INSIGHT: The Natural Capitalist’s Toolkit: 3 Keys for Success
Posted on 8th October 2013
When the World Forum on Natural Capital takes place in Edinburgh this November, it will bring together two groups that we might call ‘Natural Capitalists’ and ‘Financial Capitalists’. Of course some (but not enough, more of this later) are members of both communities. Let’s assume that the Natural Capitalists have a shared mission to accelerate corporate behaviour change to create an economy that runs within environmental limits. What then are the key tools we must acquire and deploy for success? I propose three above all – translation, pragmatism and stamina.
Let’s start with translation, for without this nothing is possible. The ability to translate from natural capitalism to financial capitalism is essential if natural capitalists are to communicate with financial capitalists, to grow the overlapping community which can describe themselves as fluent in natural and financial capitalese, to influence the future direction of business and finance. To state the obvious, translation requires mastery (or at least a degree of fluency) in two languages. So if you only know natural capitalese you have to dedicate time to learning the language of business – this means getting out of the comfort zone of esoteric discussions with other natural capitalists to study business. It means engaging with business people, listening to the challenges of business, putting yourselves in the shoes of those running businesses, so constrained by the rules of the game as currently constructed. It means finding ways of putting aspects of our ecological crisis into language which can engage businesses in specifics. We need to engage with business and finance at scale, not to keep on pointing to the isolated success of a few pioneers and kid ourselves that this is anything approaching adequate progress– we all know that all indicators are still going in the wrong direction at the global scale.
I spent the first 18 years of my career running factories and manufacturing businesses so the acid test of any piece of natural-to-financial capital translation for me is ‘would the average plant manager be able to immediately understand why this is a business issue to invest time in?’ I see three categories of argument which can attract attention – cost, risk and valuation. Let me give three examples to illustrate what I mean.
With regards to climate change, we spend a lot of time defining the measurement rules and pursuing the disclosure of GHG emissions. This is the language of natural capitalism. Necessary but not sufficient. Stern converted this language into economics at the macro level in 2006. A recent report published by CDP and WWF with analysis from McKinsey (The 3% Solution) has translated the science of a 2 degree global warming target into sector specific emissions reduction opportunities, by showing how the required reductions could be made profitably using existing technology and with returns on investment higher than the average returns achieved by businesses today. Once the translation has been made the ordinary user can throw away the original text (the GHG reduction science) and focus on using the document in their primary language (investing to generate $190 billion of net savings by 2020 in USA alone). The translator doesn’t need to force the new reader to learn the source language, thank goodness!
A second category of argument focuses on risk. When CDP started to work on water disclosure back in 2008, we thought that the main issue would be the lack of water pricing, the fact that this key externality was effectively free for major industrial users. It turns out we were wrong, and we quickly learned that water is much more complex, requiring holistic thinking and an understanding of a complex set of risks around license to operate, regulatory change and reputational concerns – now wrapped together in the growing understanding that companies need to demonstrate world class levels of water stewardship to mitigate this basket of risks. Recent research by CDP and Eurizon Capital (Metals & Mining: a sector under water pressure) translates the ecological problem of declining fresh water availability into the language of risk which investors and miners can understand – noting for example that ‘detrimental impacts are already being felt and over 90% of respondents report exposure to substantive water risks that have the potential to impact their business now or within 5 years.’
A third and increasingly powerful argument looks at the valuation models used by investors. This can draw on cost and risk data but most promising at the moment are valuation arguments based around the over-valuation of fossil fuel reserves (see the excellent Unburnable Carbon report produced by Carbon Tracker, or the recent Economist article presaging the end of big oil for just this reason). Again, this is a great example of translation – take the global policy consensus of a 2 degree limit to warming, convert that into a carbon budget, compare that to the carbon embedded in disclosed fossil fuel reserves and then calculate how much of those reserves (and hence the company valuation) risk becoming ‘stranded’ ie unburnable. Just last week the Smith School published an equally well translated report on Stranded Assets in Agriculture
My second tool is pragmatism – the ability to make practical decision to increase the likelihood of success with limited resources. Businesses frequently refer to the ‘pareto principle’, or the ‘20/80 rule’, that in most systems around 80% of the impact can be ascribed to 20% of the causes. At CDP we apply this in two ways – firstly we engage with the world’s largest 3000 listed companies, on the basis that this represents the vast majority of companies of interest to institutional investors with whom we work, being well over 90% of global market capitalisation and being responsible for the majority of corporate impact on climate change, water and deforestation. Of course this simplifying decision means we are not tackling 100% of the problem but that is beyond the reach of any one organisation and going too far down the ‘pareto tail’ risks diluting focus, reduced environmental returns on investment and the loss of ability to deepen engagement on the few chosen areas. Similarly we focus on climate, water and deforestation – TEEB for Business’ excellent recent report Natural Capital at Risk using Trucost analysis shows these three areas to represent approximately 80% of externalities by value. We are exploring extending to other land- and marine-based commodities, along the lines of the approach suggested by WWF’s 2050 Criteria report on soft commodities. That might allow us to cover 90% of the issues but we wouldn’t go further.
Another pragmatic decision is how to find the right ‘access point’ to engage companies on some of the complex issues arising out of an understanding of the loss of ecosystem services and biodiversity. We believe that the lens of commodities procurement is the most promising. This is the premise baked into our work on deforestation – rather than try to engage companies (at scale) in a discussion on the implications to them of loss of biodiversity and ecosystem services concomitant with deforestation, rather than even ask directly how much a company’s activity is driving deforestation, we look through the lens of the five commodities most responsible for causing the problem (timber, beef, soy, palm oil and biofuel). Companies understand their bills of materials (sometimes only one layer deep which is a challenge!), they understand what they buy. So to engage at the level of – ‘how much of commodity X do you buy?, what risks does this expose you to (price volatility, regulatory restrictions, reputational damage), how much do you source sustainably (however you define that), what are your plans for the future – these are all questions which a company can understand and discuss largely using the language of sourcing and quality with which it is familiar.
Finally stamina – or call it true grit, the ability to keep on going while others around you lose hope, rush off in other temporarily interesting directions, seek to create a new story where in reality there is none. This of course is hard to develop against the scourge of short-termism which afflicts our capital markets, our governments and even some philanthropic thinking – there is no quick, ‘silver bullet’ solution to undo the massively complex set of rules and institutions which we have developed together over centuries in order to make our economy work within environmental constraints. But that is our chosen mission, one which thankfully more and more are joining. I look forward to meeting many of my fellow marathon runners in Edinburgh soon!!
Nigel Topping is Chief Innovation Officer at CDP. He will be a guest on the panel session titled ' Which sectors are leading the way?' on Day 1 (Thursday 21 November) of the World Forum.
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