Our Common Future
The impact of businesses on the environment and the communities that they are linked to is a concern that has been at the forefront of public opinion for many years now. Since the days of the great Enron scandal in which financial records were tampered with to cheat shareholders out of their money and the more recent Deepwater Horizon incident in which BP directly contributed to massive ecological damage in the Gulf of Mexico, the standard of accountability for companies has increased significantly.
In a 1987 United Nations report entitled “Our Common Future”, the UN presented one of the earliest definitions of sustainable development, in which it stated that “In essence, sustainable development is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development; and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations.”
With respect to the operations of business entities, many of which make profits which dwarf the GDPs of some countries, applying the principle of sustainability means that growth, material enrichment and the provision of goods and services to consumers does not come at the cost of the health and wealth of future generations. This can encompass a number of areas, many of which are covered under the guidelines of ESG, which suggests how companies can adopt business practices which respect the natural environment, society at large and its own internal corporate obligations. In this article we are going to consider, in particular, how companies can adopt practices which regulate its utilisation of natural capital in a responsible and sustainable way.
The Concept of Natural Capital
Natural capital refers to the stock of renewable and non-renewable natural resources, such as plants, animals, air, water, soils and minerals that combine to yield a flow of benefits to people. Essentially anything that occurs naturally which we have found ways of converting into energy sources, building material, consumables and other such products and services comes under the spectrum of natural capital.
What has become increasingly important for us to pay attention to in recent years is the means and magnitude to which we exploit such resources for our needs, and the impact that such exploitation can have on the ecosystems that we are intrinsically dependent on. Industrial business practices in particular can have heavily detrimental effects on the environment through carbon emissions and the contamination of soil and groundwater, which can make the future utilisation of these resources challenging.
Source: Natural Capital Protocol
A Compelling Case for Sustainable Business Practices
The Deepwater Horizon incident mentioned in the opening paragraph, for instance, is a vivid example of how a failure to adhere to the principle of sustainability in operational practices can have disastrous effects on both the company in question and the wider environment and community it rests within.
In the incident, a concrete core installed by a third party contractor, Haliburton, ruptured when a surge of natural gas blasted through it. The gas then travelled upwards and ignited, resulting in the death of 11 workers and injuring 17 others, and eventually causing the rig to capsize and sink. This then led to a major spillage of oil into the sea which was estimated to be somewhere between 1,000 to 60,000 barrels worth per day.
It was later discovered that the rupture occurred because the concrete core was too weak to withstand the pressure, as it had been built using a mixture which included nitrogen to accelerate the curing process. As a direct consequence of the incident, multiple industries were affected, including the fisheries and tourism sectors, causing a major economic slowdown in subsequent years. The environmental damage to the local ecosystem and biodiversity in the area was also substantial, as thousands of birds, mammals and sea turtles were wrapped in oil.
Source: Britannica
It is worth noting that 300,000 sea turtles from breeds originating from other regions around the world were affected by the incident, pointing to the global implications of the disaster. The coral reef in the immediate area also sustained severe damage. A report by the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling concluded that the spill occurred as a result of a lack of proper oversight by the relevant U.S. regulatory bodies as well as the implementation of “time-saving measures” by BP and its partners with respect to the installation of the aforementioned concrete cap in the oil drilling mechanism.
Source: Statista
The above case study serves as a compelling reason for ensuring that operational practices are conducted with the principle of sustainability in mind. Hasty decisions aimed at reducing costs and expediting profits at the expense of human safety and natural capital (like aquatic systems and oil reserves) run counter to the notion of sustainability and should act as a clear red flag. When these elements are ignored in the interest of short term games, the worst case scenario is a lose-lose situation for all stakeholders.
The Business Argument for Sustainability
Aside from the obvious environmental and sociological reasons for adhering to sustainable business practices, not to mention the economic consequences of ignoring them (BP spent in excess of $ 40 billion US dollars in cleanup and recovery efforts), there are also very practical, day to day business arguments for adhering to sustainable business practices.
One such argument is that companies which have principles of sustainability clearly embedded into their business conduct have an easier time attracting and retaining employees. A study conducted by Unily, a UK based intranet company, showed that 65% of respondents were more likely to work for a company with a strong environmental policy.
Another practical benefit of applying the principle of sustainability can be seen in the form of supply chain resilience. Building sustainable supply chains, which includes improving the traceability and transparency involved in supply chain management, can prevent supply chain disruptions and improve stakeholder confidence.
