There is common understanding of a need for action to counter the destruction of natural resources and the environment for the sake of the economic growth. Political and investors’ pressure on business is continually increasing, and the need for sustainability and risk disclosure cannot be ignored anymore. Only a fraction of the current global economy can be considered sustainable according to leading financial institutions and multinational agencies, however the EU has set out an ambition to achieve a sustainable financial system and economy by 2050.

The EU has recognized that to achieve this ambition, a shift is required in the way that businesses understand and account for their relationships with nature and people, and that accounting for the value of nature in decision making is crucial to achieve this shift.
With Transparent we developed a methodology that supports business decision-making processes through the use of robust environmental information. The Transparent methodology was developed to complement future developments in external reporting such as the CSRD and related European standards.

The Transparent project is connected to a sister project (ALIGN), where the methodology of Transparent is adapted to develop an approach for biodiversity measurement and valuation.

The Transparent methodology provides the approaches for natural capital accounting and impact measurement and valuation, applicable for the entire value chain, that could span over multiple countries and continents.

Transparent methodology and guidance documents are intended to be used by:
– All companies who want to prepare for future requirements and understand their embeddedness in their environment.
– Accountants within the businesses, as their role will include the provision of data to complete this type of assessment and own the results to communicate it to different business functions in the future. In the longer term, integrated accounts might be created combining financial results with human, social and natural capital accounting results.
– Business executives and decision-makers from key corporate functions (operations, purchasing, marketing and public affairs, R&D, etc.)

The Methodology provides a step-by-step assistance to get from framing to applying natural capital accounting It enables companies’ internal stakeholders to better identify and manage their environmental impacts and dependencies in a credible way using standardised methodologies which are fit for purpose.

Deliverables included:
– A benchmark of best practices
– The first set of methodology principles
– Tested corporate implementation
– Cross-industry and sector-specific application guidelines
– A blueprint for corporate management decision-making
– Update of the MIT Shift Capitals Toolkit
– Uptake recommendations.

Building on the consensus achieved through the Natural Capital Protocol, the goal of the Transparent Consortium was to further drive those efforts, particularly with regards to standardised natural capital accounting methods and a clear focus on applicability to:

– Enable decision-makers to improve corporate decisions
– Standardize where possible, provide guidance where needed
– Be embedded in broader movement, connected to existing and emerging frameworks
– Consider scalability and practical feasibility

The application of Transparent provides users with relevant and useful information to support decision making. Transparent will be used by business aiming to understand the value of their impacts and dependencies. Currently, ‘best-in-class’ companies integrate this relevant information into their management processes. Transparent aimed to escalate these practices to a broader group of companies, providing recommendations for standardization and creating consistency in how businesses measure and value their impact and dependency on natural capital. It provided management accounting principles, that can, in turn, be used for external disclosure for reporting to stakeholders under CSRD, the EU Taxonomy Regulation, or the international and national standards (e.g., ISSB).

The project created consistency in what should be measured and how businesses should measure and value natural capital impacts and dependencies in the scope of air, water, land, and biodiversity.

To guarantee a close alignment, the project Transparent has several interlinkages with the IFRS/ISSB. The ISSB focuses on external disclosure and aims at qualitative reporting a company’s sustainability performance from an investment perspective.

Transparent considers the effects of a company’s operations on its environment and values them in quantitative monetary terms. The ultimate goal is to facilitate decision-making processes in a company that takes account of both its operations on its environment and the environment’s value on the company (double materiality).

The IFRS/ISSB experts were involved in Transparent’s technical review panel providing actionable feedback on the methodology. Developments around ISSB fed into Transparent’s further methodology development and were considered in the final project output.

The Corporate Sustainability Reporting Directive (CSRD), is an amendment to the 2013/34/EU Accounting Directive, an EU legislation requiring larger companies in the EU to disclose information on environmental, social, governance and human rights-related matters.

The EU Commission formally adopted the CSRD proposal in April 2021, expanding the scope of earlier reporting legislation by making reporting requirements mandatory for a wider range of companies, requiring auditing and digital tagging of reported information, and introducing more detailed reporting requirements.

The proposal for the Corporate Sustainability Reporting Directive (CSRD) by the EU Commission in April 2021 demands to integrate natural (environmental) capital and biodiversity with businesses.
The contribution of the preparatory project Transparent is described in the Recital 38 of the CSRD proposal: “In its communication on the European Green Deal, the European Commission committed to support businesses and other stakeholders in developing standardised natural capital accounting practices within the European Union and internationally, with the aim of ensuring appropriate management of environmental risks and mitigation opportunities and reduce related transaction costs. The Transparent Project sponsored under the LIFE programme is developing the first natural capital accounting methodology, which will make existing methods easier to compare and more transparent while lowering the threshold for companies to adopt and use the systems in support of future-proofing their business.”

Under CSRD, companies will be required to report on their environmental impact following the concept of double materiality approach (see above)

The main purpose of Transparent is to streamline existing natural capital accounting practices and find a commonly applicable standardized methodology.
The Transparent methodology focuses particularly on the measurement and valuation of a company’s impact on its environment along with the six impact drivers: GHG emissions, non-GHG air emissions, Water consumption, Water pollution, Land use, Waste.

The methodology follows four main steps: Defining the objective (why?), Scoping (what?), Measure and value (how?), using the results (what next?).

To do so, the project brought together leading practitioners from businesses and experts, reviewed relevant initiatives, research, standards, methods, reporting frameworks and other key resources to develop an overall map of the corporate natural capital accounting landscape.

