Natural Capital

Natural Capital

Preparing your business to account for nature's value in your supply chain.

"We use nature because it's valuable. We lose it because it's free."

- Pavan Sukhdev

What is natural capital

Natural capital is the total stock of both renewable and non-renewable natural resources that provide a flow of benefits, such as ecosystem services (e.g. fresh water provisioning, clean air regulation, flood protection, carbon sequestration) and ecosystem goods (e.g. food, water, fuel) to humans. All economic and financial value is dependent on this natural capital.

Natural capital can also take the form of abiotic services, such as fossil fuels, minerals, solar thermal, geothermal and wind, which don't rely on ecological processes - at least on a human timescale - but from geological and planetary functions.

Each year this natural capital produces around $72 trillion worth of these ecosystem goods and services, without which the economy and society could not function.

These goods and services are provided by natural systems for free; they are typically not priced, reported nor bought and sold in traditional markets. This has been called the 'economic invisibility of nature1'.

Ecosystem services

The relationship between supporting, regulating, provisioning and cultural ecosystem services and human well-being.
The relationship between supporting, regulating, provisioning and cultural ecosystem services and human well-being.

Types of natural capital

Natural capital provides flows of ecosystem goods and services from which humans can potentially benefit. The Millennium Ecosystem Assessment2 classified these goods and services as regulating, provisioning, and cultural ecosystems services.

Some of these goods and services, such as wild fish or timber from a forest, are easy to appreciate and are traded as commodities. Other benefits, such as the storm surge protection provided by coastal mangroves or the capacity of the atmosphere to provide a stable climate, are less tangible, are not clearly priced, but yet provided considerable value.

Natural capital and ecosystem services are concepts related to human benefit (it is anthropocentric). Whilst this is sometimes criticized as taking a narrow view of nature, it is nevertheless a useful way of considering how an economy can be managed to maintain nature's integrity.

Environmental problems arise when these ecosystem services are over-exploited and the natural capital base is compromised.

Why are some ecosystem services over-exploited

Many of nature's flows of benefits from ecosystem services are what economists call either public goods or common pool resources. For both these types of goods and services exclusive ownership or obligations (property rights) are very hard to define, as it is difficult to exclude other people or organizations from also using this resource or service.

As such they tend to be under-valued, or most often valued at zero and therefore get over-exploited, leading to a reduction in future flows of the benefits nature provides us with.

Hard to define property rights Free use Over-exploitation Damage to natural capital Reduced benefit flows

This was famously describe as The Tragedy of the Commons3 by the scientist Garret Hardin. Hardin used an the analogy of cattle herders turning out ever more cattle on to common land, each acting in their own interests, but contrary to their collective interests.

Externalities

For some ecosystem services—those that are not depleted by their use—this is not necessarily a problem. For example, excluding your neighbour from benefiting from the same storm protection offered by an offshore reef as you do is difficult. But why would you want to exclude them?

For other types of ecosystem services one person's use—particularly over-use—does have an impact on others. These goods and services are rivalrous.

These are known as common pool resources, such as fish stocks and timber on public lands. For example, if a collection of fishing trawlers take more fish from a fishery than can safely be replenished by the fish stock, the maximum sustainable yield is breached and the natural capital (the stock of fish) will erode.

When the costs of over-exploitation are born by others, an externality is said to occur. For example, the cost of managing the impacts of climate change—the social cost—is external to the company responsible for the carbon emissions. In reality, the person or company that benefits from a resource or service also suffers the long term consequences of its over-use.

Not all externalities are a cost to others. In some instances the actions of one person or company can provide a benefit (inadvertent or otherwise) impact on another's well-being.

An over-exploited natural capital asset

Catchments flowing into the land-locked Aral Sea in central Asia have for years been over-exploited for irrigating crops, shrinking it to just 10% of its original size, causing considerable harm to communities that depended on ecosystem services provided by the water body and significant health issues.

Images from NASA
The progressive depletion of the inland Aral Sea as a result of excess water extracted from catchments for crop irrigation, from NASA satellite photography. The most recent slides demonstrate improvements in water levels as a result of better management.

Impacts and dependency risks for business

The depletion of natural capital can create significant risks to your business.

If your company is dependent on natural capital inputs, when stocks of this capital are depleted, or are under threat from changing environmental conditions, your future profits are put in jeopardy. In addition, whilst your company may not directly purchase these resources itself, it may nevertheless have suppliers that rely more directly on nature.

