Is Natural Capital a Material Issue

Is natural capital
a material issue?
An evaluation of the relevance of biodiversity and ecosystem
services to accountancy professionals and the private sector

A report from ACCA, Fauna & Flora International and KPMG

We are on the brink of a potential crisis from the combined effects of ecological degradation and population
growth. Natural resources on which society and business are dependent are being lost at an unprecedented
rate. This loss of natural capital is posing a new array of risks to business ranging from increasingly
severe competition for access to resources, to tightening regulation and greater and more costly hurdles
to accessing finance. The Rio+20 meeting saw over 50 countries and 89 private sector organisations make
formal commitments on natural capital. A trend is emerging that attempts to use accounting practices to give
better understanding of the implications of the loss of natural capital for governments and for business.

How prepared is the accounting profession to respond?

About ACCA www.accaglobal.com
ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, supporting
154,000 members and 432,000 students throughout their careers, and providing services through a network of over
80 offices and centres. ACCA works to strengthen a global profession that is based on the application of consistent
standards, which ACCA believes provide the best support for international business and the desire of talented people
to have successful, international careers. ACCA champions the needs of small and medium-sized business (SMEs) and
emerging economies, and promotes the value of sustainable business.

About Fauna & Flora International www.fauna-flora.org
Fauna & Flora International (FFI) protects threatened species and ecosystems worldwide, choosing solutions that are
sustainable, on the basis of sound science and taking account of human needs. Operating in more than 40 countries
worldwide – mainly in the developing world – FFI saves species from extinction and habitats from destruction, while
improving the livelihoods of local people. Founded in 1903, FFI is the world’s longest-established international
conservation body and a registered charity. Through its global corporate partnerships, within the Business and
Biodiversity Programme, FFI aspires to create an environment where business has a long-term positive impact on
biodiversity conservation. FFI leads the Natural Value Initiative (NVI) collaboration (www.fauna-flora.org/initiatives/nvi).
To date, the NVI has released a series of valuable publications and tools that address biodiversity
and ecosystem services within the finance, extractive, pharmaceutical, and agricultural sectors.

About KPMG www.kpmg.co.uk
As sustainability and climate change issues move to the top of corporate agendas, KPMG in the UK’s Climate Change and
Sustainability Services (CC&S) practice assists organisations by providing sustainability and climate change Assurance,
Tax and Advisory services to organisations, helping them apply sustainability as a strategic lens to their business
operations in order to better understand the complex and evolving environment, optimising their sustainability strategy.

For more information, please visit our website:
www.kpmg.com/UK/en/services/Audit/Pages/ClimateChangeandSustainabilityServices.aspx

2 | Is natural capital a material issue?

Contents

Foreword 4

Executive summary 6

1. Introduction 10

2. Biodiversity, ecosystem services and corporate performance 11

3. Biodiversity and ecosystem services as a business risk and opportunity 14

4. Are biodiversity and ecosystem services issues material? 19

5. Biodiversity and ecosystem services in reporting 23

6. Valuing biodiversity and ecosystem services – trends and current practice 28

7. Conclusions and recommendations 34

Appendix 1: Interviews 36

Appendix 2: Financial statements and Financial reporting standards 37

Appendix 3: Disclosure survey of high-risk sectors 41

Authors 42

Endnotes 43

Is natural capital a material issue? | 3

Foreword

Business and government leaders from around the world are increasingly sounding the alarm about the significant
impact of human activities on the natural environment – affecting its capacity to provide the goods and services we rely
upon, and consequently resulting in a clear cost to business. Such is the concern of business and government that the
recent Rio+20 UN conference on sustainable development saw CEOs of 39 financial institutions, including banks,
investment funds, and insurance companies, make a formal commitment to work towards integrating natural capital
considerations into their products and services.

Shareholders are becoming increasingly engaged with the issue. Alongside this, governments are exploring regulatory or
policy changes to encourage the sustainable use of biodiversity and ecosystem services (BES) through the development
of frameworks for national ecosystem services accounting.

The commitment at Rio+20 demonstrates the growing realisation that all economic activity is either directly or indirectly
linked to natural capital, and action is needed. Nonetheless, this link has yet to be measured and addressed widely by
the corporate sector. As all aspects of business are ultimately linked to and influenced by trends in natural capital, this
highlights a risk to business, which could ultimately lead to business failure.

The question remains: how do we effectively measure, assess and report to business on the economic impacts of
natural capital on business?

ACCA has long recognised that companies ignore the need to account for non-financial issues: natural capital is no
exception. The accountancy profession and the business world need to start urgently considering the extent to which
they are drawing down natural capital and how the erosion of such capital will affect business. New accounting,
valuation and reporting techniques are required; different approaches to risk identification, materiality processes and
the internalisation of externalities are needed.

ACCA, together with its partners KPMG and Fauna & Flora International, has been exploring the relevance of natural
capital to accountancy professionals and the corporate sector. This report aims to continue to show the relevance of
non-financial accounting to its members and students, as well as demonstrating the tangible role the profession can
play in managing corporate impacts and dependencies on natural capital. It demonstrates how some among the
business community are integrating natural capital into their decisions, and that accounting for it is paramount.

Helen Brand, Chief Executive, ACCA


Foreword

Nature underpins business in countless ways. For many years humanity has failed to place a value on the resources
obtained from the environment – freshwater, healthy soils, stable climates, pollination. Our days of securing such
resources at no cost are numbered. As biodiversity and ecosystems are degraded, the ecosystem services that are
derived from them (and form a large part of the natural capital on which we rely) decline. Society, and business as a
part of that, is increasingly living off the capital of the natural world rather than the interest. Basic economic theory
suggests that this is unsustainable.

