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An introduction for finance teams
- Natural capital and social capital accounting can help businesses manage risks more effectively
- Finance teams are increasingly recognising the commercial value of broadening the information upon which decisions are made to include natural and social capital considerations
- Companies are making use of an increasingly diverse range of metrics to ensure effective assessment of business performance and inform strategy, management and operational decisions
- There are a number of overarching ‘principles’ which draw on financial accounting principles that finance teams can use to test and define the information used to account for natural and social capital
- Whilst there is good progress in relation to environmental issues, dealing with social issues is far less developed
- Evaluation of natural and social capital impacts and dependencies is typically undertaken through use of quantitative metrics such as physical units e.g. tonnes of carbon, or through estimated monetary values (often referred to as the ‘valuation’ of natural or social capital)
Why the project was chosen
To date, traditional accounting methodologies have focused on financial metrics. Natural and social stocks have not often been reflected in commercial decisions. Whilst financial metrics will continue to be an important indicator of business performance, we now also need better visibility of our natural and social resources and to understand the impacts they may have on future business viability.
Issues such as the global decline in resource availability and changing population demographics, mean organisations need to improve their understanding of their impacts and dependencies on the environment and society.
The natural and social capital accounting project was initiated to identify principles which can be applied by financial teams when considering how and when to embed natural and social capital issues into decision making.
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. This guide focuses on its use to strengthen decision making.
Natural and social capital accounting involves the identification, quantification and potential monetisation of both how your business activities have an impact on the environment and society, through pollution or training of employees for example, and also how your business depends upon natural and social assets and the ‘services’ they provide such as clean air, water or community relationships.
To monetise or not to monetise?
Many companies are using economic valuation of natural and social capital. Monetisation 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, and there is currently no standard methodology to do this. 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.
What is the role of finance teams?
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