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Quantifying Sustainability II – Natural Capital and Monetisation

Part I of this article series explained why companies might want to monetise sustainability, expressing impacts in monetary value to make them more tangible. This part shows the steps required to do monetisation, and discusses the drawbacks and advantages.

By Paula Bernstein on July 14, 2014

 

Monetisation is the process expressing impacts associated with social and natural capital in monetary value, making them more tangible. Monetising environmental impacts, the subset of monetisation known as natural capital valuation, could be considered a type of sustainability return on investment analysis, although it provides a different financial perspective on sustainability. Sustainability return on investment or S-ROI provides a direct reflection of the financial value of sustainability programmes. A well-publicized example of monetisation is PUMA’s environmental profit and loss statement, conducted by Trucost and PwC in 2011. This study valued overall environmental impacts of both supply chain and operations at €145 million.

 

How To Prepare For A Natural Capital Valuation

Companies may choose to value natural capital at different levels: throughout the supply chain, for instance, or on a product level. The first step is to determine which impacts to examine. A tool such as Life Cycle Assessment (LCA) can help quantify the environmental impacts throughout the supply chain. However, LCA reports impacts in terms of tons of carbon and cubic meters of water. After environmental impacts are quantified, companies need to take one more step to actually monetise these impacts.

 

Currently, there is no single standardized methodology for natural capital valuation. The lack of a harmonized approach is one of the challenges of natural capital valuation. The Natural Capital Coalition is now developing and testing a harmonized framework for valuing natural capital, due to be published by the end of this year.
 

Methods for Expressing Environmental Impacts in Monetary Terms

So, how is natural capital valuation actually done? Economists have developed ways to assess environmental impacts in monetary terms. Examples of these methods include surveys or “stated preference” methods, which ask respondents their willingness to pay in a given situation, and “revealed preference” methods, which examine observed behaviours or trends such as effects on production. In one famous example of such a survey, following the Exxon Valdez oil spill in 1989, a large-scale study asked respondents to place a value on preventing a future accident similar to the Exxon Valdez spill. The results of the study indicated that Americans would be willing to pay on average $56.88 per person per household per year to prevent similar accidents in the future.

 

Another method is to examine the costs associated with a particular activity, for example the cost of the damage or the costs to replace the service.  For example, the social cost of carbon (SCC) is an estimate of the economic damages associated with increasing CO2 emissions. The United States Environmental Protection Agency (EPA) uses a model of different years and discount rates to help make decisions. In 2015, for example, estimated SCC lies between $12 and $116 per metric ton, according to this model. In the Environmental Profit and Loss statement conducted by PUMA, mentioned above, researchers used PUMA’s assumptions and 232 different estimates of the SCC to obtain a figure of $87 per metric ton of carbon. A more exhaustive description of various valuation methodologies can be found in the WBSCD’s Selection & Application of Ecosystem Valuation Techniques for CEV.

 

Where to Find Data Sources for Valuation

There are quite a few tools that can help with locating valuation data sources. WBCSD’s Guide to Corporate Ecosystem Valuation (CEV) provides a framework and methodology for conducting natural capital valuation, but does not include the monetary valuations themselves. Users still need an expert to help conduct this part of the analysis. However, the guide does help companies determine if a monetary valuation is appropriate for their goals. More data sources and tools are available to help conduct monetary valuations. The Ecosystem Service Valuation Database (ESVD), for example, contains more than 1,350 data points from more than 300 case studies on ecosystem services. The Natural Capital Coalition has put together a useful inventory of initiatives, methodologies and tools.

 

Criticism Of Monetisation

While the monetisation approach is valuable because it allows comparisons across impact categories, it’s not without drawbacks. It’s easy to look at a dollar value and assume it is factual and accurate. But valuation methodologies can be variable and always include inherent value judgments, which is why it’s important to understand the methodologies used to conduct the analysis. Critics are concerned that monetisation may oversimplify complex issues, as it is difficult to quantify or monetise every ecosystem value.

 

Natural Capital Valuation: A Useful Tool to Add To Your Toolbox

Natural capital accounting, monetisation, and other sustainability return on investment assessments are growing in popularity and increasingly get more attention. This trend will likely continue with the release of a standard accounting methodology later this year. Overall, natural capital valuation helps interpret environmental impacts in a language (dollars) that everyone can understand and stands to be another useful tool to help companies make informed investment decisions, manage risk, and understand environmental impacts.

 

Read Part I for more information

The first part of this article serie 'Quantifying Sustainability - Supply Chain and Minimising Risk', explained why companies might want to monetise sustainability, expressing impacts in monetary value to make them more tangible.

If you have questions or comments regarding these articles, I will be delighted to share ideas with you!

‘In today’s world, I believe it is crucial for companies to make decisions that are both financially sound and also have a positive impact on the environment. Ever since I first learned how humans have damaged the environment, I have been inspired to help preserve our planet so that future generations can enjoy nature the way I have. I am so excited to work for an organization that shares my personal values.’

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