20/04/2023

Road to net zero: why non-financial capital is important

Road to net zero: why non-financial capital is important Why solving modern slavery and biodiversity loss is just as important as reducing emissions on the path to net zero

Standards exist for calculating financial capital in terms of assets and liabilities. But non-financial capital, like human labour and ecosystem services, is somewhat more abstract despite its capacity to financially devastate businesses.

Non-financial capital underpins environmental, social, and governance (ESG) and can be split into natural, human, and social relationship capital. ESG has become synonymous with climate change, with urgent calls for action from national and international organisations as extreme weather intensifies.

In the midst of reducing carbon footprints from complex supply chains, nefarious risks like modern slavery and biodiversity hazards get pushed to the backseat of corporate vehicles. Demand for ESG related information from investors and other stakeholders is on the rise. Companies must recognise there is a real reputational and financial risk of ignoring this growing demand. Acknowledging the intertwined relationship between climate change, modern slavery, and biodiversity loss is a step in the right direction.

The plight of the modern slave

Corporate ESG frameworks are built around protecting people and the environment. Climate change has created economic and environmental vulnerabilities. Extreme weather events, rising sea levels, and desertification drive people into deeper poverty, exclusion, and marginalisation. This vulnerability makes people victim to things like debt bondage, sexual exploitation, slavery, and even exploitative labour.

UN sustainable developmental goal 8.7 says immediate and effective measures should be taken to end modern slavery, trafficking, and child labour. Businesses have a range of ‘stop slavery’ tools at their disposal, from initial baseline risk assessments to confidential business audits. These include drafting written policies and statements on modern slavery, supply chain road mapping, and training to support anti-slavery processes.

But quantifying the effect of modern slavery remains difficult to assess, which means it is often overlooked by investors. Modern slavery indicators help to describe the risk profile of organisations, but even these are difficult to measure. Reports on company websites do not tend to provide detailed insights, and the existing indicators in this area typically are non-standardised. This further complicates the matter for investors who wish to draw comparisons and assess risks that modern slavery holds for their investments. For investors this is not just an ethical issue but also an investment risk as their earnings and reputations become exposed to human rights violations.

Regardless of the aims to improve the situation, modern slavery is a reality for millions. According to the UK Independent Anti-Slavery Commissioner, there are more than 40 million people trapped in modern slavery. And yet there remains a low level of awareness or acknowledgement of the prevalence of slavery.

Biodiversity loss versus climate change

So much international attention has been directed towards carbon as a means of resolving climate change. It is only really after COP15 that biodiversity has become a point of key interest, as it has become more evident to the wider audience that climate change exacerbates and is exacerbated by biodiversity loss. These 2 issues are clearly not mutually exclusive.

According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, the planet is facing the risk of one million species going extinct. Many species face this risk within decades. Based on World Economic Forum estimates, this has risks and ramifications for USD 44 trillion dollars. Healthy, balanced ecosystems are critical for both society and economies, as they provide essential material, non-material, and regulatory services, and resilient stocks of natural capital.

With politicians finally acknowledging the fact that humans are dependent on the survival of nature, 100 world leaders united at COP26 to pledge to halt deforestation by 2030. In part one of COP27, the Kunming Declaration was adopted, which aims to reverse biodiversity loss. In part 2, this was converted into an action plan to protect the environment, to address unsustainable agricultural practices, and to implement nature-based solutions.

Data collection remains a preventative challenge as it can be a slow and costly process. There may also be an unwillingness by stakeholders to collect biodiversity data. That said, with the development of new nature tech solutions, standards, and frameworks, the process of collecting biodiversity data is gradually becoming easier.

This means it is increasingly possible to:

  • reflect the impact of businesses on biodiversity (and vice versa)
  • produce actionable metrics that can be used to align strategies with scientific recommendations

But this may still be financially restrictive for the small players.

Where from here?

Companies, due to regulatory or investor pressure, have been blinkered into measuring and reducing carbon footprints. But tides are shifting as conversations on modern slavery and biodiversity loss move up the global agenda. The challenge is the quantification of these impacts, especially in the absence of reliable measurements.

To manage sustainable growth, companies typically follow a particular route:

  1. Identify stakeholders and the respective duties and obligations to the stakeholders
  2. Define standards of performance
  3. Apply context-based metrics to measure performance against those standards
  4. Identify room for improvement (for example, better supply chain due diligence)
  5. Plan interventions to close any gaps, implement the interventions, and remeasure performance

The field of corporate sustainability translates sustainable growth, respectful of all stakeholders, into pragmatic action points. There is a growing need to quantify the other forms of capital to allow non-financial capital to be analysed in the same light as financial capital.

Advancements in data collection and reporting tools and standards combined with expert knowledge are starting to make it easier to identify problems in supply chains. (Although it may be more challenging to solve those problems.) Some companies may only be pursuing the ‘E’ and ‘S’ in ESG. Others may have an honest desire to eradicate injustice and protect the environment. Irrespective of the motivation, companies need to re-evaluate their current practices.

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