What is natural capital and social capital accounting?
Natural and social capital accounting is the process of considering the value of the environment and society in business decision making and / or reporting.
Natural and social capital accounting involves the identification, quantification and potential monetization of both how your business activities have an impact on the environment and society, and how your business depends on them. Impacts could include pollution or training of employees, and ‘services’ such as clean air, water or community relationships.
To monetize or not to monetize?
Many companies are using economic valuation of natural and social capital. Monetization can either be in terms of financial values to companies and shareholders, or societal values to broader stakeholders.
Monetary values often resonate much more with financial decision makers and are a means of comparing different issues e.g. carbon emissions and water consumption to facilitate trade-offs. However, assigning monetary values to some issues can be very challenging. In addition, it may not be appropriate for all issues to be monetised for example, where there is a threshold which the business is not willing to cross, as might be the case when considering the risk of fatalities or impact on culturally important sites.
Five actions for finance teams to take
As the custodians of key data processes and metrics, finance teams are increasingly recognising the commercial value of broadening the information upon which decisions are made. This broader information set helps ensure all relevant factors and risks are taken into account. Finance teams have a crucial role in ensuring that:
- All natural and social capital issues that may have a material impact on a financial decision are considered
- Underlying data is robust, comparable and reliable and can be trusted by decision makers
- Collection of data on natural and social capitals is efficient, and where appropriate, automated within financial data collection processes
- Natural and social costs and benefits are included in management information and external reporting where appropriate
- Appropriate targets are set along with key performance indicators that are measureable and comparable, and helping to track these
