by Professor Owen Skae

GOOD GOVERNANCE

Over the past 50 years, an “unnoticed apocalypse” may have killed off half the planet’s insects.

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Over the past 50 years, an “unnoticed apocalypse” may have killed off half the planet’s insects. This is the opening line of a World Economic Forum feature on 25 Nov 2019. It is a sign of the times that this is getting the attention of the World Economic Forum and we really need to sit up and take notice.

The author of the feature, Johnny Wood, says the factors contributing to the decline of the insect population include climate change, overexposure to chemicals used in fertilisers and pesticides, which are deadly for insects, and the loss of natural habitats through human development and agriculture. This includes the disappearance of vast expanses of flower-rich habitats on which bees and other pollinating insects depend.

According to Emeritus Professor Stuart Reynolds of the University of Bath, UK, we’re talking about a loss of millions of species. He explains that if the current rate of decline continues, it could have catastrophic consequences for the planet and everything that lives on it, including humans: The role allotted to all these tiny creatures in the grand scheme of nature is to eat and be eaten. Insects are the key components of essentially every terrestrial food web. And so it’s obvious that when insect numbers decrease everything higher up in the food web will suffer. This is already happening …

But what does this have to do with good governance? Everything. First of all, we’re talking about critical biodiversity and ecosystems without which we cannot survive. And therefore the question that business is now being pressed to answer as part of good governance is: Can a board of directors contend that the business model of a company is sustainable without dealing with the risks of climate change and biodiversity and species extinction?

This was addressed in a fascinating presentation at a colloquium of the Good Governance Academy held at the Regenesys Business School in Johannesburg on 28 November 2019. The patron of the Good Governance Academy, which was launched in 2018 (https://thegoodgovernanceacademy.com/) is Professor Mervyn King, who, as we all know, has pioneered the path of integrated reporting.

The Academy is all about developing conscious leaders, and it has become increasingly clear, that conscious leadership requires a deep understanding of- and commitment to proactively address the devastation of the natural environment we are seeing in our country and the world over.

Highlighting the global biodiversity crisis in a most interesting presentation at the colloquium, was Prof Jill Atkins from Sheffield University Management School, and Visiting Professor at Wits University. Her presentation was titled: Is a company’s business model sustainable without considering the risks of climate change and species extinction? Atkins has also co-authored a book with her BBC writer/editor husband, Barry Atkins, titled Around the World in 80 Species: Exploring the Business of Extinction. It looks at why companies need to be concerned about threats to the environment and why they need to account for their use of natural capital.

They are very clear about the dystopian future we could be facing. Jill states: “We are currently experiencing what is often called the sixth period of mass extinction on planet Earth, caused undoubtedly by the impact of human activities and businesses on nature. Extinction, at its current rate, will ensure that financial markets will collapse, which will happen shortly before the extinction of the human race, if no urgent action is taken.”

She emphasises that the extinction crisis is a human-created material financial issue that only we can solve. To back this up, she presents strong illustrative estimates for the 2019 period, when, globally, we consumed natural resources very much faster than the earth can produce them.

In terms of goods and services provided by ecosystems, she said the human demand, if converted to monetary terms (based on values on earth overshoot day https://www.overshootday.org/about-earth-overshoot-day/), was US$145 000 000 000 000, while the Earth’s production capacity was US$98 000 000 000 000. The number of traditional and modern medicine plant species required was 50 000–70 000, while the Earth’s production was 37 500–52 500. The harvest from the oceans was 100 000 000 tons, while the Earth’s production capacity was 67 000 000 tons.

In any business you cannot continuously demand more than you can supply; if you do, you are heading for a disaster, and so the question is what are we going to do about this?

A useful framework for action is provided in a paper Atkins co-authored with Wits University School of Accountancy Professor Warren Maroun, titled: Integrated extinction accounting and accountability: Building an Ark. It was published in 2018 in the Accounting, Auditing & Accountability Journal.

They outline seven actions required to implement integrated “extinction accounting” systems:

1: A proactive and progressive emancipatory accounting framework

The authors write: An emancipatory extinction accounting framework is different from conventional sustainability or biodiversity reporting, which is often limited to disclosing environmental, social and governance considerations … Extinction accounting needs to be transformative and, for this reason, our model requires companies to be proactive in how they manage extinction risk.

They explain this requires active stakeholder engagement, appropriate management systems to monitor and drive environmental performance and supporting accounting infrastructure, and that specific management interventions, systems, controls and policies need to be developed and implemented to drive extinction-reversal plans.

2: Integrated thinking

The authors write: Extinction accounting is more likely to produce the desired outcomes when extinction is understood at the operational and strategic level and as part of an integrated thinking approach to business management based on the six capitals referred to by the International Integrated Reporting Council (IIRC).

The six capitals are: financial, manufacturing, human, social and relationship, intellectual, and, natural.

3: Extinction as a business imperative

The authors write: In many cases, the link between extinction and the different capitals can be established. A salient example is the risk of pollinator extinction which, for the food industry, would have catastrophic consequences for production and supply of agricultural produce (manufactured capital) and the profitability of producers and retailers (financial capital). Companies need to manage this risk by reviewing the environmental impact (natural capital) of existing farming methods, including the use of pesticides, and how new technologies (intellectual capital) and existing knowledge, expertise and experience of its employees (human capital) can be mobilised to mitigate the threat to long-term sustainability.

4: Extinction as a moral imperative

We’ve already discussed the impact of insect extinction and here they offer another example, of the rhino, which does not impact the business of the local food industry as directly as the honey bee but is a flagship species within its ecosystem. The extinction of our rhino is not only an assault on our culture, heritage and tourism but has other devastating consequences as well.

