useful when
integrating natural and social capitals into
your decision making.

ThE jOuRNEy

we recognise that companies are at
different stages on their natural and social
capital journey. The principles, metrics and
approaches outlined in this guide can be used
wherever you are on this journey and we have
included a maturity model to support you in
assessing at which stage you are (see p23).

This guide includes case studies from network
members to illustrate how the principles,
metrics and approaches can be applied in
practice.

i hope this guide will help those who are
seeking to develop their activities in this area.

Louise Rowe, Corporate & Central Finance
Manager, South West Water

Chair of A4S natural and social capital
project

“In stark financial terms, all
the evidence demonstrates a

simple fact: we are failing to run
the global bank that we call our
planet in a competent manner.

We no longer just take a dividend
each year; instead, for some

time, we have been digging deep
into our capital reserves.

And, after the near collapse of
our entire financial system, we

all know that such excessive risk-
taking can cause immense havoc.
The ultimate bank on which we
all depend – the bank of natural
capital – is in the red; the debt
is getting ever bigger and that
is reducing Nature’s resilience
and considerably impeding her
ability to re-stock. It leaves us

dangerously exposed.”

HRH The Prince of Wales,
Speaking at The prince’s Accounting

for Sustainability Forum,
St. James’s palace, London,

december 2013.

4

WhaT iS NaTuRal aNd SOcial
capiTal accOuNTiNg?

natural and social capital accounting involves
considering the environment and society in
business decision making and / or reporting.
This guide focuses on its use to strengthen
decision making.

Companies are making use of an increasingly
diverse range of metrics in this area to help
inform strategic, management and operational
decisions, and ensure effective assessment of
business performance.

Assessments are typically undertaken through
use of quantitative metrics such as physical
units e.g. tonnes of carbon emitted by a
project or through estimated monetary values
(often referred to as the ‘valuation’ of natural or
social capital) such as the benefit to society of
a company apprenticeship, for example.

Monetisation of natural and social capital is
being used increasingly by organisations to
understand their impacts and dependencies
more effectively, and can either be in terms of
financial values to companies and shareholders,
or societal values to broader stakeholders.

we have found that monetary values often resonate
much more with financial decision makers and allow
comparison of different issues in a common unit e.g.
when making trade-offs between different impacts
such as reductions in carbon emissions or water
use, it is easier to compare £/€/$ than tonnes of
carbon to m3 water.

however, assigning monetary values to some
issues can be very challenging, and there is
currently no standard methodology to do this
(see p24).

in addition, it may not be appropriate for all
issues to be monetised for example, where
there is a threshold which the business is not
willing to not cross, as might be the case when
considering the risk of fatalities or impact on
culturally important sites.

hOW Will accOuNTiNg fOR
NaTuRal aNd SOcial capiTal
BENEfiT My BuSiNESS?

issues such as the global decline in resource
availability and changing population
demographics, mean organisations need to
improve their understanding of their impacts
and dependencies on the environment
and society.

Using a natural and social capital accounting
approach offers a number of commercial
benefits, including:

• Strengthened decision making that can
result in long term sustainable value creation
e.g. improved foresight into future regulatory
or price risks from resource scarcity

• enhanced risk management leading to
increased business resilience and reduced
future costs e.g. improved ability to increase
security of supply of water, agricultural
products or skilled labour

• identification of new business opportunities
e.g. more sustainable products or services

• improved reputation and strengthened
‘license to operate’ e.g. easier
planning consents

WhaT iS ThE ROlE Of fiNaNcE
TEaMS?

As the custodians of key data processes
and metrics, finance teams are increasingly
recognising the commercial value of
broadening the information upon which
decisions are made. This broader information
set helps ensure all relevant factors and risks
are taken into account.

