The natural resources that support business activities, that is, natural capital, has not traditionally been included on an organization’s balance sheet. However, natural capital is increasingly recognized for the benefits business derives from it.
Most organizations rely on natural capital even if they don’t realize it. Without uninterrupted access to natural capital, such as air, land, and water, businesses can collapse or have their operations severely curtailed or disrupted.
Natural Capital Protocol
Recognizing the importance of natural capital has led to a the establishment of the Natural Capital Coalition and its release of a draft Natural Capital Protocol, which is being pilot tested by companies including Coca-Cola, Dow Chemical, F. Hoffmann-La Roche, Hugo Boss, Kering, Natura, Nespresso, Nestlé, Olam International, and Shell. Through testing and other stakeholder feedback, the Coalition is developing a standardized framework for business to manage and measure natural capital in practice.
Business Impact and the Role of Accountants
With this increasing interest in how business can account for natural capital, accountants are poised to become world leaders in natural capital and its connection to sustainable organizations. Accountants in business are positioned to help make accounting for natural capital more mainstream and bring comparability and consistency to existing diverse approaches.
One of the most important aspects of natural capital is water. Water is a crucial resource required to support virtually every form of business activity, either directly or via supply chains. The 2014 Global Water Report, published by the CDP, revealed 68% of respondents from the world’s 500 largest companies believe their organization’s exposure to water-related risk could generate a substantive change to their business, operations, or revenue in the future. In addition, 22% felt that lack of water access would curtail future growth; one third believe this effect would be felt within the next 12 months.
Water crises will affect all business sectors. It is only a matter of time.
To adapt to this reality, internal management accounting can support managers’ identification of inefficiency hotspots, and opportunities for building reputation. As identified by CDP, good stewardship of water is seen as good business practice. Good stewardship of water will:
- ensure social and legal license to operate in a specific location;
- prevent or react to operational crises caused by inadequate availability or management;
- gain competitive advantage or help ensure competitive survival;
- assure investors and markets that operations will remain profitable; and
- uphold corporate values and ethics.
Measurement and monitoring of actual water information is a start for business management. But monetary information about water is equally important for management accounting to identify, classify, record, and capture as a foundation for better decision making.
Stakeholder pressure to understand how management will address water shortage and floods is becoming more evident as perception increases that climate change is beginning to bite. Risks and opportunities associated with water are clearly outlined by the World Business Council for Sustainable Development, which has developed a Global Water Tool to assist businesses’ decision making. The Tool addresses the full spectrum of critical business issues water affects, including risk management, exploration of revenue opportunities, product and process improvements, and supply chain issues.
Stakeholder Reaction and Concerns
External stakeholders, including shareholders, are becoming aware of the operational risks and infrastructure investments needed to take advantage of opportunities as well as address water surpluses and shortages. Shareholders may will have reservations about poor water management because of the potential economic impact through reductions in and volatility of shareholder value. Investors will look for information on water in external reports and disclosures. They will want to know what managers are doing about water risk. Investors are likely to seek information about water markets and the costs and benefits from trading. Evidence suggests shareholder resolutions seeking disclosure of water-related information have already increased, quadrupling in some industries from 2000-2010.
Management Accounting and Water
Smart managers will recognize the need to be accountable to stakeholders while acknowledging that effective water management is about more than just reporting and disclosure. They will be aware of and set up the necessary internal management accounting and control systems as a foundation for driving external accountability through disclosure about water demand and supply.
You cannot manage what you do not measure, and transparent and responsible water use must be driven from the inside-out. Effective water management will ensure organizations can meet stakeholder demands for accountability while protecting themselves from water-related risk, thereby safeguarding financial returns, community relationships, and employee trust, and limiting the potential for additional regulatory oversight.
Water accounting, or put more accurately water management accounting, is about more than just environmental management. Rather it is simply good management. With changing weather patterns and demand for water increasing, the result of population and economic growth, “water crisis” will be used more frequently in boardrooms and corporate reports. Organizations and their accountants must act now if they are to survive the cycle of drought and deluge that is to come.
IFAC has previously shown itself to be a leader in providing guidance on environmental matters. The International Guidance Document: Environmental Management Accounting is extremely popular with practitioners and academics alike. IFAC has also recognized the complexity and urgency of water risk. It is now time to extend this leadership to a water management accounting to fully address the interrelationships between physical and monetary measures of corporate water activities.
Dr. Katherine Christ and Professor Roger Burritt have recently joined the Scientific Committee for the Responsible Global Value Chains Standing Track for the EURAM 2016 Conference, Manageable Cooperation. The conference will be held in Paris, June 1-4, 2016. Dr. Christ and Prof. Burritt are responsible for a new topic concerning responsible and sustainable water supply-chain management and governance. If you have an interest in environmental and water-specific research, please see the Call for Papers.