In the business community, many of us have heard the phrase “tone at the top” – this refers to how the management team and the board of directors set expectations about organizational culture in the context of achieving a company’s vision, mission and strategy.
The “tone at the top” is often considered to be the standard for the types of behaviours expected across all levels of the organization. Put another way – it is the management team and board of directors articulating what matters most to them and how they are trying to achieve the organization’s goals in the short, medium and long-term.
If the “tone at the top” sets the mandate for expected behaviours in support of achieving the company’s vision, mission and strategy, we need to be considering how natural capital can become a core factor in discussions amongst these influential players.
A growing body of research shows that investors may serve as a primary driver for corporate leaders to pay greater attention to natural capital. Investors continue to display an increasing interest in how an entity will preserve, enhance and create value over the long-term as part of their investment decision-making. In particular, many shareholders are taking notice and making a greater effort to better understand the environmental and social risks in existing and potential investments. Further, they have a growing interest in board governance regarding such issues.
A 2016 Canadian Investor Survey, conducted by RR Donnelley and SimpleLogic, found that Canadian investors look at environmental, social and governance (ESG) issues when they make investment decisions – and they want to know how these issues are related to the company’s strategy, risk management and operations. The survey concluded there is a gap between the ESG information companies are providing in their mandatory securities filings and voluntary reports, and what Canadian investors want to know. Further, 85% of investors said that the quality of a company’s ESG disclosure impacts their perception of management and/or the board of directors.
Senior management and the board of directors are responsible for overseeing strategy, risk management and external reporting as part of their fiduciary duty. For business leaders and their organizations to perform effectively, stakeholder expectations must be addressed. Better understanding their company’s dependency on natural capital can greatly assist business leaders with strategic planning on a broader scale and help to identify how success can be achieved over the long-term. In performing internal natural capital assessments, businesses are well-positioned to make more holistic and integrated decisions about strategy. This information also enhances communications on environmental and social risks to investors in external reporting.
There are real-life examples that demonstrate the business case for embedding natural capital assessments into traditional financial decision-making processes. Take Dow Chemical’s Seadrift, Texas Project as an example. By taking into account ecosystem services into its strategic planning and decision-making, the company has used reconstructed wetland for wastewater treatment, yielding more than $280 million in net present value. An example closer to home is TD Bank Group, which measures the organization’s natural capital impacts across three main areas: business operations (e.g. energy efficiency); green products and financing (e.g. green bonds and insurance products); and, community initiatives (e.g. grow and enhance green spaces). In 2015, they reported that the natural capital value of reduced impacts in each area was $34 million, $3 million and $2.5 million respectively. There are numerous other examples of organizations that have reduced costs and/or increased revenues due to decisions based on natural capital assessments, resulting in improved profit for the business.
In order to get natural capital onto the boardroom agenda, we need to share these real-life business case examples, using them as a starting point for dialogue with senior management and the board of directors.
After all, proven strategies for success are always of great interest to business leaders!