The consumer argument is perhaps the most compelling from a business standpoint. The idea here is that consumers are more likely to pay for goods or services that have been delivered through sustainable means, a standpoint that is receiving increasing validity as evidenced by a recent study by Simon-Kucher and Partners. While the number of respondents willing to pay more for sustainably produced goods and services remains modest (34%), a whopping 85% have reported becoming ‘greener’ in their purchasing in the last 5 years.
Source: Simon-Kucher Global Sustainability Study 2021
Planning for Sustainability
Now that we have a better understanding of the concept of Natural Capital and the importance of ensuring that sustainable business practices are adhered to, let’s take a look at how businesses can align themselves with sustainability outcomes through strategic business planning.
A company wishing to leverage on a sustainability strategy which prioritises natural capital utilisation first needs to ensure that it is in alignment with the Natural Capital Protocol (NCP). The NCP was developed by the Capitals Coalition, an international collaborative organisation whose goal is to allow businesses to identify and measure their relationship with natural, social, human and produced capital, to enable more responsible and sustainable decision making.
Source: Pexels
The NCP is the globally accepted standard for measuring and valuing a business’s direct and indirect impacts and dependencies on Natural Capital, translating it into risks and opportunities which can be used in decision making processes. The NCP essentially provides a reporting framework which companies can use to record, monitor and assess their businesses interactions with Natural Capital, allowing them to then develop strategies for improving these reciprocal interactions in ways that emphasise the principle of sustainability. A well conducted natural capital assessment using the NCP framework can be integrated into existing business processes, risk assessments, procurements, operational delivery plans, financial planning and board papers.
In adopting the framework of the NCP, companies will have to ask themselves questions such as why they are conducting a natural capital assessment, what the objective of the assessment is, and what their scope for the assessment will be. The assessment will also cover areas such as which impacts or dependencies the company considers to be material, how they intend to measure those impacts and dependencies, and ultimately how they will take action based on the data they have collected.
Source: Natural Capital Protocol
The NCP is a great starting point for companies looking to introduce sustainable practices into their daily operations which improve their relationship with Natural Capital. For companies that already have a sustainability plan in place, the NCP provides a good benchmarking mechanism, allowing them to revise and refine their sustainability strategy and bring it into alignment with the optimised standards of the NCP.
Other Means of Achieving Sustainability
Sustainability reporting in the form of the NCP as above is useful as it allows companies to make a better assessment of their position with regards to non-financial performance while also allowing them to remain accountable to various stakeholders and the public at large. It can also highlight the ways in which the company can best leverage its available resources to bring itself into alignment with sustainability targets.
Taking action is of course the next stage in achieving sustainability and companies can approach this from a three tiered perspective. Firstly, by making changes internally. Secondly, by reviewing the way in which they engage with other businesses. And finally, by taking steps to engage with society and the wider community towards achieving sustainability targets.
Source: T.Bansal, 2022
From an internal standpoint, innovation is one such way in which companies can work towards sustainability targets. By emphasising principles of sustainability in the development of their product and services, such as utilising biodegradable or reusable materials, or developing climate friendly green technologies, companies can reduce the stress on natural capital while still achieving their bottom lines.
In terms of their engagement with other businesses, companies can achieve better sustainability by improving supply chain practices. By using preferred supply chains, improving traceability and transparency, and monitoring the supply chain practices of affiliated businesses, companies can improve efficiency, avoid disruptions and keep themselves accountable in how they make use of natural capital sources.
With regards to achieving sustainability from a social perspective, community engagement is an excellent way from companies to remain committed to sustainability targets. By identifying the geographies, platforms and issues which are most appropriate, community engagement can be an effective means for companies to learn how to better incorporate sustainable business practices into their operations as well as get a better gauge of the sentiments and expectations of customers.
Conclusion
The importance of natural capital both from a purely ecological perspective as well as from a business standpoint cannot be overstated. As society at large becomes more aware of the importance of preserving a balance between human activity and the natural environment, the impetus on businesses to ensure their practices are as sustainable as possible is more relevant than ever.
As companies continue to strive towards achieving better practices in sustainability, the need to leverage on a detailed framework which most effectively aligns them with their obligations towards natural capital is both essential and vital. Developing an effective sustainability strategy benchmarked against accepted international standards is the first step towards developing a healthy relationship between corporate activity and the natural environment.
Source: Pexels
Moving ahead, perhaps what is most important is that businesses begin to take note that conventional practices which prioritise short term shareholder interests need to be replaced with long-term, sustainability driven practices that earnestly consider the wider interests of stakeholders at all levels. Doing so will not only improve the resilience of a businesses operational strategy but also safeguard our most precious natural resources for many generations to come.
