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Natural Capital Accounting

■ Recent Trends in Discussions on Natural Capital
[Image] Recent Trends in Discussions on Natural Capital

Trends in natural capital

In recent years, natural capital accounting, which incorporates the value of natural capital into corporate accounting, has been actively debated.

The Economics of Ecosystems and Biodiversity (TEEB), which was published in 2010, recommends disclosure of biodiversity information in corporate accounting reports. It also proposes setting "no net loss" and "net positive impact" as targets as well as considering an offset system. Furthermore, the Natural Capital Declaration: (NCD) prepared in 2012 by the United Nations Environment Program Finance Initiative (UNEP FI) requires that natural capital, which generates several trillions of dollars annually, be evaluated in the same way as social and financial capital. "The 50/50 Project," which was launched by the World Bank in 2012, also aims to incorporate natural capital into government accounting in 50 countries and corporate accounting at 50 companies.

Moreover, Natural Capital at Risk, a report published in 2013 by the TEEB Business Coalition (now the Natural Capital Coalition), proposes that companies evaluate the effects of their operations and supply chain activities on natural capital.

Meanwhile, the International Integrated Reporting Framework (FW) drafted by the International Integrated Reporting Council (IIRC) and the Sustainability Reporting Guidelines G4 drafted by the Global Reporting Initiative (GRI) were published one after the other in 2013. The IIRC-FW specifies natural capital as one of six capital assets that support corporate activities. In addition, the GRI-G4 recognizes economic assessments of natural capital as an important information disclosure item, requiring companies to implement appropriate measures.

Against this backdrop, Japan's Ministry of the Environment held a public meeting in March 2015 to discuss natural capital accounting. Toshiba personnel attended the meeting. At the meeting, experts in different areas—including scholars, institutional investors, consultants, and business managers—actively exchanged views about the needs, utility, and future of natural capital accounting from their professional perspectives and had lively discussions.

Then, in July 2016, the Natural Capital Coalition published the Natural Capital Protocol. Rather than providing a method for quantitatively assessing natural capital, the Protocol shows procedures for assessing and managing natural capital as well as processes for incorporating natural capital accounting into corporate decision making.

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Natural capital

Natural capital refers to capital (stock) generated by nature, including forests, soil, water, air, and biological resources. Flows generated from natural capital can be regarded as ecosystem services. According to the definition by Masatsugu Taniguchi, Specially Appointed Professor at Kyoto University's Graduate School of Economics, natural capital exists on earth in the biosphere, geosphere, atmosphere, and ocean. Natural capital includes all entities except artificial objects in these spheres, including forests and fishery resources in the biosphere, minerals and energy resources in the geosphere, air and sunlight in the atmosphere, and currents and tides in the ocean.

Appropriate evaluation of the value of natural capital and wise use will likely increase the sustainability of corporate management.

■ Classification of natural capital
Natural capital Biosphere Ecosystems, biodiversity (animals, plants, fungi, etc.), forests, surface water, soil, climates and landscapes, humans (cultures, traditions, and spirituality)
Geosphere Minerals, fossil fuels, groundwater
Atmosphere Air, wind, sunlight
Ocean Coastal waters, seafloors, currents, and tides

Compiled based on materials provided by Specially Appointed Professor Taniguchi

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Requirements for corporate natural capital accounting

Stakeholders particularly interested in natural capital include institutional investors mainly in Europe and the United States. An increasing number of investors are beginning to pay attention to business sustainability when making investment decisions, and they are said to be highly interested in how companies disclose corporate information.

To meet these stakeholders' needs, Toshiba Group is reviewing the following four requirements for corporate natural capital accounting.

■ Requirements for corporate natural capital accounting
(1) Assessing environmental impacts in terms of physical quantities
(2) Converting physical quantities into monetary values
(3) Assessing environmental impacts across entire supply chains and identifying areas with large impacts as hot spots
(4) Enabling inter-company comparisons

At present, companies disclose a variety of environmental impact data. Items with particularly great impact on natural capital are greenhouse gas emissions and water usage amounts. However, it is difficult for investors to make investment decisions based on information on physical quantities alone. Therefore, it is necessary to make these values easier to understand by converting them into monetary values. In addition, it is also necessary to enable intercompany comparisons to facilitate selection of companies to invest in, as well as to assess environmental impacts of entire supply chains and to indicate areas with particularly serious impacts on natural capital as hot spots and review measures for improvement, thereby helping to judge business sustainability.

In addition, business management actions that do not devalue natural capital include collecting and recycling end-of-life products as well as recycling water at factories. Businesses that use renewable energy generated by sunlight, water, wind and tides as well as businesses that perform desalination of seawater and other water businesses can promote economic activities without damaging natural capital.

In addition, biodiversity conservation activities directly help restore ecosystems.

We will continue our efforts to quantify the effects of these various business activities on natural capital.