For example, your company might:

  • directly rely on clean fresh water, whose supply may come under pressure from localized population growth and climate change;
  • indirectly rely on the pollination services provided by insects, which are under threat due to toxicity and parasitic infection.

A company might also have significant impacts - or external social cost - on natural capital as a result of its production processes, such as being the driver for deforestation and loss of biodiversity. Also, many businesses rely on the natural environment to process and recycle wastes, such as electronics, plastics and carbon dioxide, that are generated by the use of your products and services by consumers.

For example, your company might:

  • generate significant carbon emissions, which will possibly face tightening regulation to limit emissions through the introduction of a carbon price;
  • have a social impact that is likely to face considerable community pressure and therefore significant additional costs, to mitigate community impacts.

Understanding and quantifying impact and dependency risks in your operations can help improve decision making.

"Sustainable development—development that does not destroy or undermine the ecological, economic, or social basis on which continued development depends—is the only viable pathway to a more secure and hopeful future for rich and poor alike4."

— Maurice Strong

So we know nature is valuable; but this value is invisible.

How can me measure that value?

Aren't we just putting a price on nature?

Warning icon

Valuing nature is not the same as putting a price on it. Although some economic methodologies do define nature's worth in monetary terms—sometimes by asking people how much they compensation they would demand for its loss—this determines its value, not its price, which is often zero.

Valuations of nature are therefore sensitive to how much people rely on or desire its goods and services.

We are breaching planetary boundaries

Despite environmental regulation and improvements in the environmental performance of many companies, natural capital is still being depleted. In The Financial System We Need5, the United Nations states that it is being eroded in 116 out of 140 countries and that it will erode a further 10% by 2030.

Research from the Stockholm Resilience Centre and the Australian National University6 argues much of our natural capital supporting systems are already at considerable risk of dramatic change. Some measures, such as biodiversity loss and nutrient recycling, are arguably already beyond the planet's capacity to safely regulate.

Whilst the Stockholm Resilience Centre takes a global view, localized incidences of collapses in natural capital are already apparent, such as the failure of the North Atlantic cod fishery, marine 'dead zones' in the Gulf of Mexico, loss of pollinating bees in China and the threat of extinction of some species of large mammals in Africa and Asia.

These collapses have acute impacts on local livelihoods. It also threatens the ability of the global community to meet its 2030 Sustainable Development Goals.

Business investment must start to be directed towards activities that sustain or rehabilitate natural capital and away from assets that deplete it.

Natural capital is now at such risk, planetary boundaries may have been breached according to work by Earth system and environmental scientists at the Stockholm Resilience Centre and the Australian National University.
Natural capital is now at such risk, planetary boundaries may have been breached according to work by Earth system and environmental scientists at the Stockholm Resilience Centre and the Australian National University.

Source: Stockholm Resilience Centre

Business's natural capital impacts and dependencies

Business impacts and dependencies on nature
Schematic showing the relationship of business to social and environmental inputs and impacts. Understanding and quantifying the natural capital inputs and dependencies of your business offers both opportunities, such as new markets, and insights into risks, such as price spikes in natural resource inputs. The schematic is adapted from the Natural Capital Protocol draft.

"Financing sustainable development will require capital flows to be redirected towards critical priorities and away from assets that deplete natural capital."

- Towards a Green Economy7

The real value of natural capital

$72
Trillion
Annual value of free ecosystem goods and services provided by nature8
$4.7
Trillion
Annual environmental & social cost of ecosystem damage from pollution9

The Natural Capital Coalition

Natural Capital Coalition logo

Trying to solve the problem of nature being under-valued and over-exploited is the Natural Capital Coalition (previously known as TEEB for Business). The Coalition is a non-government collaboration, made up of over 200 organizations from around the world from business, finance, conservation, research and policy.

The Coalition has come together with a mission to help businesses evolve into enterprises that build natural and social capital through their activities, rather then erode it. The Coalition’s activities include developing frameworks for evaluating natural capital inputs and dependencies, 4-dimensional profit and loss accounting and maintaining a specialist community of interest.

Altus Impact is a proud member of the Natural Capital Coalition.

The Natural Capital Protocol

The Natural Capital Coalition has drafted an extensive guide on how companies can integrate and then mainstream natural capital accounting into their business practices: The Natural Capital Protocol.

The Protocol provides businesses with a standardized framework that can help them measure their direct and indirect impacts and dependencies on natural capital to ensure profit generation also results in increases in public wealth.