Finance teams have a crucial role in
ensuring that:

• All natural and social capital issues that
may have a material impact on a financial
decision are considered

• Underlying data is robust, comparable
and reliable and can be trusted
by decision makers

• Collection of data on natural and social
capitals is efficient, and where appropriate,
automated within financial data
collection processes

• natural and social costs and benefits are
included in management information and
external reporting where appropriate

• Appropriate targets are set along with
key performance indicators that are
measureable and comparable, and helping
to track these

information on your organisation’s natural and
social capital impacts and dependencies can
then be used to help inform:

• risk management processes

• Options appraisal and trade-offs

• Supply chain management

• Asset and product pricing and design

• Cost effective compliance with current and
future regulation

• Merger and acquisition due diligence

• An evaluation of your organisation’s wider
contribution to society

• Corporate reporting and disclosure, for
example as part of an integrated report

As the custodians of
key data processes and

metrics, finance teams are
increasingly recognising
the commercial value of

broadening the information
upon which decisions

are made

SUMMArY

5

NaTuRal capiTal

in simple terms, natural capital represents the
renewable and non-renewable environmental
resources that all individuals and organisations
are dependent upon. This can be through
the ‘goods’ that nature provides such as
the food, water, timber and minerals that we
consume – both directly and in our supply
chains – and the ‘services’ that we receive
from our environment such as flood protection,
recreational enjoyment and climate regulation.

As natural capital does not tend to have a
market value – or where it does, this typically
does not reflect the full value of the goods
and services provided – in the past it has
been largely invisible in corporate decisions,
accounts and economic models.

Traditionally, many businesses have assumed
that natural capital is inexhaustible. however,
the dramatic global decline in natural capital,
resulting in increased volatility of commodity
supply and prices; increasing government
regulation; and new environmental markets,
has highlighted that future value creation for
businesses will increasingly depend on these
non-financial factors.

SOcial capiTal

in basic terms, social capital is comprised of
the people, institutions and relationships that
organisations rely on and contribute to through
their activities. This might be through the role
an organisation plays in the communities in
which it operates, or the training it provides to
its employees to build their capabilities. This
latter element is sometimes defined separately
as human capital.

even more so than natural capital, social
capital does not typically have a market
value. As with natural capital, this can lead to
organisations undervaluing the benefits that
they receive and the cost of their impact and
consequently, under-investment in the social
capital on which they depend.

BuSiNESS BENEfiTS

Accounting for natural and social capital can
offer a number of commercial benefits, in
particular:

Strengthened decision making and
business resilience through the use of
a broader information set including the
ability to:

• protect capital investments and operations
from future environmental and social
change, for example water scarcity from
a changing climate or skills shortage from
local demographic changes

• improve negotiations with suppliers and
discussions with regulators and policy
makers on costs, and access to, future
resources

• Secure access to skills and improve
productivity through understanding the
value gained from training programmes and
wider engagement

• enable assessments of the relative
performance of products and investments
and more effective targeting of initiatives
and expenditure

Enhanced risk management and reduced
costs including an improved understanding of:

• Costs of potential disruptions from resource
scarcities, price rises or extreme weather

• impact of new environmental and social
regulations and penalties which may tilt the
cost-benefit balance of different investments

• risk of fines and compensation claims as
global environmental and social
regulation increases

Identification of business opportunities,
revenues and consumers including:

• determining ways to realise the value of the
natural and social assets you own, control,
or have access to

• Quantifying and demonstrating reduced
environmental and social impacts of new
products or services for marketing purposes

• Access to new markets through more
sustainable products or services

Improved corporate reputation and
strengthened ‘license to operate’,
including:

• improved access to resources and faster
planning consents through improved
relationships with local communities
and regulators

• Competitive advantage when bidding for
contracts, particularly for the public sector

• increased consumer trust, demand and
greater engagement with employees

whY iS nATUrAL And SOCiAL CApiTAL
reLevAnT TO BUSineSS?
Today, typically only around 20% of a company’s market value can be accounted for by its financial and physical assets, with other factors such as relationships, human capital and access to natural
resources, making up an increasing proportion of a company’s value1. Organisations that begin to account for these other forms of capital are likely to improve both their internal decision making, and
where reported externally, the markets understanding of their business.

