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18 | 9TH - 15TH JUNE 2017 | UTILITY WEEK Policy & Regulation Market view A s water companies prepare their busi- ness 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 house- holds, 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 mar- ket, 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 natu- ral 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 rec- reational value provided by good bathing waters. Last year the Natural Capital Coalition launched the Natural Capital Protocol, which provides a clear framework to help busi- nesses 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 organi- sations may measure natural capital at a site level, the next step is to develop and roll out this approach across entire operations. Com- panies 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 deci- sion-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 capi- tals 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, com- munity cohesion and mental and physical wellbeing. Social capital includes the trust that indi- viduals, communities and businesses have in water companies to deliver a reliable sup- ply 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 employ- ment 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 preven- tion benefits, an alternative might be to adopt water-sensitive urban design. Not only would these types of blue-green infrastruc- ture 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 exist- ing 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 toi- lets, for example, are a way of using social and human capital to deliver added financial benefits. Widespread implementation of app- roaches 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 chal- lenges for organisations that have not previ- ously 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 addi- tional skills to those used in orthodox asset construction programmes. Despite these organisational obstacles, overlooking natural, social and human capi- tal is no longer viable. Given the range of pressures water companies increasingly face, these additional capitals are just as impor- tant 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. Adrian Rees, director of asset management, AECOM Capital accounting 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. Key points Natural capital is a measure of assets that provide vital services to humanity such as food and water. The Natural Capital Protocol help compa- nies measure natural capital. Looking at the big picture could help water companies come to better investment decisions, to the benefit of shareholders and the wider community.