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February 18, 2013

Natural Capital and Integrated Reporting Among Trends for 2013
    by Robert Kropp

With the help of environmental research from Trucost, GreenBiz publishes the sixth annual edition of its State of Green Business Report, assessing major trends as well as the environmental performance of 500 US companies.

SocialFunds.com -- Sustainability initiatives by companies are on the increase. Corporate reporting on environmental impacts is by now an embedded practice of the majority of major corporations, and reporting on more difficult matters such as the greenhouse gas (GHG) emissions of supply chains is on the increase as well.

Furthermore, according to environmental data compiled by Trucost, corporate impacts on the environment are on the decrease relative to revenue in almost every key category.

Yet absolute global emissions are again on the rise after a brief decline brought about by the economic recession. And as GreenBiz asks in its sixth annual State of Green Business report, "Is the growing engagement of companies sufficient to alter the trajectory of negative environmental and social trend lines — issues like climate change, air quality, the health of aquifers, species extinction, the abundance of topsoil and fisheries, human health and well-being?"

GreenBiz concludes that the question remains unanswered thus far, and James Salo of Trucost—which supplied the environmental data for the GreenBiz report—provided one explanation of why corporations still have far to go.

"By our calculations, half of all direct impacts are not being recognized by companies," Salo said. "Those companies that have better information on their impacts, and the risks associated with them, will be at an advantage when looking to minimize the potential costs associated with those risks and therefore to maximize their opportunity to better their competitive peers." Trucost analyzes more than 700 environmental impacts of more than 4,000 companies on an annual basis.

Noting that environmental costs rose by eight percent between 2007 and 2011, Richard Mattson of Trucost wrote in the report's foreword, "Companies have yet to decouple growth from environmental damage. This is mainly because of our global economy's continued reliance on carbon-intensive fossil fuels, which meant that 42 percent of costs came from greenhouse gas emissions." Another 27% of global environmental costs came from water abstraction.

With extreme weather events and other impacts of climate change already affecting the global economy, what trends might help forestall more the widespread climate change damages that many think will soon be inescapable? The GreenBiz report describes ten, including several that have been of interest to sustainable investors for years.

Corporate attention to natural capital, defined by the report as "value through ecosystem services, the 'free' deliverables provided to business and society by a healthy planet," is one such trend. The economic value of the major ecosystem services equals two-thirds of the global Gross Domestic Product (GDP), the report observes, but until very recently companies have paid too little attention to the concept.

In 2012, that began to change when the Natural Capital Declaration was launched at the Rio+20 conference on sustainable development. Signatories to the Declaration commit to embedding environmental considerations into their decision-making processes. More than 40 financial institutions have signed the Declaration; however, signatories do not include a single US-headquartered bank.

Whether corporations will fully embrace the concept of measuring and managing their use of natural capital remains an open question. "It could lead to corporate decisions that balance economic and environmental needs, and that consider the longer-term consequence of business strategies and initiatives, eventually integrating the concept into planning and accounting," the report states. On the other hand, "'Natural capital' could become just another synonym for 'environmental responsibility,' the latest advance in corporate messaging without necessarily a corresponding advance in anything else."

Another trend highlighted by GreenBiz has been the uptake of integrated reporting by some companies. The practice of embedding environmental, social, and corporate governance (ESG) information into corporate financial reports, integrated reporting is now mandated by stock markets in South Africa and Brazil. Why is integrated reporting so important?

"Freestanding sustainability reports have become mainstream — more than 5,000 are published annually worldwide, according to CorporateRegister.com — but most aren't very helpful," the report states. It quotes the Harvard Business School professor Robert Eccles, who said, "Even so-called mainstream investors are increasingly recognizing that a company's ESG performance increasingly affects its ability to create value for shareholders over the long term, and can even put its license to operate at risk."

"Good companies will see integrated reporting as an opportunity to communicate on and implement a sustainable strategy, which I define as one that creates value for shareholders over the long term while contributing to a sustainable society," Eccles continued. "But accomplishing this at a global scale means that integrated reporting needs to be a mandatory, not voluntary, exercise."

Another key trend highlighted by the report is the growing acknowledgement, by both companies and investors, of the materiality of ESG factors. Until recently, "Few investors — particularly the large pension funds and other institutions that can move financial markets — have viewed sustainability as a relevant investment criterion," the report states.

But as extreme weather events increase and regulatory actions such as the Securities and Exchange Commission's 2010 interpretive guidance on climate change reporting by corporations serve to focus corporate attention on the issue, initiatives have formed to further the materiality of ESG factors. In 2011, Ceres and Tellus Institute formed the Global Initiative for Sustainability Ratings (GISR), "to create and bring to widespread adoption a single standard for rating the sustainability performance of companies."

"The global economic crisis calls for new forms of global governance to direct all forms of capital — financial, human, social, and natural — to organizations earnestly committed to meeting the great sustainability challenges of the 21st century," GISR states. "Tracking results, analyzing data and implementing actions that address sustainability risks and opportunities can no longer be treated as optional, but must instead become integral to a company's way of doing business."

There is much else worth considering in the 90-page report, including a trove of environmental data provided by Trucost. The report can be downloaded from either the GreenBiz or the Trucost website.

© SRI World Group, Inc. All Rights Reserved.

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