6

The global population is expected to increase
to 8 billion by 2030, with 3 billion new middle
class consumers2, placing ever increasing
pressure on natural resources. For example,
global energy demand is expected to rise by
35% by 20403. Similarly, by 2050, global food
demand is projected to rise by 70%4
and water demand by 55%5.

This pressure on natural resources is already
being felt. in total, we are already currently
using 50% more of the earth’s natural capital
each year than the earth can replenish,
and this rate of depletion is accelerating6.
if businesses and societies are to prosper,
innovative management of natural resources
will be required, particularly as, on average,
60% of natural capital risks are embedded
within supply chains7 – risks that are therefore
less visible to organisations who may be
exposed.

The level of dependence of economic activities
on natural capital is huge, but seldom reflected
in market prices, with the ‘services’ frequently
provided for free and the cost of depletion
not priced in financial terms. it has been
estimated that the top 100 ‘environmental
externalities’ (i.e. the environmental impacts
that do not currently have a direct financial
cost, such as the cost of carbon for many
companies), currently cost the global
economy approximately $4.7 trillion per
year8. These costs are currently absent from
corporate profit and loss accounts. The risk of
internalisation of these costs to business for
example through tax or regulation is likely to
increase as resources become scarcer.

natural capital accounting is a useful
technique to highlight these future
risks and enable organisations to
respond early.

“This was a complete turnaround in corporate culture brought about by
the finance function input”
Susan davy, director of Finance, pennon Group
(former Finance and regulatory director, South west water)

whY iS NATuRAL CApiTAL
reLevAnT TO BUSineSS?

SOuTh WEST WaTER

Investing in natural assets in preference to capital assets delivers benefit to cost ratio
of 65:1

water companies have conventionally relied on energy, chemicals, and expensive engineering
solutions to improve quality and expand resources. At South west water, our finance team
catalysed a new approach where using natural capital accounting highlighted the benefits
of investing more in collaborative work with third parties to improve the upstream catchment
areas. This work should avoid or defer capital investment in new plants in the future, and
reduce energy use and chemical costs.

Our operating costs were increasing and we were looking to address this by the usual means
of improving the technology. we decided to try and prevent some of that work, for example
by improving water quality through better upstream management. This would create a much
better long term payback than the more conventional methods. The rationale was that it was
cheaper for us to help farmers deliver cleaner raw water upstream, than treat polluted water
after abstraction. we have therefore been working with farmers and other land users to use
natural resources to improve water quality to meet growing demand and manage the effects
of climate change, rather than just relying on traditional intensive water treatment approaches.

This was a complete turnaround in corporate culture brought about by the finance function
input. historically, we are used to working with our asset base, for example water treatment
works on our land, where such end-of-pipe solutions are very clear and well defined. instead,
we started working with third parties and outside our asset base. The project’s success
required collaboration across the business, including a need for strong leadership from the
finance team to realise tangible benefits for all stakeholders. we drew upon skills from across
the company from financial governance, project management, legal, tax, through to treasury.

The projected benefits of improved water security and increased resilience to climate change,
identified a benefit to cost ratio of 65:1. This was calculated using a range of techniques to
quantify and then value the benefits, including: customer’s willingness to pay for clean water
and biodiversity, a market value for the carbon reduction provided by the natural resources,
and the avoided costs of capital investment and water treatment.

7

whY iS SOCIAL CApiTAL reLevAnT TO BUSineSS?
no organisation can exist without the social
capital of its employees and the communities
within which it operates. Organisations and
communities with higher levels of social capital
are healthier and more resilient, and their
members are better able to work together to
solve problems. economists have found that
social capital also contributes to economic
growth and poverty reduction.

how an organisation approaches management
of its social capital is becoming increasingly
important when levels of trust by the public
in both private and public institutions is low.
A recent global survey indicated that three

times as many people believe that innovation
by business is motivated by greed rather than
by a desire to make the world a better place.
At the same time 81% of respondents thought
that business can take actions that increase
profits whilst also improving social and
economic conditions in the communities in
which they operate, with 47% stating that they
have a greater trust in businesses that they
believe contribute to the greater good9.

The diagram below shows actions taken in the
previous 12 months by respondents based on
their level of trust in a company.