FFI welcomes a move by regulators to understand the true value of these services to mankind and business and to
take steps to protect them. Such steps are giving rise to a range of risks and opportunities for businesses. These are
hitting their bottom line. As the issue becomes increasingly material to companies, it will increasingly feature in their
risk analyses and disclosures. FFI believes that the measurement and disclosure of this issue is absolutely key to
enabling stakeholders such as investors, government and civil society to hold to account poor performers while
rewarding those who adopt a proactive stance on the issue.

Mark Rose, CEO, Fauna & Flora International

KPMG’s UK Climate Change and Sustainability practice helps clients to understand how global sustainability mega-forces
affect their businesses and to implement sensible solutions that reduce the risks and unlock opportunities. ‘Ecosystems
and Biodiversity’ is one of ten mega-forces that KPMG highlighted in the report Expect the Unexpected, published earlier
this year; KPMG is convinced that businesses will increasingly be held to account for their impacts on the natural
environment and that they need to think now about how they should respond.

Further evidence of the trend came at the recent Rio+20 UN Conference on Sustainable Development, where the CEOs
of 39 financial institutions, including banks, investment funds, and insurance companies, committed to working towards
integrating natural capital considerations into their products and services. This means they will take account of
ecosystem impacts when deciding whether and how to provide finance.

As a result, many businesses could find that their impacts on nature directly affect their credit worthiness, balance sheets
and company values within the next five to ten years, as moves to place an economic value on ‘natural capital’ accelerate.

With that in mind, urgent work should be done to find practical ways to assess and report on the natural capital impacts
of business and to use those assessments in formulating future strategy. CFOs and accounting professionals must be at
the centre of this work, which is why KPMG’s UK Climate Change and Sustainability practice, has been pleased to join
with ACCA and Flora & Fauna International on this important report. By setting out a series of recommendations on
natural capital loss, materiality and disclosure, the report makes a timely and useful contribution to this process.

Vincent Neate, Head of Climate Change and Sustainability, KPMG in the UK


Executive summary

This report investigates the concept of materiality and
how it is used to identify issues for management and Box 1: Definitions of biodiversity and
disclosure. It is aimed at accountancy professionals ecosystem services (BES)
and business leaders. It explores the extent to which
Biodiversity: The variability among living organisms from
materiality definitions currently reflect the increasing
all sources at a species, habitat and genetic level – a
significance of natural capital as a business issue.
constituent of natural capital.
A survey of over 200 accountancy professionals,
interviews with CFOs/senior management from eight Ecosystem: A dynamic complex of plant, animal, and micro-
major companies, a disclosure survey of corporate organism communities and their non-living environment
reporting by 40 organisations in specific sectors, and interacting as a functional unit, e.g. ecosystems include
desk-based research into relevant literature and work deserts, coral reefs, wetlands or rainforests.
in the field were all undertaken as part of this work.
Ecosystem services: The benefits, closely dependent on
The report focuses on biodiversity and ecosystems,
biodiversity, which human beings obtain from ecosystems.
which are specific constituents of natural capital that
give rise to ecosystem services (see Box 1 for definitions
of these scientific terms, see Box 4, page 11 for more
details). The report does not consider the specific impacts Box 2: The value of ecosystem services (ES)
on geological resources as these are routinely included in
• loss of the pollination services from bees in Britain
The
market transactions and accountancy practices.
would cost the UK economy GBP 1.8 billion per annum2
Natural capital is the stock of capital derived from natural • onserving forests avoids greenhouse gas emissions worth
C
resources such as biological diversity and ecosystems, in US$ 3.7 trillion over the long term (net present value)3
addition to geological resources such as fossil fuels and
mineral deposits. It provides the ecosystem products and • costs of cumulative losses of ecosystem services in
The
services that underpin our economy and provide inputs or the 50-year period to 2050 will be equivalent to 7% of
indirect benefits to business. GDP by 20504.

Biodiversity and ecosystem services (BES) are in decline
globally. This trend is predicted to continue as the world’s Figure 1.1: Risk and opportunity identification
population grows and demands on natural resources
increase (see Box 2). Loss of BES exposes the corporate
sector to a range of new risks and opportunities that can Global issues and trends
affect profit, asset values and cash flow. Yet BES issues Risk and opportunity identification filter
are often overlooked in materiality assessments1 owing to
low or uncalculated market-based values. Corporate risks and
opportunities
The concept of materiality as a driver of action Materiality filter
As part of overall corporate governance, companies may
go through a risk-prioritisation process to identify those Company issue
issues on which to focus management effort. Further disclosure
filters may then be employed if companies choose to
disclose specific issues to stakeholders (see Figure 1.1).


Executive summary

Only a very short time ago, we were drawing blank looks
when we mentioned natural capital accounting…
At Rio, everyone is talking about it.i
Rachel Kyte, Vice President for Sustainable Development, World Bank

