Olam among first in Singapore market to report detailed natural capital accounts

BURIED in Olam Group’s 2021 annual report was a profit and loss (P&L) statement of an unusual kind – one attempting to take stock of all the shadow costs “paid” by society and the environment to sustain business activities at the food and agri-business company.

It appears to be one of the first, if not the first, Singapore-listed company to have released such a detailed account of “natural capital” that went as far as computing a balance sheet. The practice is not new, but it is still rare, although market players expect to see more examples in the coming years.

Companies that conduct such an exercise are in all likelihood already calibrating their business activities to mitigate their impacts and dependencies. For example, companies can use the analysis to explore different types of land use or markets, decide on changes to procurement sources, or invest in landscape restoration.

Olam, for one, is allocating resources to scale up the number of farmers trained on good agricultural practices. The company told The Business Times that this is expected to not just improve quality and volume of yields, but also improve use and maintenance of existing farm land, which can, in turn, cut down land conversion needs.

Whether the reports are useful to investors is a more complex question to answer. The results could help investors to monitor the company’s natural capital performance over time. But investors eager to use this for industry benchmarking by tracking net impact per dollar revenue, for instance, might have to hold their horses.

Companies have different motivations for carrying out natural capital assessments, and each scopes out different aspects of their business to focus on as they currently see fit. Until regulators and international bodies standardise natural capital accounting and reporting, it remains difficult to compare figures from different companies. 

Origins Puma, the German sportswear giant, pioneered the practice of ascribing monetary values to a company’s environmental impacts in 2011, when it released an environmental P&L account. It was a groundbreaking move, providing a tool that could potentially help businesses to navigate difficult trade-offs between different kinds of impact, such as carbon emissions, water use or job creation. The key was providing a common financial unit instead of pitching tonnes against litres or number of jobs.

The exercise at that time placed Puma’s 2010 negative impact – or a loss in the P&L statement – at 145 million euros (S$207 million), including deteriorations caused by its supply chain. Although this loss did not affect Puma’s financial earnings, the company used the analysis as an “initial metric” for better decision-making.

The P&L’s underlying methodology, which was developed with the support of consultancies PwC and Trucost, inspired many of the frameworks on natural capital accounting available today.

Olam’s approach is similar to Puma’s. Olam also carries the caveat that the natural-capital bottom line is not related to financial results or financial reporting, and is an approximation at best, dependent on formulae and third-party expert studies.

Logic for line items There is no standardised methodology or taxonomy for non-financial capital accounting, and Olam cautions that its results could be readjusted for further methodology refinements. However, global multi-stakeholder collaboration Capitals Coalition’s 2016 published Natural Capital Protocol is one of the most highly referenced among existing frameworks. Olam took elements from it as well.

The Protocol provides companies with 11 categories of possible natural capital “impact drivers” to help them consider which are most material to their businesses. Olam zoomed in on four – greenhouse gas emissions, water consumption, water pollution and biodiversity – to track its natural capital deteriorations under the “expense” portion of its P&L.

The Protocol also provides a non-exhaustive list of 10 possible dependencies, which appears to be the basis on which Olam added line items like “pollination” to its balance sheet. (Pollination is important to agriculture as a decline in the population of wild pollinators, like bees, due to factors such as deforestation and climate change can lead to lower yields and additional costs to producers, who may be forced to rely on commercial pollinating services.)

Flows and stocks Like conventional accounting statements, Olam’s natural capital P&L tracks “flows”, while the balance sheet tracks “stocks”. And like conventional accounting, the two statements are related. Without sufficient stock of natural resources, a business activity can’t yield a flow of benefits or services to people.

There’s an important difference. While the P&L captures natural capital performance within the financial year, the balance sheet tracks changes to the underlying natural capital stock on a “future flow of benefits” basis, so the latter is, in fact, a forward-looking statement.

This practice is not new, and is allowed under the Protocol, which noted that net present value, a commonly applied method of assessing the current value of an asset based on future flow of benefits, can be applied to natural capital stocks. Olam uses this.

Nat Vanitchyangkul, the regional chief executive officer of sustainability consultancy ERM, believes such quantification of natural capital will enter the mainstream.

The Taskforce on Nature-related Financial Disclosures, he noted, has released draft disclosure recommendations urging companies to understand the financial implications of the nature-related dependencies and nature impacts. The global, market-led initiative’s finalised framework – which draws inspiration from existing recommendations on climate-related risk disclosures from the Task Force on Climate-related Financial Disclosures – is earmarked for release in late-2023.

He added: “The trend, moving forward, is that even permitting authorities will not allow you to do a project just because it creates jobs with minimal environmental impact. They will ask you to quantify (among others) the natural capital impact.

“Those are the emerging standards that the authorities would use to approve a project. I see it coming.”