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Environmental accounting and natural capital accounting

Environmental accounting aggregates the costs of environmental conservation activities and analyzes the benefits obtained from such activities. Toshiba Group calculates four environmental conservation benefits (actual economic benefits, assumed economic benefits, customer benefits, and risk prevention benefits).

However, environmental impacts associated with business activities cannot be reduced to zero. Viewing these final environmental impacts as "external diseconomies," we can regard environmental accounting as an attempt to measure the costs and benefits involved in various environmental activities in order to minimize such diseconomies. Meanwhile, natural capital accounting is an attempt to "visualize external diseconomies" by converting environmental impacts into monetary values.

Toshiba Group's concept of natural capital accounting can be summarized as shown in the chart below. The chart indicates that reduction of environmental impacts by the environmental activities leads to minimization of effects on natural capital. In the future, we will continue to further raise our level of environmental management by effectively using the two tools of environmental accounting and natural capital accounting.

■ Environmental accounting and natural capital accounting
[Image] Environmental accounting and natural capital accounting

BAU (Business as Usual):Best obtainable value for environmental impacts
This chart is presented merely for the convenience of the reader; in reality, some external diseconomies are also visualized in the environmental accounting scheme. For example, to calculate the B benefits (assumed benefits) used in environmental accounting, we assess the impact of different substances discharged annually in reference to the equivalent amount of cadmium for each substance, which we calculate based on environmental standards and other criteria, and then multiply such amounts by the damage compensation for cadmium contamination. This enables us to compare the environmental impacts of different substances (nitrogen oxides (NOx), sulfur oxides (SOx), suspended matter, total nitrogen, chemical oxygen demand (COD), etc.) on the atmosphere, hydrosphere, and soil according to the same standard. These effects are recognized as external diseconomies. By continuing to apply our original environmental approach while also considering the use of approaches specific to natural capital accounting, Toshiba Group will analyze the financial aspects of environmental management in greater detail.

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Integrated assessment of product life cycles, including supply chains

Since FY2009, Toshiba Group has annually published data on environmental impacts throughout entire product life cycles, including supply chains, which we convert into monetary values using one of the leading environmental assessment methods in Japan (LIME). Natural capital accounting, which has often been discussed in recent years, requires assessment activities for the upstream of a company's supply chain as well as for the company's own business activities. Toshiba Group is accumulating detailed data on entire product life cycles, including raw materials procurement, research and development, design, manufacture, distribution and sales, use, and collection and recycling. These activities are analyzed as negative impacts on natural capital.

At the same time, we are also gathering data on business activities that positively affect natural capital as well as activities that do not consume natural capital.

Results for the period from FY2013 to FY2015 are shown below.

■ Integrated assessment of environmental impacts
[Image] Integrated assessment of environmental impacts

(b) Costs covered
- Costs of biodiversity conservation activities
- Nature conservation and afforestation costs
- Donations and financial support associated with environmental protection
(c) Activities covered
- Amount of power generated by using renewable energy systems put into operation in the relevant fiscal year (geothermal, hydroelectric, wind, and photovoltaic power generation)
* Calculated using the electricity charge per kWh
- Reuse and recycling of water as well as effective use of rainwater
* Calculated using the price of one cubic meter of industrial water

The impact on natural capital in FY2015 measured in monetary value decreased by 17% from the previous year to 261.2 billion yen. Data by life cycle stage shows that the environmental impact is most significant during the use of products sold, followed by the procurement of resources and raw materials. To reduce the environmental impact during the use of products, it is important to create products with the highest level of environmental performance, including energy efficiency.

Meanwhile, the monetary value of business activities that did not consume natural capital was 241.4 billion yen in FY2015. These activities include newly started power generation using delivered renewable energy systems as well as reuse and recycling of water in addition to rainwater utilization at business and production sites.

Moreover, the costs incurred for biodiversity conservation, factory afforestation, and other initiatives that positively affected natural capital totaled 770 million yen. This includes, for example, cases in which new ecosystems are created through environmentally friendly greenery management on the premises of Toshiba factories built on reclaimed land which originally had no ecosystem.

These numbers include monetary values of environmental impacts and the amounts that were actually paid. Therefore, they cannot be simply compared. However, Toshiba Group is considering a system for comparing in an expeditious manner these results to offset or reduce its environmental impacts for natural capital. We found that the reduction rate changed from 57% to 90% to 93% over the threeyear period from 2013 to 2015. The reduction rate has increased particularly rapidly since FY2014 due to the increased amount of power produced by newly started hydroelectric power generation. We believe our analysis will lead to offsetting impacts on natural capital required by TEEB.

In the years to come, the Group will strive to improve the reduction rate by reducing environmental impacts for natural capital through reduction of such impacts and expanding business activities that do not affect (deteriorate) natural capital as well as those that positively affect natural capital.

