Have you seen recent articles about Natural Capital Valuation (NCV), Environmental P&L and other financial measures of environmental impact like the one titled “When will your company begin accounting for nature?” on GreenBiz.com?
You should know that Interface has done this as well. Although this type of valuation is still in its infancy and is experimental in nature, it identifies which of our impacts are most important and the value to society of reducing those impacts.
So what is “natural capital” and why is it important?
Business and society freely use the services that nature provides in the form of water, land, air and others without including the cost of these services on their balance sheet. Externalizing the value of these services causes companies to under represent their financial risk if these services are interrupted through super storms, drought and other effects. Capturing the value of this natural capital on the balance sheet will help companies manage risks and drive innovation towards products and systems that are more resilient and that have reduced environmental impacts.
The price we pay for materials is not the true cost. True cost is what Ray Anderson use to call “God’s currency.” We may pay $8 for a kg of yarn to extract the petroleum, crack and distill it, convert it to polymers, extrude it into yarn and transport that product to us, but along the way, there are environmental emissions and lost resources that are not included in the price we pay. These additional costs are borne by society. If we don’t consider the true cost of our products, we are externalizing the value of these services much like we once ignored our environmental impacts. Today we consider our impacts, work to reduce them and offset them where possible, but we don’t consider the costs to society. NCV converts environmental impacts into financial costs, which makes it more accessible to the corporate audience, other stakeholders and our customers. It’s hard to grasp the concept of a tonne of carbon, but it’s easy to understand the financial cost of the damage associated with emissions from that tonne of carbon.
How did we do it?
We partnered with TruCost to apply NCV to the impacts in two of our EPDs. Trucost calculated the natural capital cost of our products’ GWP, AP, POCP and water use based on the values and material production locations found in our third party verified EPDs. The methodology used by Trucost includes a combination of valuation techniques with things like direct market pricing, abatement cost, avoided cost, replacement cost, substitute cost, contingent valuation, hedonistic pricing method, site choice and travel cost model. You may have heard of the “social cost: of carbon. This is an example of the application of these valuation techniques to carbon emissions. While this is still a very new science in the field of economics with significant uncertainty, it is evolving, and it may soon become an accepted metric for off-the-balance-sheet risk.
What did we learn?
You know the old saying “an ounce of prevention is worth a pound of cure?” It’s no surprise that it’s the same with environmental impacts. Five dollars for a tonne of prevention through carbon offsets prevents $120 per tonne of damage when considering the social cost of carbon. Our Cool Carpet™ program is a great investment. Last year it prevented the emission of over 344,000 tonnes of greenhouse gases, which represents over $41 million in natural capital cost. What a great investment in our environment.
We also learned the regional differences in some impacts. For instance smog emissions cause different levels of impacts in different locations. Our EPDs tell us how much those emissions are, but NCV tells us where those emissions do the most damage. This can help us with manufacturing location and supply chain decisions. We’re still studying the results of this complex valuation and figuring out how this information can help us on our journey up MountSustainability.
Who else is doing Natural Capital Valuation?
Some companies who are taking a leadership position by valuing natural capital include Puma, Unilever, Dow Chemical, Coca Cola, EKO, FEMSA, Nike, Weyerhauser, Dell and Alcoa.
Check out this report from the Corporate Ecoforum at http://corporateecoforum.com/valuingnaturalcapital/ to see how others are approaching NCV.