Material issues are those issues that could influence Natural capital and materiality
the users of financial accounts. Key stakeholders such As shareholder attention on BES issues grows, these
as investors still largely judge corporate performance issues are beginning to feature in management disclosure
on the basis of measures of financial materiality. Many and analysis – the qualitative part of the annual report
environmental and social issues, including BES, are and accounts, or within separate sustainability reports.
rarely considered to be material by companies, despite There are also some instances where an item or issue
increasing concern from civil society. The concept of might be measurable in financial terms and therefore
materiality underlies principles of corporate disclosure. included in the quantitative elements of the accounts.7
Unless the materiality of BES as an issue can be
demonstrated, the arguments for its inclusion within • here have been planning restrictions as a result of
T
corporate disclosures, and by association corporate impacts on natural capital and associated decreases in
strategy and management systems, are weak. Yet action company share price. For example, in 2012 the Canadian
by civil society suggests that BES loss is an increasingly Gold mining company, Infinito Gold, lost permission to
significant issue for business and society as a whole. develop a mine as a result of the potentially significant
impacts on agriculture, forests and endangered
A changing landscape of risks species.8 This led to a decrease in share value of 50%
The Principles for Responsible Investmentii show that 50% (see Figure 4.1, page 20) and a reference in the annual
of company earnings could be at risk from environmental report to material uncertainties regarding the company’s
externalities – equivalent to 11% of global gross domestic ability to continue as a going concern.9
product.5 In addition, full environmental costs of
production in 11 key industry sectors could account for • lean-up costs from the 2010 Gulf of Mexico oil spill
C
a considerable proportion of earnings (earnings before and associated compensation claims for ecological
interest, taxes, depreciation and amortisation – EBITDA), damage have affected both BP’s balance sheet and
this would have amounted to 41% in 2010.6 It is becoming its profit and loss. The company’s 2011 annual report
increasingly accepted that a significant volume of financial included a $3.5 billion provision related to clean-up
flows are not accounted for in corporate accounts. costs and a $7.8 billion provision related to litigation
Furthermore, it is becoming clear that the costs of these and claims associated with the spill.
externalities are being borne primarily by governments
• here have been delays in securing permission to
T
and society more broadly. At least some of these
develop as a result of concerns about natural capital.
externalities will at some point be internalised. Thus, the
For example, Newmont Mining Corporation in Peru
links between BES and corporate value through impacts
experienced significant delays as a result of concerns
on share price are strengthening. Shareholders are
about the impacts of the mine on water availability. This
becoming increasingly engaged on the issue. Alongside
not only resulted in costs associated with the delay,
this, governments are exploring regulatory or policy
but also required an investment of approximately $150
changes to encourage the sustainable use of BES through
million from the investment partner, Minera Yanacocha.10
the development of frameworks for national ecosystem
services accounting and by evaluating the status and
economic value of ecosystem services.

Source: http://blogs.worldbank.org/voices/rios-buzzing-about-natural-capital-accounting
i

The United Nations-backed Principles for Responsible Investment have been devised by the investment community to provide a voluntary framework by which all investors can
ii

incorporate ESG issues into their decision-making and ownership practices and so better align their objectives with those of society at large.


Executive summary

Key findings the perceived immateriality of the issue. In fact, this is at
Perceptions of risks and opportunities associated with odds with stakeholder expectations, including those of
BES are variable within the accountancy profession: not some of the investment community who are looking to
all companies that are considered high risk in terms of companies to disclose on the matter.
their impacts or dependence on BES by stakeholders
Existing financial reporting and disclosure standards can
evaluate that risk. Nonetheless, some of the accountancy
be applied to the issue of BES: in some cases, an item
profession routinely include such issues within business
or issue relating to BES is measurable in financial terms
risk evaluations (see Box 3). Furthermore, a small but
and, therefore, included in the quantitative elements
significant proportion of companies, such as Iberdrola
of the accounts. The interpretation and application of
and EON, include BES in their materiality reviews. In
International Financial Reporting Standards (IFRS), such
general, however, the focus on financial measurement
as those on business combinations, and International
for determining materiality acts as a barrier to the
Accounting Standards (IAS), such as those on impairment
identification of BES issues as material.
of assets, agricultural or intangible assets, could be
influenced by natural capital loss in some sectors. In
Box 3: Highlights from a survey of the ACCA practice, many significant risks and opportunities are
membership unquantified, cannot be easily valued, and are therefore
excluded from the accounts.
A survey was sent out to the ACCA membership to gather
their views and activities on natural capital. Respondents Companies in a range of sectors are exploring the use
were skewed towards those in senior management posts, of valuation techniques to assist in decision making,
such as CFOs, CEOs or other senior managers. alongside other means of identifying and evaluating risk:
some, such as Rio Tinto and Eni, are testing the use of
Key findings included:
environmental economic valuation in informing business
•
60% of respondents agreed that the natural world was
decisions; others are using stakeholder dialogue or
important to their business
enhanced environmental impact assessment processes
• more than half of the respondents had included that include consideration of BES.
natural capital issues in their company’s business risk
evaluations at some point There are a number of barriers to corporate action: these
impede companies from effectively determining risk and
•
49% identified natural capital as a material issue for opportunity exposure on BES. These barriers include the
their business and linked it to operational, regulatory, lack of a standardised business case, low and lacking
reputational and financial risks market values for BES and certain accounting principles.
•
there was a relatively low response rate of less than 1% The accounting and business communities also lack
(218 members) compared with an average response rate awareness on natural capital issues.
of around 3% in other ACCA surveys.
Understanding of the concepts and terminology: although
there is broad understanding of terms such as biodiversity
and ecosystems, the terms ecosystem services and natural
Corporate BES disclosures, as currently practised, are
capital are less well known, reflecting the relatively recent
too limited to provide insights into risk management: a
emergence of these issues as business risks.
handful of companies in sectors with high environmental
impact are reporting substantial detail on BES, but the
majority are reporting little or no information owing to


Executive summary

Recommendations • onsider whether natural capital can be incorporated
c
Targeting its two key audiences – CFOs and accountants – into financial accounts, and engage with the IASB
this report’s recommendations are focused on the five key or local accounting standard setters on how current
themes that form the overarching issues discussed within accounting standards can be improved to address the
the report as follows: topic more fully

• ngage with experts and develop skills: follow
E • ngage with organisations such as IIRC or NCDiii that
e
guidance being produced by expert groups on how want to develop tools to account for natural capital
to address BES.
• earn from those already engaged with these issues,
l
• dentify externalities to internalise impacts on BES.
I and consider how the tools that are used by these
companies can be applied to their own operations.
• efine materiality to ensure that all risks and
D
opportunities posed by BES are picked up. Accountants should:
• raw on their core skills and expertise in accountancy
d
• onsider the use of valuation methods if and when
C to contribute to the development of potential
appropriate. natural capital accounting methodologies to aid the
quantification and management of company externalities
• nhance disclosures on natural capital.
E
• all on accountancy bodies to provide guidance on
c
CFOs should:
how to address natural capital within company annual
• ngage with experts to understand the level to which
e
reports and accounts, as well as sustainability reports
their organisations depend on natural capital; this
would include understanding the degree to which • ollow and track new guidance that becomes available
f
company revenues, costs and going concern status rely within the area of natural capital
on natural capital (both directly and indirectly)
• ngage with experts to increase skills through
e
• nsure that risk and materiality assessments consider
e workshops and training
natural capital; by doing so, CFOs will be able to
determine if the various risks posed by declining • ilot or trial natural capital accounting methodologies
p
natural capital will have a material impact on their with clients, where appropriate, and use this experience
organisations and implement mitigation strategies to to work with regulators on disclosure guidance and
avoid negative impacts on corporate value assurance practices.

