The balance sheet should also account for natural capital
It’s time water companies’ 25-year business plans went beyond accounting only for financial capital and included natural, social and human capital as well, says Adrian Rees.
As water companies prepare their business plans for PR19, they will need to consider a range of challenges that are only likely to escalate over the coming years. From population growth and the rise of high-consuming single occupancy households, to the impacts of climate change and more stringent environmental regulatory standards, the sector is facing an increasing number of pressures. The need to provide a better service to customers, the potential impact of competition in the domestic market, as well as the likely requirement for companies to deliver more with the same or reduced revenues following PR19 are also factors that companies now need to consider in their investment planning.
To meet these challenges, the industry must embrace new approaches to delivering great service that will require companies to think beyond financial investment in built assets. Natural, human and social capital are not typically included in business planning, but incorporating them into decision-making now could help shape a more financially secure water industry in the future.
There is already growing recognition of the need to include natural capital in expenditure planning, with more and more companies in the sector integrating natural capital assessments into their decision-making to varying degrees. Natural capital is defined as the natural assets that provide vital services to humanity such as food, water and clean air. For the water industry, an example of natural capital is the recreational value provided by good bathing waters.
Last year the Natural Capital Coalition launched the Natural Capital Protocol, which provides a clear framework to help businesses across all sectors measure, manage and value their natural assets. For the water industry, the protocol provides a timely route map to expected future natural capital accounting, which should help companies inform their plans. Although a lot of organisations may measure natural capital at a site level, the next step is to develop and roll out this approach across entire operations. Companies that incorporate natural capital into their plans now could be at a competitive advantage given that investors are showing increasing interest in requiring this as part of assurance.
Perhaps trickier to apply to business decision-making is social and human capital. Very few water companies yet take account of their investment programmes’ social and human impacts and look at how these capitals can be applied when managing assets. Similar to natural capital, human and social capital underpin people’s quality of life, providing benefits such as education, community cohesion and mental and physical wellbeing.
Social capital includes the trust that individuals, communities and businesses have in water companies to deliver a reliable supply of clean water and protect them from flooding, while human capital includes the skills, knowledge and experience that derive from, or contribute to, water sector employment opportunities.
Thinking beyond financial considerations to measure and value natural, social and human capital requires a long-term approach to investment planning. Water companies are planning for the next 25 years or more, so the investment decisions they make now must be resilient to any changes that could happen in the future. Take, for example, the installation of new sewers. While this approach brings immediate flood prevention benefits, an alternative might be to adopt water-sensitive urban design. Not only would these types of blue-green infrastructure provide habitat for biodiversity, but they could also lead to improvements in local air and water quality, as well as create green spaces that encourage local communities to exercise.
Measuring these types of factors when looking at different investment options could lead to the introduction of initiatives that deliver multiple benefits by adding to existing stocks of natural, social and human capital. A further element of social and human capital is stakeholder participation, including customer behaviour. Campaigns that raise awareness of costly blockages caused by foreign objects thrown down toilets, for example, are a way of using social and human capital to deliver added financial benefits.
Widespread implementation of approaches that measure the value of natural, human and social capital is dependent on achieving buy-in from commercially focused departments, such as finance and procurement. Gaining support from the wider company is critical to incorporating additional capitals into future investment decisions and delivery. A lack of specialist skills and resources may also present challenges for organisations that have not previously assigned financial values to natural, social and human assets. Not all businesses will have the necessary resources in-house, which will require the development of additional skills to those used in orthodox asset construction programmes.
Despite these organisational obstacles, overlooking natural, social and human capital is no longer viable. Given the range of pressures water companies increasingly face, these additional capitals are just as important as financial capital. Identifying and valuing natural, social and human capital could transform the basis on which billions of pounds of investment decisions are made, helping to create a more sustainable and financially secure water industry.
- Pennon’s CFO to take on south west chair role at CBI Susan Davy will become a regional chair for the UK’s largest business group, early next year
- 3i Infrastructure sells stake in Anglian Water The sale to a joint venture of council pension funds is expected to generate £395 million
- Scottish Government increases energy budget But Holyrood also freezes warm homes funding at the same time