How boards can create resilient business models
David Wood, ICAS Executive Director of Technical Policy, outlines the important role for board members to play in considering their business’ impact on natural capital, following a recent event.
Leading businesses are increasingly focusing on a more holistic view of their business activity and realising that they are creating value beyond their financial numbers. To them it is becoming clear that in order to sustain their business model over the long term, they need to think about their impacts and dependencies – and consequently the risks they face - across a broader range of perspectives.
This was one of the key points discussed at a breakfast event on 7 October convened by ICAS, The Institute of Directors in Scotland and the Scottish Forum on Natural Capital. Entitled “Directing for resilience: how can board members create resilient business models?”, the event was attended by a variety of business leaders from listed companies to SMEs.
Such a holistic approach needs to ensure that the business model can be sustained as a source of profits whilst ensuring that sufficient innovation – disruptive as well as incremental – is also occurring. It also needs to address the impacts and dependencies of its activities on a whole range of other “stakeholders” such as employees, the local community and broader society, and the natural environment (natural capital) – as well as ensuring that everyone in the organisation is “doing the right thing” and maintaining the organisation’s integrity and reputation.
A number of the attendees admitted that they had really only considered the impact of their businesses - and dependencies of those business - on natural capital, after being invited to the event. They had therefore started to realise the relevance of natural resources for their businesses and the possible risks arising to their business models from depletion or sudden non-availability of these resources.
Natural capital was a new term to a number of participants and struck some as a term that was appropriate for certain audiences, but it was suggested that more accessible terminology would be needed to successfully engage with the population of consumers. Certainly, we would need to influence populations and drive changes to consumer behaviour if we were to secure the right incentives on business and ensure that all stakeholders were focused on the overall objective of sustaining our stocks of natural assets such as plants, water, animals, air, soils and minerals.
The whisky industry was held out as an example of an industry which has embraced considerations of natural capital. The Scotch Whisky Association has just released an updated environmental strategy for the Industry, and it was reported that individual distillers are making huge progress in energy efficiency, switching to renewables, reducing packaging waste and improving recycling, ensuring more sustainable land use through their supply chains, and improving water efficiency. This had benefited the natural environment, but had also benefited the distillery companies through cost savings and a whole range of process and other efficiencies.
It was agreed that we shouldn’t just focus on the risks arising from natural capital considerations, but that for most businesses there are significant business opportunities which can be generated, through cost savings, improving competitiveness, improving client relationships and driving innovation in new technology and new processes to minimise impacts and dependencies.
One major concern raised was the transferability of impacts – for example where the UK reduces its natural capital impact but in fact really just transfers the impact elsewhere. This can happen by transferring manufacturing overseas. The tourism industry in Scotland could also claim to be increasingly sustainable, but if more planes are bringing more tourists, there is an increasing impact from the airlines. The need for more holistic assessments was therefore noted, across industries and supply chains, and also on a global basis.
Natural Capital Protocol
Mark Gough, Executive Director of the Natural Capital Coalition, and John Lelliot, Chairman, gave a brief introduction and explanation of the new Natural Capital Protocol. This has picked up the best of the existing methodologies intended to help organisations assess their impacts and dependencies on natural capital – and has assimilated all this into one standardised framework to identify, measure and value these impacts and dependencies.
The Protocol allows a better and more comprehensive understanding of impacts and dependencies and can help value these, including in monetary terms, as a basis for influencing business decisions. Key, though, is that such thinking should be an embedded part of business decision making and operations, and not a one-off or separate thought stream.
Many businesses had already been involved in considering their impacts and dependencies on natural resources, but it was felt that the new Protocol would assist in doing this in a more focused and standardised manner.
Internationally, businesses are showing increasing interest in natural capital. 50 businesses including Coca Cola, Dow, Shell and H&M were involved in piloting the protocol. Since its launch the Protocol has been downloaded over 3,500 times, and it is hoped that all those organisations are finding it useful in making better business decisions. For organisations choosing to follow Integrated Reporting, the Protocol should be of huge assistance in relation to the natural capital aspect of <IR>. It should also help to provide a better justification (in monetary terms) for choosing more environmentally sustainable ways of doing business.
With a high degree of anti-establishment feeling amongst electorates across the developed world and doubt as to whether the benefits of business globalisation have been filtering down to everyone, there was a sense that the UN’s Sustainable Development Goals (“the Global Goals”) had been established at just the right time and that businesses needed a new definition of success, a better sense of social purpose and a more holistic view of their responsibilities in meeting their obligations to society. The Global Goals and The Paris Agreement have set a direction of travel for all countries and businesses need to be part of this shift. The publication of the Natural Capital Protocol would seem to be particularly relevant to assisting businesses to be aligned to the movement towards achieving the Global Goals and The Paris Agreement and not simply “doing its own thing”.
Finally, the discussions agreed that whilst there needs to be good processes, systems and tools, there also needs to be the right leadership and the right behavioural incentives throughout the business sector and through individual businesses.
The Scottish Forum on Natural Capital has a “Natural Capital Navigation” signposting page designed to help Board members – and company executives looking for more detailed help – by highlighting key sources of information and guidance.