• ork with finance teams to develop the skills and
w An emerging challenge
capacity for accurate assessment of a company’s impact The challenge for the accountancy profession will be to
or dependence on natural capital determine when the loss of natural capital will require
an enhanced understanding and approach to business-
• isclose material natural capital impacts and
d
risk assessment and corporate disclosure. Doing so too
dependencies, guiding the development of robust
late may lead to failures when anticipating future risks
disclosure and assurance systems to ensure data quality
and their associated costs to business. It may also lead
• se their board position to educate other board
u to overlooked opportunities to increase supply chain
members on the importance of BES within key resilience, secure and maintain licences to operate, and
management and strategic decisions enter new markets.

iii
Natural Capital Declaration


1. Introduction

To reflect their significance, the challenge to CFOs and accountants
is to ensure BES related externalities are incorporated into risk and
materiality assessments, financial accounts and reporting cycles.
Helen Brand, Chief Executive, ACCA

The Association of Chartered Certified Accountants (ACCA), production, utilities and construction. The review was
KPMG and Fauna Flora International’s Natural Value based on annual reports, sustainability reports and
Initiative (NVI) have come together to investigate the website disclosures.
concept and existing use of materiality and its conflicts
in light of the increasing significance of natural capital as • survey of the ACCA membership was conducted
A
a business risk. This report focuses specifically on issues on natural capital issues (see Box 5, page 13), with
of biodiversity and ecosystem services (BES), which form responses from over 200 professionals.
a part of natural capital. It asks the question, are current
The work was guided by an expert panel with
approaches and guidance on BES enough to enable
representatives from industry, academia and the
corporate management of risk and opportunity?
accountancy profession. The rest of the report is divided
This report is aimed at chief financial officers (CFOs), into the following sections.
accountancy professionals and business leaders as key
• hapter 2 explains what is meant by natural capital
C
gatekeepers of corporate strategy, accounting, reporting
and how it links to BES, business risk, strategy and
and disclosure. It explores the current response to BES
corporate valuation and performance.
issues within the accountancy profession.
• hapter 3 explores BES as a business risk and
C
The approach used combined desk research with other
opportunity, and examines corporate approaches
methodologies.
to identifying and understanding these risks and
• emi-structured interviews were conducted with eight
S opportunities.
CFOs and senior managers (see Appendix 1 for details)
• hapter 4 considers the materiality concept and how it
C
covering the following questions:
is currently applied to BES issues.
o ow are company risk and materiality assessments
H
• hapter 5 reviews current reporting practices, standards
C
performed, and how do they relate to BES?
and guidance on BES and identifies potential gaps and
o hat is the impact of BES-related issues on their
W areas for development.
businesses?
• hapter 6 considers how BES are currently valued
C
o ow well equipped is the current financial and
H within company disclosures, and the development and
sustainability reporting model to consider such issues? adoption of new valuation methodologies.

• review was carried out of disclosure practices within
A • hapter 7 sets out the report’s conclusions and a series
C
40 companies across four sectors broadly considered of recommendations for CFOs and accountancy and
to be high risk with regard to BES: forestry, food audit professionals.


2. iodiversity, ecosystem services
B
and corporate performance

This section defines key terms and concepts used within
this report and set out the links between natural capital, Box 4: Definitions
biodiversity and ecosystem services (BES) and overall
A number of the terms used throughout the report are
corporate performance.
defined below.
Biodiversity, ecosystem services and Natural capital: The stock of capital derived from natural
natural capital resources.
Stocks of capital interact to support economic activity.
Biodiversity: The variability among living organisms from
Such capital can be classified into six categories:
all sources at a species, habitat and genetic level – a
manufactured, human, social, intellectual, financial
constituent of natural capital.12
and natural.11
Ecosystem: A dynamic complex of plant, animal, and micro-
Natural capital is the stock of capital derived from natural organism communities and their non-living environment
resources, such as biological diversity and ecosystems interacting as a functional unit,13 e.g. ecosystems include
along with geological resources such as fossil fuels and deserts, coral reefs, wetlands or rainforests.
mineral deposits. It provides the ecosystem products and
services that underpin the global economy and provide Ecosystem services: The benefits, closely dependent on
inputs or indirect benefits to business (see Box 4). biodiversity, that human beings obtain from ecosystems.
These can be classified into four categories:
This report focuses on biodiversity and ecosystems,
provisioning services: goods that ecosystems produce,
•
specific constituents of natural capital that give rise
such as food and water
to ecosystem services. Geological resources are not
considered because they are routinely included in regulating services: natural processes regulated by
•
market transactions and accountancy practices. ecosystems such as flood and disease control
cultural services: benefits obtained from ecosystems
•
Business is dependent on ecosystem services
such as recreation and spiritual values
Figure 2.1 (page 12) shows the links between natural
capital, BES and corporate value. It shows that, in supporting services: services that maintain the
•
addition to being reliant on the other types of capital (i.e. conditions for life on Earth and all other ecosystem
human, manufactured, etc.) that are perhaps more familiar services, e.g. photosynthesis.14
to the corporate world, business is dependent on the
Biodiversity offset: Measurable conservation outcomes
BES aspects of natural capital and the ecosystem services
resulting from compensation for significant residual
derived from them.
adverse biodiversity impact, in particular, those that persist
Companies also have the potential to have impacts on even after appropriate prevention and mitigation measures
sources of natural capital through their activities and have been taken.15
outputs. Importantly, these impacts can be either positive
or negative, resulting in changes in corporate value such
as improved asset values or decreasing profit margins.


