The water industry must consider natural, social and human capital in addition to financial capital in its business planning if it is to successfully address the myriad of challenges it faces over the coming years.

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. Identifying and valuing these additional forms of capital could transform the basis on which billions of pounds worth of investment decisions are made.

AECOM’s environmental economists and asset managers are working with companies in the water sector to develop ground-breaking methodologies for evaluating potential investments in managing assets, such as reservoirs, treatment works and sewers, using an extended range of metrics that include natural, social and human factors.

Natural capital is the stock of natural assets that provides vital services to humanity such as food and water, clean air and spaces for recreation. Human and social capital also underpin people’s quality of life, providing benefits such as education and skills, community cohesion and mental and physical wellbeing. In the water sector, for example, natural capital includes bathing waters that provide opportunities for recreation. Social capital includes the trust that individuals, communities and businesses have in water companies to deliver a reliable supply of clean water or to afford protection from flooding. Human capital includes the skills, knowledge and experience that may be derived from, or contribute to, water sector employment opportunities and apprenticeship schemes.

Population growth, the rise of high-consuming single occupancy households and the impacts of climate change are just some of the pressures water companies increasingly face. Intensifying environmental regulatory standards, the need to provide a better service to customers and the potential impact of competition in the domestic market are additional concerns companies must now consider in their investment planning. These challenges, combined with the likely requirement for companies to deliver more with the same or reduced revenues following the sector’s next Price Review, necessitate new thinking and approaches to future investment programmes. Managing demand through customer participation is a clear example of this new direction.

While there is growing recognition of the need to include natural capital in expenditure planning, very few organisations in the water sector are yet to fully take account of their investment programmes’ social and human impacts and look at how these capitals can be applied when managing assets. Given the significant challenges faced by the industry, not factoring these additional capitals into investment choices now could have a major impact on business resilience in the longer term.

Water companies are planning for 25 years or more in advance so the investment decisions they make now must be resilient to any changes they might expect in the future. The sector has the opportunity to lead the way in the assessment of natural, social and human capital, not just for the water industry, but for company planning and reporting across all sectors.

Thinking beyond financial considerations to measure and value natural, human and social capital requires water companies to take a long-term approach to their investment planning. While installing a new sewer, for example, may bring immediate flood prevention benefits, introducing sustainable drainage systems as an alternative could also provide habitat for biodiversity, lead to improvements in local air and water quality and create green spaces that encourage local communities to exercise and interact. Accounting for these types of factors when deciding between different investment options could support the introduction of measures that deliver multiple benefits by adding to existing natural, social and human capital stocks.

Valuing natural, social and human impacts will enable better reporting, risk management and investment choices, which could have a significant positive impact on the communities that water companies serve. However, factoring natural, social and human capital into business planning and delivery requires additional skills that the sector will need to develop, as well as a renewed focus on stakeholder management and stakeholder engagement. The success of natural, human and social capital accounting will also depend on the level of support the process has from senior stakeholders within a company, and the finance department is key. Gaining buy-in from the wider company will be critical to incorporating additional capitals into future investment decisions.

Despite these operational challenges, ignoring natural, social and human capital is no longer viable. The water industry has obvious impacts and dependencies on natural, social and human spheres and must consider these in its business planning and delivery if it is going to become more sustainable and financially secure.