Is natural capital a material issue?

4 December 2012

Presentation overview

• Overview of KPMG’s Climate Change and Sustainability Team• Overview of the research• Key definitions

• Biodiversity, ecosystem services and corporate performance

• Research methodologies:» Case studies» ACCA member survey» Company disclosure survey» Interviews with company directors

• Key findings• Recommendations

KPMG’s Climate Change and Sustainability Team

Presentation overview

• Overview of the research• Key definitions• Biodiversity, ecosystem services and corporate performance

• Research methodologies:» Case studies» ACCA member survey» Company disclosure survey» Interviews with company directors

• Key findings• Recommendations

Overview of the research

Objectives

• Investigate the concept of materiality

• Explores the extent to which natural capital is reflected as a business issue

• It focuses on biodiversity and ecosystems, specific constituents of natural capital

Key audience

• CFOs

• Accountants

Key definitions

• Natural capital – the stock of capital derived from natural resources.

• Biodiversity – the variability among living organisms from all sources.

• Ecosystem – dynamic complex of plant, animal and micro-organism communities and non-living environment interacting as a functional unit.

• Ecosystem services:• provisioning services • regulating services • cultural services• supporting services

Biodiversity, ecosystem services and corporate performance

Capital

CapitalManufactured Human Social

Intellectual Other Financial

Interactions

Capital

Natural Capital

BiodiversityEcosystem Services

Dependencies

Impact

Dependencies

Impact

Impact on corporate value

● Changing asset values/share price

● Impact on intangible assets

● Going concern issues

Business

● Dependencies e.g., raw materials, provision of a stable operating environment, etc.

● Impacts e.g., through pollution overexploitation, or may be positive through conservation activities

Economy and Society

Links between natural capital, biodiversity, ecosystem services and corporate value

Biodiversity and ecosystem services as a business risk and opportunityA changing landscape of risks

• 50% of company earnings could be at risk from environmental externalities (UNPRI)

• Risk that significant costs and benefits are not accounted for in corporate accounts

Natural capital and materiality

• Shareholder attention on BES issues growing

• BES beginning to feature in management disclosure and analysis

Biodiversity and ecosystem services as a business risk and opportunity

Type Risks (red) & Opportunities (green)

Operational Scarcity/ reduced quality of raw materials, disruptions to business operations

Improvement to quality of raw materials, increased output/ productivity, sustainable operations

Regulatory and legal

Restrictions on land access, litigation, resources quotas, pricing and compensation

Land access, meeting legislation and resource quotas

Reputational Potential damage to brand/ licence to operate

Potential improvements to brand/licence to operate

Market and products

Failing to match developments in consumer preferences

Matching developments in consumer preferences,

Financing Increased cost of capital/ inability to meet lending requirements

Ability to potentially reduce cost of capital/ meet lending requirements

Agenda

• Overview of the research• Key definitions• Biodiversity, ecosystem services and corporate performance

• Research methodologies:» Case studies» ACCA member survey» Company disclosure survey» Interviews with company directors

• Key findings• Recommendations

Research methodologies

• Case studies

• A survey of ACCA members

• A disclosure survey of the top 10 companies by market capitalisation in four sectors:

- Utilities- Forestry- Food - Construction

• Interviews with company directors

Case Studies

Infinito Gold:• Canadian gold mining

company• Lost 50% of share value due

to environmental concerns• Lead to uncertainties over

the company’s ability to function as a going concern

2 4 th N o vem b er 2 0 1 0 C o sta R ican go ve rn m e nt an nu lle d Infi n ito ’s go ld m in e co nce ssio n d ue to co n ce rns abo ut its po te n ti al im pacts o n fo re sts, e nd ange re d spe cie s and agricu ltura l live lih o o ds 3 0 th N o vem b er 2 0 1 1 C o sta

