Natural capital valuation offers water companies a powerful tool to identify sustainability challenges, engage stakeholders such as the chief financial officer and drive innovation in low-carbon technologies, a recent meeting of water industry executives concluded.
The findings were made at a meeting hosted by The Crowd (formerly Green Mondays) and Trucost to discuss the potential of natural capital valuation in the water sector. The event was attended by senior executives from a dozen water companies, trade bodies and expert advisers. To encourage open debate, comments were unattributable.
The event was inspired by Yorkshire Water, which in May became the first UK water company to use natural capital valuation to create an EP&L to help identify and communicate the most important strategic sustainability issues the company faces.
Natural capital valuation is a way of putting a monetary value on natural resources such as water, clean air, a stable climate and plentiful land, forests and oceans. At present, our economic system takes these natural resources for granted, yet we all rely on them for our continued prosperity and well-being. By putting a price on natural resources that reflects their real value, we can encourage business and society to use them in a sustainable way.
Yorkshire Water’s EP&L is a type of natural capital valuation that adds up the costs and benefits of a company’s business activities to the environment – a sort of green financial account. The EP&L showed that water abstraction and greenhouse gas emissions were by far the company’s biggest impacts.
Yorkshire Water used the findings of the EP&L to support plans to invest £10m in a new plant that will cut carbon emissions by generating renewable energy from sewage sludge biogas. The EP&L helped the company secure a further £1m in government funding for the plant which will start to operate on 23 June.
Delegates at the meeting agreed that EP&Ls were a useful strategic business planning tool to identify the main environmental risks and opportunities facing a company. While water companies are already well aware of the broad implications of climate change, population growth, energy and resource price volatility for their businesses, they agreed that being able to put a monetary value on these challenges could help grab the attention of the company board – especially the chief financial officer. Gaining the CFO’s support for sustainability initiative is vital to secure investment.
EP&Ls help companies take a long term view of future scenarios in a way that existing tools, such as cost benefit analysis, do not. One delegate commented that, had water companies known about the potential cost of climate change to its business, they would have acted early to find alternatives to carbon-intensive water and sewage treatment processes. He said the water industry had to avoid making the same mistake on water abstraction.
Some concerns were expressed that the costs calculated by natural capital valuation were not robust enough for companies to rely on. But others remarked that – as a strategic planning tool – the figures did not have to be absolutely precise. As experience of natural capital valuation in the water sector develops, the robustness of the results would improve and confidence would grow. One delegate, quoting Walt Disney, said: “‘The way to get started is to quit talking and begin doing.’”
The meeting grappled with an important dilemma: if natural capital valuation shows that society undervalues water, what does that mean for water bills? Several attendees noted that public opinion polls consistently show that, while people say they are concerned about the environment, they do not want to have to pay more to protect it. Moreover, customer trust in water companies was acknowledged as a challenge. As a privatized utility, there is a tension between a company’s role as a profit-making business and its role providing a public service. Nowhere is this tension highest than over prices, as the recent furore over energy bills showed.
There were no easy answers, but delegates agreed that water companies need to work constantly to keep sustainability on the public and boardroom agendas. Society is disconnected with where water comes from, one attendee remarked, in much the same way as people are with food. Extreme weather does not help communicate the importance of water resources. With droughts and hose pipe bans one year, followed by torrential rain and floods the next, it is not surprising that the public is confused.
One point was clear: systemic change is needed. As a regulated industry in which water prices are agreed with watchdog Ofwat, it was felt that sustainability leaders in water companies could do more to use their influence to change the rules of the game. Natural capital valuation could have a role in convincing officials of the need for policy and regulatory framework that reflects the true value of water and encourages business and society to use it sustainably. Indeed, the EU water framework directive calls on member states to use economic analysis in their management of water resources.
In Australia – a country that is already suffering extreme weather including droughts and wildfires – Yarra Valley Water commissioned research to calculate the value of water in Melbourne. The study found that the value was three times higher than official water prices. The results helped inform debate on how to balance customer demand with the need to conserve and enhance water resources.
The meeting drew to a close on a positive note. Natural capital valuation offers water companies a new lens through which to understand, in business terms, looming environmental challenges. It provides a tool to measure, manage and communicate the risks and opportunities, so that water companies can play their part in ensuring a sustainable future.
James joined Trucost as Research Editor in December 2013. He is responsible for editing Trucost’s public and client research reports, as well as promoting the importance of natural capital valuation in the marketplace. James has over 13 years of experience writing about corporate sustainability as a journalist for ENDS Report, the UK environment business magazine. Before that he worked as an environmental policy adviser for the Confederation of British Industry. James graduated from the University of Strathclyde with a degree in politics. This article was republished with permission from Trucost.
The Crowd and Trucost would like to thank the following organizations for participating in the meeting: Liz Allen, stakeholder engagement manager, Affinity Water; Simon Barnes, programme director, Yorkshire Water; Andy Brown, head of sustainability, Anglian Water; Keith Colquhoun, climate change and sustainability strategy manager, Thames Water; Andrew Fairburn, head of government relations, Severn Trent Water; Alison Hoyle, head of strategic planning, Southern Water; David Knaggs, sustainability & regulation director, Albion Water; Sarah Mukherjee, environment director, Water UK; Richard Spencer, head of sustainability, The Institute of Chartered Accountants in England and Wales.
