Is the South African CFO risking accountability by assessing natural capital incorrectly?

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Natural capital – the stock of capital derived from natural resources such as biodiversity, ecosystems and services they provide – is declining globally. In South Africa stock from natural capital forms a large part of the economic value and many corporate companies have vested interest in risk assessing natural capital correctly. Sustainability forms a large part of risk assessing natural capital and in South Africa our sustainability effort is dwarfed by the much larger concern of smaller profit margins and economic slowdown.

A point to start is to evaluate your natural capital and to ensure that when one embarks on funding expansions or investing in an industry one should be well informed on the impact and cost of the natural capital. Business operations that have negative environmental impacts can have high, but often unrecognised costs for organisations, investors and society.

According to a recent report released by ACCA, KPMG and Fauna & Flora International; analysis estimates that global primary production and processing sectors (forestry, fisheries, agriculture, mining, oil and gas exploration, utilities, cement, steel, pulp and paper and petrochemicals) have unaccounted costs of US$7.3 trillion per year – mostly from greenhouse gas emissions, water use and land use.

In the South African economy CFO’s tend to underestimate the risk value of under assessing the company’s natural capital revenue contribution and cost factor. This leads to unexpected rise in budget spend. It is vital that the definitions of materiality affect the boundaries of materiality assessments, enhancing interest in and justification for natural capital’s consideration in corporate materiality assessments in relation to the three key areas:

  • the scope of issues that are material broadening to the environmental and social impacts of organisations, including those related to natural capital
  • the stakeholder groups to be included when assessing if an issue is material, extending to bodies such as NGOs and local communities that are concerned about natural capital issues
  • the time frame over which business impacts are considered material, incorporating previously unaccounted medium- and long-term impacts and effects on natural capital issues.

International companies and governments alike have filtered evaluation methods down to one of the below derivatives, CFO’s can adapt these methods to enhance accounting the risk and value factors on natural capital:

Large and eclectic dashboards

These dashboards bring together a number of indicators that are directly and indirectly related to the durability of socio-economic progress. One example of this is the Eurostat Sustainable Development Indicators, which is a list of over 100 indicators used to monitor the EU Sustainable Development Strategy.

Composite indices

Composite indices normalise and aggregate various data into a single number. For example, the Human Development Index, Osberg and Sharpe’s Index of Economic Well-Being, the Changing Wealth of Nations, or the Environmental Sustainability Index, which ranks countries based on an assessment of 76 variables covering 5 domains.

Indices focusing on overconsumption

Indicators that fall in this category conceive of sustainability with respect to consumption levels and investment in natural resources. Examples include adjusted net savings (ANS) and ecological footprint accounts. ANS is calculated as the change in total wealth over a given time period, while ecological footprint assessments determine how much of the regenerative capacity of the biosphere is required to maintain the consumption habits of a defined project or development.

South African CFO’s that incorporate natural capital issues in corporate materiality and risk assessments offers a range of benefits and value to companies: from better-informed decision making by an organisation and its stakeholders, to an enhanced and more comprehensive risk management process, to an increased ability to realise strategic opportunities.