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Challenges for the future

At present, to quantitatively evaluate the impacts of activities of Toshiba Group and its supply chains on natural capital with respect to the four items chosen as the requirements for natural capital accounting for companies, we use LIME along with physical quantities to convert the impacts into monetary values. Also, in response to requests made mainly by institutional investors, we are considering making inter-company comparisons based on publicly released information (for details, refer to TOPICS).

At the same time, we are aware of the great need to analyze and disclose information on local differences in environmental impacts. We will work to improve the accuracy of such analysis and continue to make improvements.

Current status of natural capital accounting
Requirements for natural capital accountingCurrent status
(1) Assessing environmental impacts in terms of physical quantities
(2) Converting physical quantities into monetary values
(3) Identifying areas with large environmental impacts as hot spots ×
(4) Enabling inter-company comparisons

Discussions of natural capital accounting have only recently begun. We expect that more lively discussions will take place worldwide in the future as various case studies are conducted.

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【TOPICS】Toward Inter-company Comparisons of Natural Capital Accounting

The results of the aforementioned natural capital accounting analysis depict various environmental effects that we estimated using a specialized method, LIME. However, investors and other stakeholders are likely to find it difficult to use this method to compare companies.

Therefore, here we present an example of an inter-company comparison using public data. The information on physical quantities used in the following comparison is company data disclosed in CDP and CDP's water program. Using the trade unit prices of the European Union Emission Trading Scheme (EU-ETS) and the average unit prices of industrial water in relevant countries as conversion coefficients provides a simple means of calculating the impact on natural capital.

The average price of emission rights under the EU-ETS during the 2012-2014 period was approximately 6 euros/t-CO2. Therefore, we used 6 euros/t-CO2 as the conversion coefficient for CO2.

To estimate the monetary value of water, we calculated an average from the prices of industrial water in the relevant countries and obtained approximately 30 yen/m3. The CDP water program shows amounts of water in liters, so we used 0.03 yen/L as the conversion coefficient for water*.

We analyzed trends during the past three years based on CDP data and trends for the past two years based on CDP water data. The table below shows the CDP and CDP water data Toshiba Group has registered along with hypothetical data for companies chosen for comparison. CDP and CDP water data are calculated and registered by individual companies at their own initiative. Therefore, data on a given item is not always available for all companies. Consequently, it is not possible to simply compare the totals. Nevertheless, these databases provide the richest available data on companies' environmental impacts, so we use these numbers.

The purpose of this demonstration is to calculate common coefficients to compare companies in terms of natural capital accounting, not to calculate probabilities regarding the economic value of CO2 and water.
■ CDP data (Unit: 1,000 t-CO2)
  Toshiba Company A Company B
Total 71,812 61,453 76,747 184,285 140,453 200 6,940 117,392 614
FY 20122013 2014 20122013 2014 20122013 2014
Assessment: Disclosure/performance 98/A 100/A 100/A 99/B 98/A 85/C 92/B 97/B 85/C
Purchased goods and services 6,580 7,000 7,500 15,121 15,900        
Capital goods 570 780 838 1,210 1,070        
Fuel-and-energy-related activities (not included in Scope 1 or 2) 200 16 159 329 410   985 203  
Upstream transportation and distribution 5,000 500 468 1,370 892   229 540 334
Waste generated in operation 35 27 29 181 183   79 137  
Business travel 59 66 68 332 240        
Employee commuting88 7 469 431 200      
Leased assets (upstream)               
Transportation and distribution (downstream) 980 14 11 628 786   294 302 280
Processing of sold products    7 10   697 948  
Use of sold products 58,300 52,950 67,580 163,857 119,762     109,430  
End of life treatment of sold products 81 92 87 462 370   3,780 4,540  
Leased assets (downstream)    319 399        
Franchises          178 306  
Investments          698 986  
Other (upstream)               
Other (downstream)               
■ CDP water data (Unit: 1,000L)
  Toshiba Company A Company B
FY 2013 2014 2013 2014 2013 2014
Total volume of water withdrawn 40,563,000 39,539,000 20,081,000 28,845,000 No answer 7,903,000
Total wastewater   32,149,000 948,100 1,103,000    
Total volume of water consumed   7,390,000        
Total volume of recycled water used 15,369,000 14,088,000        

The following graphs show the monetary amounts obtained by multiplying these physical quantities by the conversion coefficients for CO2 and water.

Impacts on natural capital vary depending on the type of industry and company size. In natural capital accounting, we think it is more important to compare trends over a medium-or long-term period (three or five years) rather than single-year figures. We hope to create a system to evaluate companies that are working to reduce impacts on natural capital based on long-term trends.

■ Example of an inter-company comparison based on CO2 emissions measured in monetary amounts
[Image] Example of an inter-company comparison based on CO2 emissions measured in monetary amounts

■ Example of an inter-company comparison based on water consumption measured in monetary amounts
[Image] Example of an inter-company comparison based on water consumption measured in monetary amounts

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