2. Biodiversity, ecosystem services and corporate performance

Figure 2.1: Links between natural capital, biodiversity, ecosystem services and corporate value.

Capital
Dependencies
Manufactured Human Social
Economy and society
Impact Intellectual Other Financial

Business Interactions
n Dependencies: raw materials, provision of a
stable operating environment, etc.
n Impacts: e.g. may be negative through pollution Dependencies Natural
or overexploitation, or may be positive through Ecosystem
conservation activities Biodiversity services
Impact

Impact on corporate value
n Changing asset values/share price
n Impact on intangible assets
n Going concern issues

Links between BES and performance unlikely that the plant would remain economically viable
Two-thirds of the biodiversity and ecosystem services owing to high water costs.18
(BES) on which society and business relies are either
The links between BES and corporate value through
degraded or in decline.16 The costs of these cumulative
impacts on share price are strengthening as the extent
losses of BES from 2000 to 2050 will be equivalent to 7%
of corporate reliance on BES becomes clearer. These
of GDP by 2050.17 This continued loss of BES will have
links are likely to strengthen further as governments
implications for long-term business performance.
take steps to maintain stocks of natural capital in the
BES are aspects of natural capital that are rarely valued face of increasingly competing demands of resource
by financial markets despite their potential to influence users. Over 30 countries now have some form of
corporate performance significantly by exposing legislation in place to enable compensation for the
organisations to different risks and opportunities. impacts of development on BES. The emergence of
For example, a Volkswagen plant in Puebla, Mexico, national-level reviews of the status of BES in countries
faced significant water scarcity issues. The company such as Brazil, India, the UK, Germany and the
helped fund the reforestation of the catchment area that Netherlands may lead to further regulation19 as
feeds the water table and, thus, has avoided significant governments act to address the findings. In the UK,
loss of invested capital. Without this investment it is for example, a National Ecosystem Assessmentiv showed

The UK National Ecosystem Assessment (UK NEA) was the first analysis of the UK’s natural environment in terms of the benefits it provides to society and continuing economic
iv

prosperity. Part of the Living With Environmental Change (LWEC) initiative, the UK NEA commenced in mid-2009 and reported in June 2011.


2. Biodiversity, ecosystem services and corporate performance

Indiscriminate draw-down of Natural Capital poses a risk to our
business today and much more so in the future. The severe under
valuation and degradation of Natural Capital constitute a real challenge
to businesses in general, in achieving longer term strategic objectives.
James Singh, Executive Vice President
Chief Financial Officer (recently retired), Nestlé

that 30% of the UK’s ES were degraded or in decline.
The UK has put in place a range of advisory groups and Box 5: Insights from the ACCA membership survey
pilot projects to inform future policy action to address
The global ACCA membership was surveyed to capture
this decline.20
members’ views on natural capital. In all, 218 members
The issue is changing from one of reputational risk, responded (less than a 1% response rate). A normal
impacts on intangible assets and weak links to response rate is in the region of 3%. A significant proportion
shareholder value, to one of operational, financial, and (18%) of these were senior personnel– a higher level
market risk and competitive advantage, all of which have than for most ACCA member surveys (approximately 13%),
greater links to shareholder value. Hence, for some suggesting that the issue had captured attention at a
sectors, BES loss is becoming an issue that can constrain senior level.
corporate success through impacts on corporate value and Key findings
corporate performance. Associated British Ports, the UK’s The issue is perceived to be important, but not broadly
largest port operator, lost 10% of its stock market value understood; the low response rate suggests that the
after the UK government prevented its development of a accountancy profession does not consider natural capital
container terminal. The decision was made as a result of issues routinely.
concerns over the potential impact on important wildlife.21
•
ACCA members had some understanding of the terms
How does an ecosystem services (ES) ‘biodiversity’ and ‘ecosystems’.
approach build on traditional environmental • term ‘ecosystem services’, however, was less well
The
management? recognised.
ES approaches are a holistic way of examining
environmental change. Analyses include understanding •
60% of respondents agreed that the natural world was
current ES availability and identifying those who use or important to their business.
rely on them. This can be extended to consider the impact
of new projects, policies and schemes and the
corresponding change in ES, in terms of both the level
and change in the types of ES available. Certain
Key messages
• ES are part of natural capital, and business is
B
categories of ES are underpinned by ‘supporting services’
dependent on them.
and these in turn are underpinned by biodiversity. ES
approaches consider the broader needs of stakeholders • he decline in BES is giving rise to a range of risks
T
and the overall system in which the impact is occurring, and opportunities to which business is exposed.
rather than a single output or impact. These approaches
can be used to build an understanding of access to ES in • urrent knowledge of these issues and risks is
C
the future and may provide greater insights into future limited within the accountancy profession.
limits of natural resources. Thus, the outputs of such
analyses can aid the development of regulatory
requirements, risk-mitigation strategies and opportunities.

The next section will explore how the issue of BES has
become increasingly important to business, and consider
how the issue links to corporate risk and opportunity.


3. iodiversity and ecosystem services
B
as a business risk and opportunity

The following section sets out the business risks and If the UK Company Law Reform were
opportunities associated with BES. It identifies the status conducted now, it would undoubtedly
of BES risk evaluation, and considers the tools available make specific reference to biodiversity
to companies. and ecosystem services risks.

