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May 15, 2014

Natural capital on a par with financial assets’ importance

By Isabella Grotto

Businesses must put natural capital at the heart of their value-creation strategy if they are to remain sustainable, the Chartered Institute of Management Accountants (CIMA) has warned in a report published today.

The report has been produced by several stakeholders of the global accountancy industry including Big Four firm EY, and warned that accounting for natural capital in business has become "as important" as financial capital.

In that respect EY climate change and sustainability services partner Steve Lang said natural capital was no longer an abstract issue but rather one which reflected in core areas of businesses.

"Accounting for natural capital goes to the very heart of how companies create value; our profession has a unique role to play in enabling businesses to manage value in this broader sense," Lang said.

Published in conjunction with the International Federation of Accountants (IFAC) and the UK government’s advisory body the National Capital Committee (NCC), CIMA’s report highlighted also the advantages to be gained by businesses able to integrate a prompt response to such issues into their governance.

According to CIMA, actors following calls to put natural capital at the heart of their decision-making processes will benefit from better risk management, increased opportunities for innovation and, ultimately, more sustainable growth models.

The report concluded that businesses that are most fleet of foot in responding to this situation will thrive. However, "those that do nothing may suffer unsustainable profits, cash flow problems, risks to their supply chain, as well as damage to brands and corporate reputations."

CIMA head of sustainability research and policy Sandra Rapacioli said despite natural capital depletion was a prominent issue, business leaders seemed not to pay enough attention to its long-term consequences.

"It is still an elephant in the boardroom as business leaders continue to focus on short-term pressures and treat natural resources as if they’re infinite," she said.

Rapacioli added that accounting for natural capital issues wasn’t easy. She nonetheless called on finance professionals to "take action now and incorporate natural capital considerations into strategic planning before the regulatory axe falls."

RiskIn April 2013, a report published by The Economics of Ecosystems and Biodiversity for Business coalition and entitled ‘Natural Capital at Risk – The Top 100 Externalities of Business’ prompted many industry leaders to call for better reporting on natural capital.

Among them, the Institute of Chartered Accountants in England and Wales chief executive Michael Izza, who said the report proved the need of both accountancy and economics "to evolve to recognise that the limiting factors to production and growth are no longer just labour, capital and technology."

He warned: "As our economies, populations and our consumption have grown exponentially relative to nature, which once seemed so abundant and limitless, we now have to face the fact that this is not so."

As recently as October 2013, the House of Commons urged the UK government to integrate natural capital into the national accounts and policy making processes, implementing the recommendations contained in the NCC’s first annual report on the state of natural capital.

In particular, the report contained 15 points for the construction of a framework for measuring and accounting for variations in natural capital assets.

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Related link

CIMA: Accounting for natural capital: the elephant in the boardroom

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