Calculating the True Value of Nature

Purchase PDF
Trucost
Richard Mattison is the CEO of Trucost, an environmental accounting firm.

Richard Mattison is the CEO of Trucost, an environmental accounting firm that works with companies, governments, and investors to quantify the economic costs and benefits of actions. Since its founding in 2000, Trucost has run hundreds of analyses using its proprietary economic models. Their data analysis allows clients to make more informed decisions by more precisely quantifying the environmental aspects of that decision.

Mattison received his PHD in Neuroscience from the University of Edinburgh, and joined Trucost in 2002 after working as a strategy consultant. In his time at Trucost, he has overseen many special projects, including aiding the UN Principles for Repsonsible Investment by valuing environmental externalities for the 3,000 largest companies in the world and developing the first Environmental Profit and Loss Account. He also helped create the UK Government’s Environmental Reporting Guidelines for Business.

Trucost calculates the true cost of economic activities on the environment. How do you do that?

Basically what we’re doing is valuing nature.

The first thing we do is to gather biophysical information on a company’s environmental impact and all of the environmental benefits that might be accruing. That’s often challenging because our starting point is to look at a company not just as an entity that exists within the scope of its own operation, but as an entity that exists within the scope of its entire value chain. So what we have to do is find ways of looking upstream and downstream, looking at the full life cycle of a product or company.

In many cases we find there is a lack of data, so we use economic models called input–output models to analyze value-chain flows. We find the output of things like tons of carbon, tons of waste, use of water, air pollution, and land conversion. The final step is that we use various different economic techniques to put a price on those biophysical units. We look at the social costs of carbon to put a price on climate change, we look at air pollution from the perspective of health care costs—in China specifically that’s quite an issue—we look at other forms of pollution in terms of the damage they create to the local environment and local economy.

Once you’ve gathered all of this data, formatted it, done your analysis, how do companies use the analysis that you give them?

There’s three main areas in which companies use that information: risk management, product development and design, and communications.

With risk management, because the cost is expressed in financial terms, we can compare different types of environmental impacts. If you need to know what’s more important to your business, 10,000 tons of carbon emissions or 10 grams of mercury emitted into a local river, these types of metrics will enable you to compare those two to determine what is material to your business in a financial context. You can use it to look up your supply chain to identify areas where risk is particularly concentrated .You might find that making your product requires a lot of water and this will allow you to put a price on water that reflects its scarcity, rather than today where there is actually a negative correlation between the price of water and how scarce it is.

Then what we do with this information is say what would happen to costs if that market failure were corrected—which it’s likely to be, in our opinion. So this allows risk managers and financial managers to analyze the extent to which input costs might increase. It allows product designers to have a better view on material selection and look potentially at substitutes that are more sustainable.

From a communications perspective, it allows those involved to communicate quite clearly about the extent to which their company is having an effect on the planet, the extent to which their interventions might be counterbalancing, and exactly how much each of those amount to in dollar terms. A new trend in communications terms is integrated reporting, which enables boards to identify what the material issues and opportunities for their businesses are in financial terms and to compare that to other financial measures of what’s going on.

Can you give us an example of companies using this information to positive ends?

Sure, as an example, Puma has developed a new product range called the Incycle according to cradle-to-cradle principles. You can compost the shoes. We analyzed that range of clothing for environmental benefits and using these metrics, we’re able to say that the range of products, on average, was 31 percent better for the planet than the conventional products. Puma could quantify the impact of water use, air pollution, zero-pesticide and zero-fertilizer manufacturing. They could quantify the benefit of not landfilling the shoe, and they could quantify the take-back scheme. In our world now, we’re trying to move out of an economic recession, but the biggest challenge is decoupling economic growth from the environmental impacts and these metrics let you do that.

You started your career as a neuroscientist, which is not really related to environmental advocacy. How did your career path evolve?

