Natural Capital Leaders Index: Identifying Corporate Sustainability Leaders

by Joel Makower and the editorial team at GreenBiz.com and Dr. Richard Mattison and the team at Trucost

 

Recently, GreenBiz Group and Trucost launched the Natural Capital Leaders Index (NCLI), a breakthrough methodology for identifying corporate sustainability leaders that are making genuine progress in reducing their environmental impacts.

Simply put, NCLI is the first-ever assessment to identify companies that have done the most to address absolute natural capital impacts, such as pollution and unsustainable demand for natural resources. NCLI achieves this by decoupling those metrics from revenue growth, which can distort corporate results by presenting efficiency gains without acknowledging that overall natural capital impacts for the enterprise are continuing to grow.

NCLI recognizes companies that have, in effect, begun to address their absolute impact, separate from their business growth. This year’s inaugural list identifies 34 companies globally that have met our criteria.

One of the interesting things about the Index is that it is not your usual cast of widely recognized “sustainable” companies. In fact, we present two lists side by side — one of efficiency leaders (companies that are using natural capital most efficiently to generate revenue), the other of decoupling leaders (companies that have successfully decoupled revenue growth from natural capital dependency and impact). There is no overlap between the two.

This new Index was released as part of GreenBiz Group’s 7th annual State of Green Business Report, an annual, award-winning assessment of corporate sustainability progress, or lack thereof in the case of this year’s findings.

From the 2014 SOGB Report – The Natural Capital Leaders Index

This year, GreenBiz is introducing a new metric of company performance: The Natural Capital Leaders Index, developed by Trucost. It assesses companies in an innovative way — one that we believe shines a light on those that are making the most progress in addressing planetary limits on natural capital.

Companies have long been measured on their environmental performance against a wide range of standards and metrics. Some of these measurements are created by companies themselves, others by outsiders: advocacy groups, government agencies, media companies and others. Most focus on identifying the leaders — the “greenest” or “most sustainable” companies.

There are challenges with many of these ratings, rankings and indices. One challenge has to do with the difference between “absolute” and “relative” performance, also referred to as “intensity.”

Most assessments of companies look at intensity — the company’s resource use or emissions normalized to revenue.

So, for example, if Company A uses 50,000 gallons of water to generate $1 million in revenue, and Company B uses only 35,000 gallons to do the same, Company B is seen as the more efficient company.

So far, so good. Companies should be lauded for efficiency. But “efficiency” doesn’t always equal “progress,” at least from the planet’s perspective. As an efficient company inevitably grows, its resource use and emissions typically grow, too. And the burden on natural capital — the use of the earth’s resources and the dumping of waste into the air, water and soil — continues to grow.

The planet doesn’t care about relative performance or intensity. It cares about absolute performance — the total amount of resources extracted or emissions created.

So, if companies achieve high levels of efficiency and their revenue grows at the same historical rates as over the past 30 years, they will not effectively address the challenges of climate change, resource depletion, air and water pollution, land use and other issues.

Please understand: There is absolutely nothing wrong with economic growth. The economy and jobs rely on companies to grow year over year. Growth is expected and inevitable. The challenge is how to accommodate economic growth within the planet’s finite limits, so as to ensure future economic, environmental and social sustainability.

Trucost’s Natural Capital Leaders Index aims to show not just which companies are the most efficient, but which ones have separated growth from impact — that is, which companies have reduced their absolute impacts at the same time that they have increased their revenue.

We believe that measuring whether and how a company is “decoupling” revenue growth from environmental impact will become an increasingly important tool for assessing a company’s sustainability goals and achievements.

In October 2013, GreenBiz.com published the draft methodology for the Natural Capital Leaders Index. Following consultation with the thousands of companies within Trucost’s research universe as well as with the GreenBiz community, Trucost compiled the Natural Capital Leaders Index. It features two categories of leaders:

•  Efficiency Leaders use natural capital most efficiently to generate revenue over the past year.

•  Decoupling Leaders have increased revenue while decreasing natural capital impacts over the most recent five-year period.

Both lists were culled from the same universe of more than 4,600 publicly traded companies used to compile the other metrics in the State of Green Business report. (Learn more about Trucost’s methodology in the Appendix at the end of the GreenBiz State of Green Business Report.

Trucost intended to include up to six companies from each of 19 sectors (three each from the S&P 500 and MSCI World Index), for a total of up to 114 Decoupling Leaders. However, out off the roughly 4,600 companies screened, only 34 met the standard of rising revenue and declining impact over a five-year period. Those companies are listed alphabetically by sector.

To provide additional context, Trucost has published a series of sector-based Natural Capital Benchmarks. Working with the Center for Sustainable Organizations, Trucost provided environmental context alongside financial context through Context-Based Sustainability analysis. Initially, that analysis is limited to carbon, but as consensus is reached on planetary limits for other environmental impacts such as water and land use, Trucost will incorporate them into future editions of the index.

The Natural Capital Leaders Index represents the beginning of a journey to create a new era of sustainability metrics that effectively align business strategies with sustainable development imperatives.

More information on the NCLI methodology can be found in the report, or at

www.trucost.com/naturalcapitalleadersindex

“We believe that measuring whether and how a company is “decoupling” revenue growth from environmental impact will become an increasingly important tool for assessing a company’s sustainability goals and achievements.”

Information from the State of Green Business Report 2014 by Joel Makower and the editorial team at GreenBiz.com and Dr. Richard Mattison and the team at Trucost.

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