THE CAMBRIDGENATURAL CAPITALLEADERS PLATFORM

THE (SUSTAINABLE) BUSINESS CASE FOR NATURAL CAPITAL VALUATION

Business LeadershipThe Compact resulted from practicalcollaboration between members to identifyinnovative business solutions to address globalenvironmental issues and sustainability concerns.

Business leaders recognise that we are no longerliving off the dividends of natural capital2 , but offthe capital itself. The signatories of the Compactare urging governments to commit to a globalpolicy framework on the responsible andsustainable use of natural resources, and havealso committed their companies to a challengingshared agenda to build a deeper understandingof the un-costed impacts on people and theenvironment associated with the production andconsumption of goods and services.

By pledging to integrate externalities into theassessments of business risk and opportunitieswithin their decision making process, signatoriesof the Compact are taking bold steps towardsthoughtful business growth that considers theimpacts beyond the purely commercial.

In 2012, members of the Natural Capital Leaders Platformdeveloped the Natural Capital Leadership Compact1 - aground-breaking commitment by business leaders toproperly value and maintain the Earth's natural assets.

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What is an Externality?Business activities can provide benefits but also place pressures upon the natural environment. Thecosts or benefits resulting from these activities are frequently not accounted for in market prices orotherwise compensated – they are called externalities.

They are borne or enjoyed by parties who did not choose to incur them. Since these externalitiesare often not perceived in economic terms, there is a need to quantify and value them. Variousvaluation methods have been developed for that purpose.

1 www.leadershipcompact.com 2 ‘Natural capital' is an economic metaphor for the limited stocks of physical and biological resources found on Earth, and

the limited capacity of ecosystems to provide ecosystem services (i.e. the direct and indirect contributions of ecosystems to human wellbeing).

Why Should Companies Value Externalities?Valuing externalities can help businesses makebetter-informed decisions that take into accountthe degradation of (or benefits provided to) theenvironment and those that depend upon it asa result of their operations. By using a financialunit to assess environmental impacts, decisionscan be made more compelling and comparablewithin a business context.

E•Valu•A•Te – Externality ValuationAssessment ToolE.Valu.A.Te is a form of the practical guidance,developed by the Natural Capital LeadersPlatform, which provides guidance on how toperform an evaluation of environmentalexternalities within a particular context:

• The Online Tool3 provides interactive, step-by-step guidance to help companiescomplete a site-specific evaluation ofenvironmental externalities.

• A detailed Practical Guide4 providessupporting information for the Tool anddives more deeply into the evaluationassessments using examples from casestudies; it also offers guidance on scopingto identify and prioritise externalities.

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Undertaking the Case Study: a learning processWorking closely with the Natural CapitalLeaders Platform and academics co-funded bythe Valuing Nature Network, SABMillerdeveloped its own valuation study, using abottom-up approach. This study undertook avaluation of the environmental externalities ofSABMiller’s procurement of malting barley inRajasthan, India. The analysis began as anexploratory desk-study using company expertsas well as publically available datasetsregarding the biophysical and socio-economicaspects of farming in Rajasthan.

Prior to the company’s arrival in Rajasthan, verylittle malting barley was grown, but thecompany did not want to import all its rawmaterial from abroad. In order to build a localsupply chain, SABMiller India had to set up afarm extension service – providing local small-scale farmers with in-field advice on how togrow malting barley and offering them anattractive price.

Whilst all these farmers are independent andbarley is only one of their crops, SABMiller was

3 For access to E.Valu.A.Te: the Tool, please contact John.Pharoah@cpsl.cam.ac.uk4 The Practical Guide can be accessed here.5 Bowe C., van der Horst D. & Meghwanshi C. (2013); Assessing the externalities of SABMiller’s barley extension program in

Rajasthan. This can be accessed here.

still interested to develop a betterunderstanding of the socio-economic andenvironmental effects of its engagement withthe farmers. This interest was strengthenedbecause SABMiller India is well aware that itsoperations are in a region where water scarcityis a growing concern.