Rhino poaching is part of transnational organised crime syndicates that are also linked to the depletion of our natural resources and oceans, as well as drug and human trafficking. This is a parallel economy that is costing our country and many other countries billions, and completely undermining the moral and economic imperative.

5: The moral versus business imperative

The authors explains there are two opposing perspectives on extinction accounting: those who feel you cannot commoditize or put a financial value on natural capital/ecosystems, and those who seek to assign financial value to them.

Putting a value on natural capital/ecosystems is known as biodiversity valuation. Essentially, it’s the process of estimating the importance, worth or usefulness of biodiversity components for your business.

6: Motivations

The authors explain that accounting can be used to construct new fields that promote positive change and drive real compliance (as opposed to superficial reporting and impression management) linked to the six capitals.

7: Drivers

The authors write: The threats posed by climate change, habitat destruction and mass extinction are well documented and no longer regarded as the exclusive domain of the scientific fraternity. Public pressure to reduce greenhouse gas emissions, use natural resources responsibly and accept accountability for biodiversity impacts is, in our view, resulting in growing coercive pressures to develop more refined accounting and management systems which are capable of reporting on and reducing adverse environmental impacts.

Scientists worldwide have come up with many innovative approaches to reducing these impacts. One example is biological control of the water hyacinth–an invasive non-native weed from South America–that has been on Hartbeespoort Dam since the mid-1960s —which clogs the dam is a drinking water safety hazard.

According to Prof Julie Coetzee from the Centre for Biological Control at Rhodes University, two insects, the Neochetina weevils, and the water hyacinth plant hopper, Megamelus scutellaris, also from South America, are proving highly effective in controlling water hyacinth. She explains that these insects have been thoroughly studied over many years in South Africa, the USA and Australia, to make sure that they are safe and that they only feed on water hyacinth.

In many different ways, extinction accounting can help us to do business better because valuing biodiversity and ecosystem services such as clean water and pollinators is not only the right thing to do, it can also contribute to business growth.

For example, development economist Wendy McCallum, has assessed the impact of water on the economy of the water-stressed Nelson Mandela Bay Metro.

In an article published in December in Business Maverick she says: “If we, as civil society and corporate citizens of our city were to reduce water usage by 10% until 2030, we would be able to generate almost 1 000 new jobs in the city.

These jobs would be created as a result of increased investment because water “saved” would be available to be used by new industries or businesses in the city. In addition, if the municipality were to better manage water infrastructure including reducing the loss of water due to leaks (which do not generate any revenue for the municipality), we would be able to create almost 500 new jobs in the city. That’s 1 500 new jobs if we as government, private sector and citizens of our city work together to save precious resources.”

This would be part of the extinction accounting model where the municipality or company reflects how it has modified its strategy, risk assessment and operational plans for driving organisational change and mitigating extinction risk. In this way, extinction becomes an integral part of the value creation process in any organisation, municipality or company, and something which is tackled using integrated thinking and reporting.

Some organisations are likely to figuratively throw their hands up in the air and say this is just yet another thing that we have to do amongst all the other things; BUT we really don’t have a choice given the risks and extinction threats we face, and also because it is the right thing to do. The time has come for science and business to come together to really solve these issues.

I’m pleased to see that a number of JSE-listed companies are already doing this. Some are part of the Biological Disclosure Project, launched in March 2019 by the WWF Nedbank Green Trust, and funded by Nedbank.

The project’s centrepiece is an online toolkit, available at www.bdprotocol.org, which is aimed at valuing biodiversity by developing the capacity of South African businesses to cost-effectively mainstream biodiversity into their strategies and practices.

Thirty JSE-listed companies, from a wide range of sectors, are being supported by the project team to do an assessment of their current levels of biodiversity mainstreaming into their strategies and activities.

‘The toolkit helps businesses to consolidate biodiversity impact data at corporate level for disclosure purposes. This way business can start looking after biodiversity, including doing aspects of business differently,’ says WWF-SA finance sector specialist Wendy Engel, who is leading the project together with the Endangered Wildlife Trust’s (EWT) Dr Joël Houdet.

Houdet explains that deciding on the biodiversity policy of your business is about determining which biodiversity dependencies and impacts are material to your operating environment and stakeholders.

A biodiversity dependency or impact is material if it is considered to have the potential to alter your business’ decision-making process: material impacts and dependencies should be actively managed.

JSE-listed companies were selected as they already report on environmental risks and practices in their annual integrated reports. However, very few companies provide a detailed assessment of their biodiversity impacts, risks and performance. The BD protocol supports companies in doing this.

Houdet says: ‘The online toolkit includes a free biodiversity performance self-assessment questionnaire, business case studies and biodiversity mainstreaming guidelines organised in nine steps. These steps constitute all the key stepping stones for businesses on their biodiversity mainstreaming journey, including building the business case, identifying risks and opportunities, measuring and valuing impacts and dependencies, designing biodiversity policy, strategy and action plans, disclosing biodiversity-related performance and monitoring progress for continuous improvement. All businesses are welcome to use it.’

The final project report to be released in the second half of 2021 will supply evidence of fit-for-purpose and practical feasibility of the various guidance and tools developed and proposed to South African businesses, based on uptake by and results obtained from the participating companies.

It’s encouraging that we have these frameworks with which to work, and a wealth of science from which to develop strong frameworks. In time we will surely find the middle ground between the moral and the business imperative. We need to find a way to put a value on natural capital if, as the Good Governance Academy emphasises, we want to achieve effective, conscious corporate leadership, truly integrated reporting, and a biodiversity enabling, proactive society.

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