The Protocol guides businesses on how to undertake qualitative, quantitative, and monetary valuation and then how to integrate this understanding into how it interacts with nature through strategies and operations. It is designed to try and create a common language for internal decision making, communication and behaviour change.

It is intended to be internationally applicable across all business sectors.

40 companies have so far successfully piloted the draft Protocol. In July 2016, the first edition will be published.

Altus Impact has been part of the review team for the draft of the protocol and has provided valuable input into its development.

Why operationalize the Natural Capital Protocol in your business

Integrating the Natural Capital Protocol into your business can help you:

  • provide a basis for meaningful, evidence-based decision making to identify savings in input and waste costs and business operations;
  • develop sustainability criteria for investment decisions and supplier selection;
  • motivate new stakeholders through enhanced transparency of reporting;
  • demonstrate and maintain your social license to operate;
  • reduce current regulatory liabilities, such as carbon taxes and permits;
  • identify potential liabilities from future policy changes;
  • identify natural capital impacts on third parties, which could yield litigation risks;
  • identify natural capital input risks from environmental changes and natural hazards;
  • normalize concepts, such as biodiversity offsetting and emissions trading into your business to pre-empt regulatory changes.

Meet suave John, he runs a big company that relies on the stuff nature provides and explains how and why it should start to account for it.

- The Natural Capital Coalition

Sustainable development goals

UN Sustainable Development Goals

In 2015, the United Nations agreed to 17 Sustainable Development Goals (SDGs) containing 169 targets for the global community to meet by 2030.

The SDGs replace the Millennium Development Goals, but go much further, with fundamental commitments to ending poverty and hunger. The SDGs also explicitly link economic development with investments in social and natural capital. It is not the case countries need to choose between the economy and the environment, but they need to do both. And the goals will only be met through a partnership between governments, civil society and the private sector.

SDG12 supports sustainable consumption and production patterns and specifically target 12.6 ‘encourage[s] companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle’.

By implementing the Natural Capital Protocol your company will be taking the lead on meeting the UN 2030 agenda and the Sustainable Development Goals.

Integrated profit and losses

One way to visualize a business's natural capital impacts is integrated profit and loss (IPL) accounting. IPL reports evaluate changes to environmental, social and human capital as well as typical measures of a business's financial and manufactured profits and losses.

Natural capital impacts - the external social costs of your business operations - are shown as losses in the business's accounts.

But it shouldn't be all one-way-traffic. A well-functioning business may also book social and environmental benefits, such as purchased biodiversity offsets, community health improvements or investments in skills.

IPL standards have been codified by the by the Integrated Reporting Council

Representation of an integrated profit and loss account
An example of an integrated profit and loss account, showing external benefits and costs of an organization's operations.

How can Altus Impact assist your business implement the Natural Capital Protocol?

Altus Impact is strategically positioned and retains the skills, knowledge and experience to help your organization implement the Natural Capital Protocol.

As part of the Protocol's  review team, Altus Impact has gained valuable insight into how it can be applied to your business.

We can help you apply the Protocol to particular streams of your business, or provide particular specialist services required for full implementation.

And also understanding the Natural Capital Protocol is potentially transformative, Altus Impact can take a programmatic approach to partnering with your business to help it on its journey towards sustainability and becoming a restorative business.

Altus Impact can:

Footnotes
1economic invisibility of natureTED talk by Pavan Sukhdev.
2Millennium Ecosystem AssessmentEcosystems and Human Well-being: A Framework for Assessment.
3The Tragedy of the CommonsHardin, G (1968). "The Tragedy of the Commons". Science 162 (3859): 1243–1248.
4for rich and poor alikeMaurice Strong (1925-2015), Opening Statement to the Rio Summit, 1992
5The Financial System We NeedThe Financial System We Need. Inquiry: Design of a Sustainable Financial System (2015), UNEP
6Stockholm Resilience Centre and the Australian National UniversityPlanetary boundaries research presents a set of nine planetary boundaries within which humanity can continue to develop and thrive for generations to come. Link
7Towards a Green EconomyUNEP (2011). Towards a Green Economy: Pathways to Sustainable Development and Poverty Eradication. Nairobi: UNEP
8Annual value of free ecosystem goods and services provided by natureFrom UNEP
9Annual environmental & social cost of ecosystem damage from pollutionNatural Capital at Risk: The Top 100 Externalities of Business. TEEB report. Link
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