I actually started out my studies doing environmental chemistry, so I’ve always had an interest in environmental issues. I studied biology and neuroscience because I liked the challenge of thinking about a system. You can’t take one piece of the brain and by analyzing it to death understand the totality. You have to take a systems approach to it. I eventually decided to switch my career to business because I felt I could make a difference in a business arena. I became a strategy consultant, learned a lot of techniques, and through a former member of Trucost I was invited to come to the company to develop their initial set of plans. I’ve stayed ever since because it married up my interest in the environmental with a systems approach to analyzing and solving problems with a business application.

You were integral in producing the UK government’s environmental and reporting guidelines for business. Because you’ve done government work and private-sector work, how effective can a government be in regulating environmental issues like this?

int2_0.jpg

Stan Wiechers
Trucost calculates the social and economic costs of business operations, through methods such as assessing air pollution through the lens of health care costs- a topic of great relevance in China, for example.

Governments have a big role to play. A lot of people say governments can be quite ineffective, and sometimes that’s true, but I do think that, for example, you can’t underestimate the impact of regulations such as fuel-efficiency in cars. That will have a huge effect on oil consumption. Just because we haven’t come to an agreement on global emissions of greenhouse gases (which frankly is a herculean task), that doesn’t mean that governments have no role. The role of the government is to regulate as much as possible, as swiftly and effectively as possible, while keeping an eye on those global negotiations. If you look at China, they’ve implemented a huge carbon-trading scheme across seven provinces. That was not because China feels the need to comply with Kyoto, it just makes business sense. China’s near-term clear and present danger is air pollution. One way to regulate it is a carbon-trading scheme. What they’ve done is killed two birds with one stone. They’ve been able to regulate on carbon, which will incidentally regulate on air pollution, and create fuel efficiency. So perhaps even three birds with one stone. There’s a huge role for businesses to play, too.

You anticipate my next question—what is the role for businesses?

I think businesses can make decisions pretty quickly. Once they realize what’s going on, businesses will act in a very self-interested way, and that’s going to be good for the environment. What we’re finding is that there’s lots of geopolitical risk created by environmental factors, a lot of volatility is caused by events related to climate change and water scarcity. For a business that relies on leather, for example, the price of wheat is hugely important because it goes in as a foodstock to beef. What happens with climate change, floods, and terms of droughts is therefore important to your product design, your sourcing, your materials, and how much of your supply chain you want to own in a world of ever-increasing scarcity. We’re finding some clients seriously considering vertically integrating their supply chain, in other words, buying up their suppliers in order to guarantee that they get their supply. So a lot of these metrics are helping guide companies’ decision-making.

Going back to the guidelines that you wrote: If you had to redo them now, is there any major change that you would make to them? Something you think “we really should have covered this?”

Yeah, we’re now 9 years down the line from writing those guidelines, so quite a lot has changed. The major problem in the marketplace is making sure, from a reporting perspective, that what’s being reported is relevant. There has been a tendency to create long lists of environmental indicators that organizations can check off and report on and put that out there. The question is, who is your reader? Because if your reader is someone in the financial community and you’re reporting on tons of carbon, tons of waste, grams of mercury emitted into a stream, honestly most financial analysts wouldn’t know how to interpret that information.

If I were to think about revisions or changes you could make, they would be in the direction of making sure that there are clear guidelines about the way in which you report on environmental issues. Let me give you a concrete example of how that could apply today. A lot of companies are thinking about issuing “green bonds.” The bonds are tied to improvements in companies’ infrastructure and many different things, and they usually have to be audited. I would imagine that, faced with the prospect of investing in a green bond, it would be helpful if there were some simple metrics, using natural-accounting techniques, to communicate the benefit of those bonds. Rather than say “over the next 20 years we will deliver 10 million tons of carbon savings, 500 tons of waste, and 20 grams of mercury,” wouldn’t it be fantastic if, as part of the mandate of the bond, you can say “it’s a million dollar bond, but it will deliver 10 million dollars’ worth of value to society over the term of the bond.” I think that will be quite a useful metric for people to consider in terms of thinking about what real benefit is accruing from sustainability and investments.