Putting a value on social investment – £3.70 return for every £1 invested

in 2003, British Land set up the Source Skills Academy training centre for retail and customer
service training in collaboration with Sheffield City Council, to help bring needed skills to
the area to support employment in our retail properties. in 2013, we carried out a review to
evaluate the success of the Academy and to identify those initiatives with the greatest direct
social impact so they can be replicated elsewhere.

The evaluation focused on the intended outcomes of the Academy – primarily the skills and
employability of those who have attended. Monetary values were placed on the outcomes of
the training where practicable, to allow the considerations of any future investment alongside
the values generated. The issues valued reflected the Academy’s key aims, and independent
consultants were commissioned to estimate the ‘net additional value generated’ from these
activities. Analysis was based on third party data which included primary research specific to
the Academy, as well as estimations based on published government statistics and valuation
guidance.

The results of the review revealed that the Academy created an estimated Social return on
investment (SrOi) of £53.4 million in its first 10 years. This equates to approximately £3.70
for every £1 invested. The outcomes have influenced our company strategy on where best to
invest to support local jobseekers, grow local businesses and support apprenticeships, as
we better understand what activities provide the most SrOi.

The review has proved instructive to improve communication with local authorities on the
social value that property developers generate for local economies, particularly in relation
to jobs and training.

Below sets out the outcomes and details of how the annual value created was estimated:

increased economic output from up-skilling: increase in productivity per person, from
qualifications (excluding individual taxes).

increased tax revenues: increase in government tax revenue from the improvement in
productivity and additional or safeguarded jobs.

increased economic output through job creation: Average annual Gross value Added of
retail/wholesale workers that would be associated with each additional job, less the share of
this which would be paid in individual taxes.

Government savings from lower unemployment: Saving to the exchequer of an individual not
claiming unemployment benefits.

‘Beyond earnings’ individual value from employment: The annual wellbeing impact of
unemployment, calculated as the cost to the individual of becoming unemployed, over and
above the loss of income (including the loss of structured time use and lower levels of activity
and social contact).

Business savings from job matching: Based on the market value that businesses would need
to pay for job-match services.

BRiTiSh l aNd

effective management of social capital can
assist with recruitment and retention of
employees. in an annual survey of over 37,000
employers in 42 countries in 2014, 36% of
employers reported having difficulty filling
jobs, the highest proportion in seven years.
notably, of these, 54% stated that this has a
‘medium’ or ‘high’ impact on their ability to

Trusted Companies Distrusted Companies

Actions Taken Over Past 12 Months – Global

Refused to products/services Chose to products/services -63% 80%

Criticized them to a friend/colleague Recommended them to a friend/colleague -58% 68%

Paid more for products/services 54%

Shared negative
opinions online Shared positive opinions online -37% 48%

Defended company 40%

I sold
shares I bought shares -18% 28%

meet client needs10. A number of studies have
shown that an organisation’s reputation as
a good employer is a key driver of attracting
and retaining talent11. This has consequential
financial impacts, and one study found a
spread of more than 5% in operating margin
between those companies with ‘low’ or ‘high’
employee engagement12.

http://www.britishland.com/~/media/Files/B/British-Land/documents/2013-the-source-10-year-review-methodology.pdf

http://www.britishland.com/~/media/Files/B/British-Land/documents/The_Source_10_Year_Review.pdf

8

whAT iS nATUrAL And SOCiAL CApiTAL ACCOUnTinG?
natural and social capital accounting involves considering the environment and society in business
decision making and / or reporting. This guide focuses on its use to strengthen decision making.

natural and social capital accounting involves
the identification, quantification and potential
monetisation of both how your business
activities have an impact on the environment
and society, through pollution or training of
employees for example, and also how your
business depends upon natural and social
assets and the ‘services’ they provide such as
clean air, water or community relationships.

Quantification can be in physical units
such as m3 for water use, or the number of
people trained. it can often be helpful to use
estimates of monetary values, either in terms
of ‘financial’ value or cost to a company and
its shareholders e.g. a carbon tax, or the
‘societal’ value …