Mar 30, 2016 / by administrator / In CPA Canada, Sarah Keyes
Beyond Financial Capital: The Next Frontier of Sustainability
This post was authored by Sarah Keyes, CPA, CA Sustainability Principal at the Chartered Professional Accountants of Canada. CPA Canada is one of the Natural Capital Lab’s convening partners.
Many of us have heard the phrase: “What gets measured gets managed.” However, just because you aren’t measuring something doesn’t mean you aren’t dependent on it. This concept applies to the natural environment, which is not captured in traditional financial reporting. Natural capital is the “elephant in the boardroom” – it is invisible in the vast majority of corporate accounts and decision-making.((http://www.ey.com/Publication/vwLUAssets/Accounting-for-natural-capital/$File/EY-Accounting-for-natural-capital.pdf))
Treating natural capital impacts and dependencies as an externality is no longer a viable approach for value creation. The notion that natural resources are free and abundant is quickly losing steam due to increasing awareness about financial impacts of unavailability of raw materials, associated price volatility and lost competitive advantage. Today, our natural capital is “in the red.” We are now consuming and degrading resources at such a rate that it takes the Earth one year and six months to regenerate what we use in a year. ((http://www.footprintnetwork.org/en/index.php/GFN/page/world_footprint/)) This is clearly unsustainable. So what can we do about it?
Firstly, business leaders need to recognize that resources and services provided by nature are the underpinnings of economic prosperity. You don’t have a business if there isn’t a healthy environment to support it. Organizations that fail to consider their impacts and dependencies on natural capital as part of their overall business strategy risk degrading ecosystems and natural resources, and ultimately the foundation of their own ability to preserve, enhance and create long-term value. A shift in mindset from business leaders and decision-makers is essential to achieving progress in this area.
Secondly, we need to clearly identify and understand the key barriers to businesses undertaking natural capital assessments. Two of the biggest challenges that I see are:
- Short-termism – Historically, business success has been measured and rewarded based on traditional financial measures, such as profit, revenue, earnings per share and cash flows. As such, quarterly earnings results motivate business leaders to focus on managing for the short term and, traditionally, investors have rewarded this approach. This system provides little incentive to prioritize the long-term benefits of measuring and managing natural capital.
- Pricing the priceless – Monetizing natural capital suggests an interchangeability that doesn’t reflect the dynamic reality of the natural environment, potentially leading to the commoditization of nature. For example, if values of $1 million dollars are assigned to both a forest and a lake, it implies that these two things are of equal value, which is not the case from an ecosystem perspective.
There are also other barriers to consider, including data limitations and the need for multi-disciplinary collaboration to undertake timely, robust and reliable natural capital assessments. While these barriers should be carefully considered, none of these is insurmountable. We need a fundamental shift in the way businesses think about long-term value creation. Business leaders need to expand their purview beyond the current financial landscape in order to truly integrate natural capital considerations into decision-making and strategy. A critical first step to overcoming these barriers is engaging business leaders in the natural capital conversation.
Sustainability is core to the Canadian accounting profession. Chartered Professional Accountants of Canada, through its legacy bodies, has been involved in sustainability initiatives for over 25 years. CPA Canada is a member of the International Integrated Reporting Council, and a founding member of the Global Reporting Initiative, which helps businesses, governments and other organizations communicate their impacts on issues such as climate change, human rights and corruption.
The emerging field of natural capital is a logical extension of our work in sustainability, and the accounting profession is well-positioned to support organizations in undertaking natural capital assessments for two key reasons:
- Natural capital is core to a sustainable business strategy – Delaying the measurement and management of natural capital poses significant business risks and could result in foregone opportunities for cost savings, competitive advantage and brand reputation. Understanding the business risks and opportunities associated with impacts and dependencies on natural resources is essential for long-term value creation.
- Natural capital is core to sustainable accounting – Chartered Professional Accountants are trusted advisors and strategists for organizations and natural capital is an area where we see tremendous growth potential in the future as the reporting landscape continues to evolve. CPAs already have the necessary skills and competencies to support organizations in managing their natural capital impacts and dependencies – they simply need to apply these tools in a different context.
CPA Canada is committed to furthering the natural capital agenda in Canada. That’s why we are proud to be a core partner of the Natural Capital Lab in partnership with the Natural Step. We look forward to exploring opportunities with Canadian businesses to integrate natural capital considerations into their decisions, accounts and economic models.
Sarah Keyes, CPA, CA is a Sustainability Principal at the Chartered Professional Accountants of Canada