Risk and opportunities management Mike Kelly, Head of Corporate Social
Undertaking a broad evaluation of corporate risk and Responsibility, KPMG in the UK
maintaining a risk register are considered routine parts
of strong governance procedures. Companies must go
through a risk prioritisation process to identify those
Figure 3.1: Risk and opportunity identification
issues on which to focus management effort. Further
filters are then employed to decide which issues are
sufficiently material for disclosure in communication to
stakeholders (see Figure 3.1). Global issues and trends

The 2006 reform of UK Company Law22 made specific Risk and opportunity identification filter
reference to the fact that company directors have a
responsibility to consider a range of issues that influence Corporate risks and
corporate performance, including environmental issues, opportunities
and, in the case of quoted companies, are expected to
report on such issues where to do so is necessary for Materiality filter
an understanding of the development, performance and
position of the business. Company issue
disclosure
Linking BES loss and risk and opportunity
management
Impacts and dependence on BES can create business
risks and opportunities through changes in: the supply of
inputs or resources; regulation and licensing conditions;
and customer demand and access to markets, including
the securing of finance and insurance (see Table 3.1)23,24,27
Financiers from the international agribusiness company,
Olam, have indicated that they examine BES
management when making decisions on plantation
expansion, believing that a proactive stance on BES
can facilitate access to finance.

By integrating BES issues into decision making and
forward planning, businesses can enhance their
performance by reducing and mitigating the
associated risks, and realising opportunities.25


3. Biodiversity and ecosystem services as a business risk and opportunity

Table 3.1: Risks and opportunities associated with BES 26

Type Risks (blue) and Opportunities (green) Examples
Scarcity and/or reduced quality of raw Profit impacts: Loss of access to pollination may lead to declining crop yields; a study in Costa
materials, reduced output and productivity, Rica showed coffee yields to increase by 20% in proximity to forest edges, where access to
disruptions to business operations, supply pollinators was higher.27 This may lead to a need to write down stock value and affect profits of
Operational

chain risks companies supplying those pesticides recently implicated in the global loss of pollinators. Four
European Union countries have enforced suspensions/bans on the use of these pesticides.28
Improvement to quality of raw materials,
increased output and productivity, Raw material quality: In order to protect the quality of the raw water United Utilities supplies
sustainability of business operations, supply to its customers, the company has implemented the Sustainable Catchment Management
chain reliability Programme. The programme started in 2005 and seeks to restore 20,000 hectares of land owned
by the company, which will improve the quality and reliability of the water table.29

Restrictions on land access, litigation, Litigation risks: In 2011, Australian logging company, Concord Pacific Limited, was ordered to pay
Regulatory and legal

resources quotas, pricing and compensation up to US$97 million for environmental damage caused by illegal logging it had carried out.30
mechanisms
Anticipation of regulation: Infrastructure group Balfour Beatty has undertaken a pilot test
Land access, meeting legislation and resource linked to Defra’s biodiversity offsetting consultation programme. The group’s participation will
quotas (including lower transition costs assist in ensuring that appropriate legislation is developed, while Balfour Beatty will benefit from
by early anticipation of such), proactive developing positive working relations with the government, enhancing skills, and demonstrating
implementation of compensation measures leadership in the field.

Potential damage to brand or the licence to Reputational risks: Greenpeace targeted Nestlé in a high-profile campaign linked to the
operate company’s product KitKat and its use of palm oil from sources linked to rainforest destruction.
Reputational

The company has since put in a range of measures to ensure sustainable sourcing of palm oil.31
Potential improvements to brand or the One of the world’s largest paper manufacturers, APP, has been targeted by Greenpeace following
licence to operate the NGO’s exposé of illegal logging practices in which APP has been involved, resulting in the
withdrawal/suspension of contracts from clients, including from significant purchasers such as
Xerox and Danone.32

Failing to match developments in consumer Access to markets: The Union for Ethical Biotrade surveyed 8,000 people in eight countries
preferences, failing to meet purchaser (Brazil, France, Germany, India, Peru, Switzerland, UK, USA), finding that 85% of consumers look
Market and products

requirements for natural ingredients in cosmetic products and 69% are concerned with the sustainability of
ingredient sourcing.33
Sales growth: The launch of Unilever’s Rainforest Alliance Certified tea in Australia saw 12%
Matching developments in consumer growth in sales.34
preferences, meeting purchaser requirements
Purchaser requirements: UK government procurement policy requiring all timber-based products
used internally to be from legal and sustainable (including BES considerations) sources.35

Increased cost of capital and/or the inability Cashflow, operating costs and licence to operate: German bank West LB recently adopted a
Financing

to meet lending requirements new environmental policy which precludes the firm from financing offshore activities in the Arctic,
owing to concerns about technical and environmental risks. In addition, insurer Lloyd’s of London
Ability to potentially reduce cost of capital has published a report discussing the vulnerability of ecosystems in the Arctic, emphasising that
and/or meet lending requirements the risks associated with drilling in the region are significant.36



Table 3.2: Sectoral risk, biodiversity and ecosystem services

Sector 38
Related ecosystem

and biotechnology

Financial services
Household goods
General retailers

Pharmaceuticals
Real estate and

Leisure, hotels

Food and drug
Type of risk 37

infrastructure
Construction

and tourism
Oil and gas

Agriculture
services

Telecoms
and food

retailers
Forestry

Utilities
Mining

Operational
Scarcity or quality of raw materials: limited natural P,R
resources, e.g. timber, fish stocks, fresh water ü ü ü ü ü ü ü ü ü ü ü ü

Reduced output or productivity: degraded natural R,S
processes, e.g. water cycling, soil nutrients, ü ü ü ü
pollination

Disruptions to business operations: natural R
hazards due to degraded ecosystems, e.g. flooding ü ü ü ü ü ü ü ü ü ü ü ü ü ü

Supply chain risks: impacts on downstream P,R,C,S
operators and consequently security of supply or ü ü ü ü ü ü ü ü
increased costs
Regulatory and legal
Restrictions on land access: restriction to P,C
operation in ecologically sensitive sites, e.g. ü ü ü ü ü ü ü ü
protected areas

