ESG Insights: Why is natural capital important in ESG?

ESG or Environmental, Social, Governance has been in play for some time and aims to demonstrate corporate behaviours that reduce harm and/or benefit the environment, human or worker rights, and ultimately encourage responsible investment whilst building positive stakeholder engagement. ESG is increasingly being used by businesses to go beyond compliance with recognised standards or principles which companies must adopt, and towards shared value creation.

This means ESG can bring myriad of wider benefits above meeting recognised standards, such as enabling companies to demonstrate they understand their overall sustainability ‘baseline’. ESG also enables companies to work towards developing a strategy for addressing business risks and opportunities, not only addressing all environmental impacts, but even working towards environmental gain. This is increasingly important as consumers, investors, financiers, regulators, and employees, are all focussing more on environmental and climate resilience and stewardship, supply chain optimisation, and resources scarcity, together with transition from a linear to a circular economy.

Many companies are proactively recognising and unlocking the ESG value already present within their organisation and one way to do this is through understanding how natural capital can play a role. Natural capital is not only the physical stocks of resources on our planet such as water, air, soils, minerals etc. but also the benefits we derive from these physical stocks. These are crucial to the sustainability of our economies and ultimately societies, and are known as ecosystem services. Examples of ecosystem services includes more recognisable aspects like adequate food and clean water, as well as regulating services such as disease control, pollination, and flood management. It also includes provisioning services such as materials and food, and equally important cultural services such as recreation and wellbeing derived from nature.

The issues around climate impacts from carbon emissions are well documented but climate risk is not the only significant issue we face on a global scale. The unsustainable consumption of natural resources, and the loss of habitat and biodiversity, together with the reduction or loss of ecosystem services (or benefits) we derive from these are equally important. The World Economic Forum top risks 2020 lists climate inaction and biodiversity loss as the top 2 ‘most impactful’ challenges.

Natural capital encompasses all environmental impacts and ‘a natural capital approach’ is a holistic view of how a business impacts on the environment. In its simplest form it enables an understanding of both impacts and dependencies on natural capital assets, together with understanding business risk and opportunities. This can involve everything from initial impacts, dependencies, and risks assessment to strategising improvement and ultimately putting numerical or financial values on assets. It involves periodically reviewing impacts and benefits to demonstrate changes and improvements over time through systematically and consistently generated evidence. Ultimately this approach can be used to drive behaviours, make better decisions longer term and demonstrate an overall environmental net gain.

Most businesses, particularly energy intensive ones, have sustainability initiatives and programmes focussed on understanding and reducing carbon emissions, energy consumption, water consumption, and waste management. But most of these may not be considering risks from the supply chain, future regulation, or wider business model risks, and yet this is critical to unlocking longer-term viability of the business model and creating/sustaining competitive advantage. Similarly, opportunities such as cost savings, brand reputation, attractiveness to investors and employees and employee satisfaction are all achievable through a natural capital approach. This offers a real opportunity to develop strategies which minimise and plan for business risk, and to understand all environmental impacts in order to develop a means to achieve a genuine positive environmental contribution. This can come through minimising consumption, minimising the impact on benefits we derive from nature, or actually developing biodiversity and ecosystem services improvement and net gain.

Similarly, in an effort to reduce carbon impacts, businesses are also looking at nature-based solutions to help in not only managing carbon impacts and climate risks, but also manging water security, food security, human health, and disaster risks.

For example, the introduction of upland afforestation can be used to reduce flooding; reinstatement of peatlands can provide the dual benefit of both improving water resources together with providing a carbon sink; another example would be the reinstatement and preservation of mangrove forests to protect ecosystems and communities from coastal erosion associated with climate-based sea level rises.

All of these actions can then be shared through ESG reporting to truly demonstrate not only compliance with recognised standards, but also a genuine understanding and planning around a comprehensive environmental approach. The direction of travel is clear; businesses that will be in the strongest position will have developed a natural capital approach, understanding and articulating their relationship and interaction with all environmental factors, and sharing their detailed strategy to ensure a positive impact on the environment.

To discuss how your company can take a natural capital approach, please get in touch and one of SLR’s natural capital experts would be happy to talk to you.