10 things you need to know about natural capital

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Do you know what natural capital means for your organisation? Laura King answers some questions.

1. What is natural capital?

The World Forum on Natural Capital defines natural capital as “the world’s stocks of natural assets which include geology, soil, air, water and all living things”. From these stocks, we get benefits (also known as ecosystem services) which include provisioning services (for example, food production) and regulating services (for example, clean air).

From a business point of view, a “natural capital assessment” will take into consideration aspects of the environment that create value, as well as areas where the business has an impact.

2. Why should natural capital be considered?

Natural capital creates the building blocks for all other types of capital (for example, financial or human). It provides the materials from which society — and business — is built, and regulates the environment so that human life is possible.

At the moment, very few organisations directly measure how their interactions with the natural world impact on profitability. However, with a growing understanding that a healthy environment leads to healthy business, this is changing, especially for companies that rely on commodities such as water or crops.

For other companies, drivers such as changing legislation, reputation and risk management all play a role in pushing the importance of natural capital up the corporate agenda.

3. What is a natural capital assessment?

In its broadest sense, a natural capital assessment evaluates how a business interrelates with the environment so that the environment can be incorporated into decision-making. To do this, an assessment attempts to take a comprehensive look at all of the stocks and services provided by nature, trying to take into account as many of the organisation’s dependencies as possible.

This can be done at a number of levels.

A basic assessment or audit is often used to refer to the simplest form of accounting, and is essentially an exercise to take stock of what is in the businesses’ control, where the businesses depend on natural capital, and where the main risks and impacts are.

A natural capital valuation takes this one step further. It collects data on the monetary value of natural capital to help gain a deeper insight into benefits to the organisation.

Natural capital accounting is the most in-depth of assessments, applying economic principles to assess how nature impacts on the balance sheet. One example of this is to develop and establish environmental loss and profit models. (See Natural capital: putting a price on nature).

4. Why does putting a value on nature help?

Assigning a monetary value on nature puts it on an equal footing to other forms of capital, which are almost always measured financially. This helps translate environmental services, benefits, and losses into a language understood by businesses, so providing a mechanism to include it in decision-making.

By including nature in this way, organisations can better understand their environmental dependencies and make better choices for long-term sustainability.

5. Should you really put a price on nature?

It is often asked whether or not it is morally acceptable to put a price on nature? This is a very valid question, often based on concerns that the process will turn nature into a commodity that can then be bought, or damaged for a fee.

However, although valuing nature and its services is in its infancy, still relatively complex, and not without its flaws, it does provide a way of taking the environment out of the “nice-to-have” box, and provides a way to recognise and assess the value of natural services to the organisation. This is especially the case for purely financial-driven decisions where nature would not normally have a place at the table. As such, many conservation and environmental organisations would agree that, if done well, natural capital assessments have the potential to make a positive impact.

6. Where should I begin?

An assessment of natural capital will be very different for every organisation, and there are many ways to approach the issue.

The Natural Capital Protocol (www.naturalcapitalcoalition.org) outlines a framework for organisations to start on the path towards conducting a natural capital assessment. The protocol builds on work conducted by many others and synthesises previous work into a standardised methodology that can be used by organisations of any size or type.

7. What data can I collect about natural capital?

The data collected will depend on the organisation and what it wants to achieve.

Some organisations will have more data on “outputs” for example, waste, emissions to air and water; others might have specific metrics associated with their landholdings. As well as this raw data, information can also be collected on the ecosystem services provided, for example, benefits of forests to flooding and health. There are a number of tools available that can help determine the value of services provided by nature.

However, it should be noted that data collection is perhaps one of the trickiest aspects of conducting an assessment. Often there are concerns around what data can and should be included, and as this is an emerging field, many questions still remain about how to assess the robustness and quality of the data used.

However, despite these concerns, it is still possible and organisations are taking their first steps. To help any assessment, the key is to identify specific objectives, which will naturally lead to specific data requirements. For many organisations, a good start can be to use data already available and use this as a proxy rather than collect data from scratch. In every case, consistency and transparency are crucial.

8. How do I make a business case for measuring natural capital?

The business case will depend on what the organisation wants from a natural capital assessment. However, it will often hang on the following hooks.

  • Resilience, value creation and avoidance of loss: Natural capital is at the core of many businesses and by assessing natural capital, risks and opportunities can be identified.

  • Legislation and policy: Increasingly political programmes are putting value in sustainable growth. Understanding environmental dependencies will help organisations avoid environmental enforcement and react effectively to changes in the political environment.

  • Reputational: A proactive attitude and transparent communication of a company’s environmental impact can help foster better relationships with stakeholders. It can also help avert potential environmental PR disasters.

  • Operation and management: Understanding nature’s input can often improve how things are done where natural solutions complement other, more traditional approaches.

9. What will the organisation learn?

The objective for conducting the assessment will have some bearing on what the organisation learns. However, some common lessons include:

  • an understanding of what data the organisation holds, and how good the data is

  • better insights into environmental risk

  • whether monetising environmental impacts and dependencies can change decision-making

  • a deeper appreciation of the organisation’s more prominent environmental dependencies and impacts

  • a new way of managing assets

  • how to engage different departments in sustainability.

10. How much will an assessment cost?

This will very much depend on what the organisation wants from its assessment. An initial assessment could be conducted internally if there is enough expertise to collect the data and make appropriate assumptions. However, where there is a desire to monetise natural capital, expert advice may need to be sought, and this will become more expensive.

In summary

  • Including nature and the environment in decision-making can be very good for business.

  • Natural capital accounting is one way of monetising the value nature brings so that it can be included in financial decision-making.

  • Frameworks and tools exist, but expert help may be needed where organisations want to do more complex accounting.

Last reviewed 4 December 2018