Litigation: if causing or have caused damage to P,R,C
ecosystems ü ü ü ü ü ü ü ü ü ü

Resource quotes: restrictions on businesses using P
ecosystem services ü ü

Pricing and compensation: growth of compensation P,R,C,S
mechanisms and price differentials linked to issue ü ü ü ü ü

Reputational
Damage to brand or licence to operate: if associated P,R,C,S
with adverse impact on ecosystem services ü ü ü ü ü ü ü ü ü ü ü ü ü ü

Market and products
Consumer preferences: trends and preferences for P,C
products with reduced ecosystem services impacts ü ü ü ü ü ü ü ü ü

Purchaser requirements: supply chain P,R,C,S
requirements that include safeguards on ecosystem ü ü ü ü ü ü ü ü
services
Financing
Cost of capital or lending requirements: P,R,C
restrictions on finance to companies negatively ü ü ü ü ü ü ü ü ü
affecting ecosystem services

P= Provisioning services, R= Regulating services, C= Cultural services, S= Supporting services;
Colour code for level of risk of each sector: n High risk n Medium/High risk n Medium risk n Low risk



Natural resources such as timber and water are
fundamental to Mondi. There is a strong link between
license to operate and these issues. They are potentially
an area of critical risk for the company.
Andrew King, CFO, Mondi

Different sectors vary in their risk and • wareness: the understanding of ecosystem services
A
opportunity profile and their links to business performance is relatively
Sectors vary in their exposure to BES risks and low within the accountancy profession39 – less than
opportunities. Table 3.2 sets out this sector variation one-third of responding ACCA members were familiar
(particularly focusing on risks), compiling the results with the term ‘ecosystem services’
of a series of studies from investors, advisers to the
• kills: the industry currently lacks the skills and
S
investment industry and professional services firms
experience to be able to understand ES issues and their
(as referenced in the table).
potential impact on corporate value and performance –
Approaches to identifying risks and 70% of ACCA members surveyed said that they needed
opportunities training on the issue. Opportunities to build this
The study involved interviews with CFOs and senior capacity are emerging through specific training courses.
managers of companies operating in high-risk sectors, See Box 7 (page 18).
or organisations that are taking a leadership position • nherent challenges: evaluating the risks and
I
in their management of natural capital. These highlighted opportunities associated with BES is inherently difficult.
a range of different approaches to identifying risk Estimating their financial value for use in making
and opportunities related to BES components of decisions is challenging and methodologies to enable
natural capital. this are still developing.40 Additionally, the period over
In some cases, the approach was driven largely by which BES issues become significant may frequently
regulatory obligations while other approaches were much exceed that over which business risks and opportunities
broader, taking into account the views of stakeholders are identified.
from inside and outside the company. • ompetitiveness issues: being a ‘first mover’ on BES
C
An approach common to many of the interviewees was issues could confer competitive advantage to proactive
the use of a risk register to monitor and manage risk. companies through differentiation, increased brand
Company directors reported that they would periodically value or the anticipation of regulatory change and
review their operations and pull together a long list of all associated costs.
the risks affecting their businesses. In order to prioritise • etrics: There is a lack of straightforward and
M
the risks, an estimate of the probability and financial internationally accepted metrics for BES issues, making
impact of each would be made. Mitigation plans would them more difficult to report, manage and monitor
be driven by this assessment, and the register would be consistently.
tracked over time to ensure that the risk register and
mitigation plans are kept up-to-date. • otential for increased risks: there is concern that
P
measuring or valuing impacts and dependence on
Barriers to understanding/acting upon BES may leave companies open to additional costs,
BES-related risks and opportunities reputational risks or increased regulation.
A number of barriers to companies’ effective determination
of risk and opportunity exposure on BES were identified
through interviews with CFOs, a survey of ACCA members,
and through desk-based research, as follows.



Tools and guidance available
Box 6: Insights from the ACCA membership A number of approaches, assessments and tools have
survey: natural capital and business risk been developed to assist the integration of BES risks
and opportunities into business performance systems.41
The accountancy professionals who responded to the ACCA
Business for Social Responsibilityv has undertaken a
survey identified a range of risks associated with natural
series of analyses of ecosystem-services-related tools and
capital. The most significant were as follows.
approaches which are useful sources of further guidance,
•
Reputational risk featured as a key concern. such as the WBCSD’s Corporate Ecosystem Services
•
More than 50% of respondents considered disruption Review (ESR) and the NVI’s The Ecosystems Services
to physical operations, supply chain risk and regulatory Benchmark.
risks as potentially significant or currently significant.
•
77% of respondents had identified natural capital as Key messages
a significant business risk at some point, and 25% had • ES issues are being included in the risk
B
identified such risks often or always within a business evaluations of some companies.
risk evaluation.
• ools are being developed to assist companies
T
•
34% of members in sectors considered ‘high risk’ in identifying BES risks and opportunities.
(as identified in Table 3.2) in terms of BES impact/
dependencies have never considered natural capital • arriers such as lack of awareness and expertise,
B
issues within their business-risk evaluation. competitiveness issues, concerns regarding risk
exposure and the long-term nature of BES risks
are hampering further integration of BES into
business risk and opportunity evaluations.
Box 7: Case Study: Business Ecosystems
Training (BET) developed for the World
Business Council for Sustainable Development
(WBCSD) by KPMG
WBCSD, in conjunction with KPMG and a member company
steering group, developed and launched ‘Business
Ecosystems Training’ in 2012 to improve the understanding
of managers and employees of their membership company’s
direct and indirect impact and dependence on BES.
The course was commissioned following a survey of
member companies by the WBCSD, which identified
an appetite for increased awareness of BES issues and
concepts. So far, KPMG has trained over 60 representatives
across a range of business sectors in different countries,
with other international NGOs also making use of the
materials available.

