CFOs and management accountants are playing an ever-increasing role in supporting the adoption of natural capital accounting in their organizations, according to a recent report.
Natural capital – forests, rivers, minerals, oceans, air, and land – underpins all other forms of capital, including financial. But natural capital issues are generally absent from the corporate agenda, ignored by most investors, and are a secondary consideration in major capital allocation and investment decisions, the Chartered Institute of Management Accountants (CIMA) noted in the study, Accounting for Natural Capital: The Elephant in the Boardroom, which was co-authored by Ernst & Young, International Federation of Accountants, and the Natural Capital Coalition.
Accountants and finance professionals, particularly those working in leadership roles in business and government, must lead a “redefinition of corporate responsibility to enable a transformation in how we account for, manage, and preserve this most precious and primary source of all capital,” according to the report.
“CFOs are responsible for taking into account all relevant factors and risks in corporate and financial decision making and reporting, including material economic, environmental, and social factors,” the report stated. “Accountants are organizational stewards and have a central role in navigating their organization toward the creation of value.”
The report identifies the following five ways that CFOs and management accountants can support the adoption of natural capital accounting in their organizations.
1. Raise natural capital as a strategic issue and make the business case for it
- Engage with natural capital as a strategic, competitive, and financial issue at board level and facilitate debate about how natural capital relates to your strategy, business model, performance outlook, and social license to operate.
- Frame the risks and opportunities that underpin natural capital impacts and dependencies in robust business terms, including how and over what timeframes they may have an effect upon the business.
- Model business scenarios to facilitate dialogue around how these issues and uncertainties may unfold.
- Identify how natural capital impacts and dependencies can be incorporated into decision making at all levels so that the organization can respond to the opportunities and risks which these may pose.
2. Measure and value
- Explore the most appropriate methodologies and help shape evolving standards for measuring and valuing your natural capital impacts and dependencies. Value can be assessed through nonmonetary metrics or in monetary terms.
- Define the scope or boundary of measurement and valuation (e.g., your organizational footprint, supply chain, or across the whole value chain).
- Engage with suppliers to understand better how the organization is impacting on critical natural resources and to identify risk “hot spots” in the value chain.
3. Use in decision making
- Prioritize those areas of the business where natural capital accounting will drive management action, such as strategic planning, risk and supply chain management, project and investment appraisal, governance and incentives, innovation and operational management.
- Adapt business processes and systems to incorporate natural capital considerations and information so that these can be embedded into decision making and reporting.
- Integrate material natural capital issues in both management information and integrated reporting to external stakeholders.
4. Influence the debate
- Establish links with international and professional organizations that are supporting the development of natural capital accounting, such as the Natural Capital Coalition’s project to develop a protocol for valuing natural capital, to ensure your views are represented.
5. Develop relevant skills
- Build capacity in your team to enable natural capital accounting with the same rigor and discipline you would apply in accounting for financial performance.
- Forge relationships with stakeholders, relevant experts, and specialists in this rapidly evolving area.