This helps identify potential gaps and development opportunities for the CSRD and ensures a rigorous scientific base for sustainability accounting.

The Transparent Methodology will not serve to label activities or assets as ‘green’ or ‘not green’ per se – an area reserved for the EU taxonomy on sustainable finance, the green claims initiative, and other green product standards.

A separate guidance document was created on the application of natural capital accounting from a management perspective (“management blueprint”).

This guidance document addresses practical matters related to decision-making in more detail, including recommendations for integrating natural capital accounting into business systems and processes.

The decisions the methodology aims to inform include, but are not limited to
– assessing risks and opportunities to inform strategy and planning
– comparing options to prioritize and target investment
– assessing impacts on stakeholders
– estimating the total value to assess net impact to determine whether a business activity creates net positive or net negative impacts on natural capital and inform Environmental Profit and Loss account (EP&L)
– communicating and reporting attract investors and customers.

By understanding the embeddedness of their value chains in their environment, companies are prepared for future legislative initiatives on sustainable corporate reporting (CSRD, etc) and are more aware of risks related to the business activities throughout the value chain and their effects on the environment.

Transparent enables decisions that consider the value of companies’ impacts and dependencies with clear guidelines. The resulting methodology help to provide consistent and robust information to a company’s diverse stakeholders.

The value of natural capital refers to the importance, worth, and usefulness provided by nature, both to business and society. Consequently, there are two major perspectives on value:

– Stakeholder perspective that focuses on positive and negative impacts of corporate activities on the environment and by extension society – the value to society perspective
– A financial-driven view of how these impacts and dependencies affect the (longer term) financial performance of corporations – the value to business perspective.

Both perspectives are inherently connected and have, thus, been widely acknowledged as “double materiality.” The Transparent consortium believes that both perspectives are fundamental for understanding a company’s long-term value creation.

Capital has traditionally been thought of as financial capital. However, capital describes any resource or asset that stores or provides value to people. Natural capital, social capital, and human capital work in much the same way as traditional capital – if companies invest in them, they create value, and if companies degrade them, they limit their value.

Natural capital accounting follows a holistic systems approach to understanding the true value of nature, people, society for humans. The economy must be recognized as parts within a deeply interconnected global system and addressed together to deliver value across the capitals. It is an approach to measure the changes in the stock of natural capital at a variety of scales and to integrate the value of ecosystem services into accounting and reporting systems at national, corporate, project and product levels. This will result in better management of natural capital by these different entities.

Natural capital underpins operations and economic activity, yet is seldomly considered because other than financial capital, for other capitals, there is not yet a robust accounting process. It provides the information for better managing all of a company’s and society’s essential resources (air, biodiversity, land, and water) for ensuring the ongoing provision of benefits to business, shareholders, and society into the future.

Steps:
– Impact driver definitions (materiality assessment, recommended)
– Measuring the impact driver (quantification of impact driver)
– Measuring the changes in the state of natural capital (modelling)
– Valuing impacts (monetary valuation of impacts and finalization of accounting)
– Using the results of impact valuation (decision making)

Currently, we experience a very fragmented sustainability reporting landscape that is characterised by ambiguity and subjectivity and is lacking a robust scientific methodology. However, for a sustainable transformation of how we do business, we need to acknowledge the interconnectedness of business activity and apply a more holistic approach.

Finding a common language is difficult in the sustainability dialogue, so more and more initiatives are moving to use monetary terms. This creates one universal language understood by all stakeholders and creates an objective and comparable base for discussion.

Monetary valuation transforms traditionally non-financial impacts on the environment or society (harmful or good) into monetary values.

The first step to do this is to identify relevant activities and measure them to quantify impacts in physical terms. Then select a method to value impacts in monetary terms.

Monetary valuation also brings challenges that manifest in uncertainties around data use and calculations, the selection and use of an interest rate to discount values, and uncertainties about the potential future value of natural capital that yet cannot be estimated.

However, regardless of the critical dimensions, monetary valuation uncovers risks in supply chains and provides a common language for the sustainability dialogue. It operationalizes efforts that can ultimately result in a more sustainable future. It provides an actionable proxy and empowers actors in our economy to speed up their walk towards de-risking operations and a responsible business mainstream.

The basic steps to derive the value of a company’s actions in relation to natural capital are:

1. Measure your impact driver (Step 05 in the Natural Capital Protocol). This typically involves measuring or estimating impact drivers in terms of physical quantities.

example

If you want to measure the impact of non-GHG air emissions, you first need to quantify how many tons of air pollutants were emitted in each of the key activities along your value chain.

2. Measure the change in the state of natural capital, as a result of your impact driver (Step 06 of the Natural Capital Protocol). These will be highly dependent on the impact driver and impact area you are considering.

example

Emitting non-GHG air emissions may lead to an increased local concentration of pollutants and hence reduced air quality.

3.Value the impact this change in capital has on society (Natural Capital Protocol, Step 07). Assessing the value of impacts on people and nature requires an understanding of how changes in natural capital are linked to impact areas such as human health.

example

The impact on society of reduced air quality will be far greater if it occurs close to densely populated areas, and the degree to which individuals contract diseases may also depend on their overall health. The degree to which people and nature are affected will be dependent on a range of factors, including local geography, population density, ecosystems, etc.

A company is likely to be dependent on natural capital not just directly but also through suppliers and customers. Therefore, an assessment of natural capital impacts (and dependencies) will likely need to go beyond a company’s own operations.