During the process of desk research, somedata gaps became apparent: informationabout actual farming practices, which is veryrelevant for valuing externalities, wasunderstood but not collected systematically atmanagement level within the company. Focusgroup meetings were held with the company’sfarm extension workers on the ground inRajasthan to collect the required data. Whilstnot as robust as an extensive survey of thefarmers participating in barley growing, thisfocus group approach was quick, affordableand very effective. It yielded a wealth of data,enabling the academics working withSABMiller through CPSL to complete thevaluation5, which supported the developmentof the E.Valu.A.Te guide.

Findings and ConsiderationsBy assessing different scenarios, the studyestablished both the background trends inagriculture in Rajasthan in the last 10 years(more fertiliser use, more fossil fuel use, minorreduction in water use) and the relativeperformance of barley farmers in comparison to that trend. The study was able to concludethat SABMiller’s barley growing programmehas helped participating farmers to:

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Increase their barley yield by55% and increase the quality oftheir barley which they sell tothe company

Across the 6000 participating farmers inRajasthan, the annual reduction of water useand CO2 emissions amounted to 3.4 million m3

and 1980 tCO2e respectively. The total value ofthese externalities was estimated at $300,000per year. Despite these benefits, the study alsohighlighted two areas for potentialimprovement.

Firstly, it showed that the water use reductionsachieved by farmers participating inSABMiller’s barley growing programme areinsufficient to address the unsustainabledepletion of the aquifer in the area caused bythe broader agricultural activities. Barley is justpart of the picture and wider systemic changesto the entire agricultural system are needed toaddress the rapid fall in groundwaterresources.

Secondly, it concluded that extension workerscould potentially help farmers to increase theirincome by $2/day if they systematicallyprovided best-practice agronomic advice forall current crops, not just barley.

Increase their income by $1/dayby following the best agronomicadvice for malting barley

Achieve a four-fold reduction ofirrigation water use comparedto other farmers

Reduce their carbon emissionsby 16% compared toother farmers

The extent of the inter-connections between resources means that issues such as waterscarcity, food and energy security cannot be addressed in silos. As global populationscontinue to grow, managing the relationship and trade-offs between water, food andenergy is only going to become more critical. SABMiller seeks to apply this kind of nexusthinking to our business decisions.

We share the risks related to these resources with local communities and other stakeholders,so collective understanding and collective action are key. In India, water scarcity is a majorissue. We work with other stakeholders to understand and tackle it for the benefit of localcommunities, and ecosystems, as well as our business.

SABMiller is excited to have undertaken this study with CPSL. This approach to valuing theexternal impacts of our business activities is a valuable tool to support better resourcemanagement. It also represents an important step in the journey towards factoring naturalcapital into business decisions.”

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Andy Wales,Senior Vice President Sustainable DevelopmentSABMiller

Final RemarksWasteful resource use and impacts upon natural capital can undermine long term economic andsocial stability, and therefore create a strategic risk for businesses. Yet assessing and pricingexternalities is not an easy task, nor is it an established business practice. The Natural Capital LeadersPlatform provides a unique forum for business leaders to build understanding of these issues,and benefit from the latest academic research.

The SABMiller India case study shows how natural capital impacts can be valued as part of the process of measuring and managing the things that matter for business performance.

Business activities can provide benefits but alsoplace pressures upon the natural environment

In the UK1 Trumpington Street,Cambridge CB2 1QA, UKT: +44 (0)1223 768850F: +44 (0)1223 768831E: info@cpsl.cam.ac.uk

In South AfricaOpen Innovation Studio27 Buitenkant StreetCape Town 8001, South AfricaT: +27 (0)21 469 4765E: info.sa@cpsl.cam.ac.uk

In BrusselsThe Pericles BuildingRue de la Scinece 23B-1040 Brussels, BelgiumT: + 32 (0)2 894 93 20E: info.eu@cpsl.cam.ac.uk

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Cambridge insight, policy influence, business impact

For 25 years the University of Cambridge Programme forSustainability Leadership (CPSL) has worked with leaders onthe critical global challenges faced by business and society.

CPSL contributes to the University of Cambridge’s missionand leadership position in the field of sustainability via a mixof executive programmes, business platforms and strategicengagement, informed by the University and otherpartners. CPSL is an institution within the University’s Schoolof Technology. HRH The Prince of Wales is the patron of CPSLand we are a member of The Prince’s Charities, a group of not-for-profit organisations of which His Royal Highnessis President.

www.cpsl.cam.ac.uk