A global business membership organisation, based in the USA, that promotes sustainability in businesses.
v


4. re biodiversity and ecosystem
A
services issues material?

This section looks at the extent to which BES are
considered a material issue for public disclosure, and Box 8: Definitions 45
whether or not this corresponds with those companies
Materiality: In financial reporting and auditing, an item
and sectors that have been identified by investors and
(usually economic in nature) is material if its omission or
other stakeholders as having material issues. The
misstatement could influence the users of the financial
processes that companies are using to reach a conclusion
accounts, with ‘users’ frequently defined as shareholders,
on materiality are also identified.
investors and lenders.
The importance of materiality Externalities: A consequence of an action that affects
The concept of materiality relates to issues that could someone other than the company undertaking that action,
influence the users of financial accounts (see Box 8). and for which the company is neither compensated nor
Sustainability reporting has its own definition of penalised through the markets. Externalities can be either
materiality, which includes impacts on broader corporate positive or negative.
stakeholders42 and focuses on a broader set of issues
Environmental externalities: include externalities to
over longer periods.43
ecosystems and ecosystem services that may affect people,
Key stakeholders, such as investors, still largely judge buildings and infrastructure, and other economic activities
corporate performance on the basis of measures of (e.g. from air emissions).
financial materiality. Many environmental and social
issues are rarely considered to be material by companies,
despite increasing concern from civil society. BES Chinese construction and materials industries was
management is one such issue. estimated at US$12.2 billion47 annually. If this is compared
with the unit cost of timber using the prevailing market
The concept of materiality underlies principles of
price, it is clear that the price paid for timber by the
corporate disclosure. Unless the materiality of an issue
Chinese construction market does not reflect its true
can be demonstrated, the arguments for its inclusion
cost48 in terms of lost ES such as watershed protection,
within corporate disclosures, and by association corporate
erosion control and recreational opportunity.
strategy and management systems, are weak. If a broad
definition of materiality is followed that includes The materiality of an issue is determined on the basis of
consideration of stakeholder views (investors, its financial impact and probability of occurrence. It flows
communities, civil society and government) and longer- directly from broader business risk and opportunity
term business risks (see Chapter 3), BES issues are more evaluations. Interviews with a number of CFOs identified
likely to be considered material, enabling companies to that BES issues are rarely considered material as their
consider an emerging set of risks and opportunities.44 economic impacts are often small or occur in the future.
Despite this, BES issues (see Chapter 3) are beginning to
Natural capital and materiality feature in management disclosure and analysis, the
Using the BES elements of natural capital rarely represents qualitative part of the annual report and accounts, as
a direct cost of doing business unless they are used as a identified in a number of the companies examined in the
specific input into production, e.g. timber, but instead disclosure survey of this report (see Chapter 5).
affects wider society in the form of environmental
externalities. As a result, BES are often overlooked in The survey of ACCA members suggests that 82% of risks
traditional materiality calculations46 owing to low values and opportunities highlighted in company assessments
or values that are not based on markets. For example, an are short to medium term (up to five years) with only
analysis of the value of forest lost as a result of the 11% perceived as affecting businesses in the long term


4. Are biodiversity and ecosystem services issues material?

(up to ten years). Favouring short- to medium-term Figure 4.1: Infinito Gold lost more than half its value when
projections when identifying material issues tends to the Costa Rican court annulled a gold mine concession 51, 52
counter the recognition of BES issues as material
because they tend to manifest over longer periods.
24th November 2010 Costa Rican
government annulled Infinito’s gold
There are, however, some instances where an item or mine concession owing to concerns 0.5
issue might be measurable in financial terms and about its potential impacts on forests,
endangered species and agricultural
therefore included in the quantitative elements of the livelihoods
30th November 2011
Costa Rican government 0.4
accounts. Some examples are given here.49 upholds its decision

• ignificant and sustained drops in share price may
S 0.3
occur as a result of the refusal of planning permission
motivated by environmental concerns. Canadian gold 0.2
mining company, Infinito Gold, lost over 50% of its
share value as a result of the withdrawal of a mining
0.1
concession in Costa Rica due to concerns about the
potential impacts on agriculture, endangered species
and forests (see Figure 4.1). This led to a reference in Oct 2010 Apr Jul 24/11/2010 Apr Jul Oct 2012
the audit accounts to material uncertainties regarding
the company’s ability to continue as a going concern

• lean-up costs from the 2010 Gulf of Mexico oil spill,
C Interest among the traditional users of financial
and associated compensation claims for ecological accounts is increasing
damage, affected both BP’s balance sheet and its There is evidence that interest in these issues among the
profit and loss. In the company’s 2011 annual report, traditional users of financial accounts is growing. In 2011
a $3.5 billion provision related to clean-up costs, and alone the following events occurred.
a $7.8 billion provision related to litigation and claims
• he International Finance Corporation’s performance
T
associated with the spill.
standards were reworked to place greater safeguards
• ewmont mining company in Peru experienced
N on BES. This will significantly affect project finance
significant delays as a result of concerns regarding through the 72 financial institutions currently committed
the impact of the mine on water availability. to the Equator Principles. These now require companies
Overcoming these concerns has required a $150 million to demonstrate no net loss of biodiversity in areas
investment from partner, Minera Yanacocha, to build identified as ‘natural habitats’. In critical habitats,
water reservoirs to compensate for the mine’s impact a company must demonstrate a net gain in biodiversity.
on local water supplies.50 This may lead to increases in the level of rehabilitation
provisions required at locations operating in ecologically
Such incidents may, for example, result in impairment of sensitive sites. Failure to comply with the requirements
assets, profit reductions, and even a need for increased of potential financiers may significantly reduce
provisions or qualifications regarding the company’s investment return53 for those companies reliant on
ability to continue as a going concern. such finance.


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