R ican go ve rnm e n t uph o ld s it’s d e c is io n

2 4 th N o vem b er 2 0 1 0 C o sta R ican go ve rn m e nt an nu lle d Infi n ito ’s go ld m in e co nce ssio n d ue to co n ce rns abo ut its po te n ti al im pacts o n fo re sts, e nd ange re d spe cie s and agricu ltura l live lih o o ds 3 0 th N o vem b er 2 0 1 1 C o sta

R ican go ve rnm e n t uph o ld s it’s d e c is io n

Survey of ACCA members

• 60% of respondents agreed that the natural world was important to their business

• Over 50% of respondents had included natural capital issues in their company’s business risk evaluations at some point

• 49% identified natural capital as a material issue for their business and linked it to operational, regulatory, reputational and financial risks

• There was a relatively low response rate to the survey, although many respondents were company directors

Disclosure survey of high impact companies

• Many companies have general environmental policies, but few policies refer specifically to BES or natural capital

• 75% of companies reviewed report on BES issues, although much of this reporting limited to water related disclosures

• 43% of companies disclosure their materiality assessments. Half of these refer to natural capital.

Interviews with company directors

Global issues and trends

Risk and opportunity identification filterCorporate risks and

opportunitiesMateriality filter

CompanyIssues

disclosure

Interviews with company directors

“Indiscriminate draw-down of Natural Capital poses a risk to our business today and much more so in the future. The severe under valuation and degradation of Natural Capital constitute a real challenge to businesses in general, in achieving longer term strategic objectives.” James Singh, Executive Vice President & Chief Financial Officer (recently retired), Nestlé

“Natural resources such as timber and water are fundamental to Mondi. There is a strong link between license to operate and these issues. They are potentially an area of critical risk for the company.” Andrew King, CFO, Mondi

“The current financial reporting model only tells half the story about a business’s true performance and potential. The numbers say little of its reliance and impact on natural capital, factors that will increasingly influence competitiveness in a resource-scarce world.” Jean-Marc Huët, CFO, Unilever

Agenda

• Overview of the research• Key definitions• Biodiversity, ecosystem services and corporate performance• Research methodologies:

» Case studies» ACCA member survey» Company disclosure survey» Interviews with company directors

• Key findings• Recommendations

Key findings

• Perceptions of BES as a risk are variable within the accountancy profession

• Corporate BES disclosures, as currently practiced, are too limited to provide insights into risk management

• Existing financial reporting and disclosure standards can be applied to the issue of BES

• Companies in a range of sectors are exploring the use of valuation techniques to assist in decision-making alongside other means of identifying and evaluating risk

• There are a number of barriers to corporate action

• Variability in understanding of the concepts and terminology

Recommendations

CFOs Accountants

Engage with experts to understand impacts and dependencies

Engage with experts to increase skills

Consideration of natural capital in risk and materiality assessments

Call on accountancy bodies to provide guidance

Disclose material natural capital impacts and dependencies

Follow and track new guidance that becomes available

Educate other board members on the importance of natural capital

Contribute to the development of natural capital accounting methodologies

Consider whether natural capital can be incorporated into financial accounts

Pilot or trial natural capital accounting methodologies, where appropriate

Launch Events UK Panel

Moderator:• Vincent Neate, Head of Climate Change and Sustainability, KPMG

Panelists:• Richard Martin, Head of Corporate Reporting, ACCA• Kerry ten Kate, Director, Forest Trends and member of UK Natural Capital

Committee• Gail Smith, Sustainable Agriculture Technical Manager, Unilever• Pippa Howard, Director of Business and Biodiversity, Fauna and Flora

International

Attendees• Unilever, BP, Defra, Treasury, Merril Lynch, HSBC, Barclays, etc.

Events also held in: Australia, New Zealand

Questions

Contact for further information

Dr Stephanie HimeLead specialist biodiversity and ecosystem services, KPMG Climate and Sustainability Services stephanie.hime@kpmg.co.uk

Is natural capital a material issue?