Is natural Capital a Material Issue?



GLOBE-Net, November 13, 2012 – A new collaborative report explores the preparedness of the accounting profession to respond to declining natural capital.

The report aimed at Chief Financial Officers (CFOs), accountancy professionals and business leaders – as key gatekeepers to corporate strategy, accounting, reporting and disclosure – investigates the concept of materiality and how it is used to identify issues for management and disclosure.

[stextbox id=”custom” float=”true” width=”200″ bcolor=”add3d5″ bgcolor=”add3d5″ image=”null”]Natural capital – the stock of capital derived from natural resources such as biological diversity, ecosystems and the services they provide – is in decline globally.[/stextbox]

The loss of natural capital exposes companies to a range of new risks and opportunities that can impact profit, asset value and cash flow.

Civil society is increasingly concerned about the loss of natural capital, but are companies  identifying and measuring these issues? When do they become material?

ACCA (The Association of Chartered Certified Accountants), KPMG and Fauna & Flora International have investigated the concept and existing use of materiality in light of the increasing significance of natural capital as a business risk.

Natural Capital is the stock of capital derived from natural resources such as biological diversity and ecosystems along with geological resources such as fossil fuels and mineral deposits. It provides the ecosystem products and services that underpin our economy and inputs or indirect benefits to business. 

This report focuses on biodiversity and ecosystems, specific constituents of natural capital that give rise to ecosystem services. Geological resources are not considered as they are routinely included in market transactions and accounting practices.

The key findings of this report:

  • Perceptions of Natural Capital as a risk are variable within the accountancy profession
  • Current disclosures on Natural Capital, as currently practiced, are too limited to provide insights into risk management,
  • A handful of companies in high environmental impact sectors are reporting substantial detail on aspects of Natural Capital, but the majority are reporting little or no information due to the perceived immateriality of the issue, and
  • There are a number of barriers to corporate action such as the lack of a standardised business case, low or unclear market values for some aspects of Natural Capital and some accounting principles

The report explores the current response of the accountancy profession to the increasing importance of natural capital as a business issue.

It involved a survey of over 200 accountancy professionals, interviews with CFOs and senior management from 8 major companies, a disclosure survey of corporate reporting by 40 organisations in specific sectors, and desk based research into relevant literature and work in the field.

Key findings of the survey: 

  • 60 percent of respondents agreed that the natural world was important to their business
  • More than half of the respondents had included natural capital issues in their company’s business risk evaluations at some point
  • Nearly half (49 percent) of respondents identified natural capital as a material issue for their business and linked it to operational, regulatory, reputational and financial risks

Author of the report Dr Stephanie Hime of KPMG’s Climate Change and Sustainability practice said: “Specific parts of Natural Capital are increasingly being recognised as critical and material business issues. This report aims to bring a new audience into the debate by focusing attention on what the accountancy profession can do to mitigate these risks”

An emerging challenge 

The report concludes the challenge for the accountancy profession will be to determine when the loss of natural capital will require an enhanced understanding and approach to businessrisk assessment and corporate disclosure.

Doing so too late may lead to failures when anticipating future risks and their associated costs to business. It may also lead to overlooked opportunities to increase supply chain resilience, secure and maintain licences to operate, and enter new markets

For a full copy of the report, click here

For a copy of the executive summary, click here


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