What is Natural Capital?

What is Natural Capital?

The World Forum on Natural Capital define it as:

Natural capital can be defined as the world’s stocks of natural assets which include geology, soil, air, water and all living things.

It is from this natural capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.

Ecosystems are the natural, biological elements of our physical environment that interact over time in a particular area. Land, raw materials, water, food, energy and the natural regulation of our climate are all parts of our ecosystems, and so are the human, social and financial capital that each business invests in their patch of the world.

You can’t impact one element without impacting other elements of the ecosystem – these impacts could result in costs and/or benefits.

Our local and national ecosystem determines the quality of our life, as these directly and indirectly produce the goods and services that we use to measure our wellbeing.

The major issue with valuing natural capital is the measurement of each element of these resources – we are not used to attributing a financial value to these invaluable, often finite resources. Some natural capital is renewable; some is not. We are now able to recognize and describe this essential business driver in financial terms.

Poorly managed natural capital, like poorly managed financial capital, leads to a decline in business profitability over time. But unlike financial mismanagement, a decline in natural capital may impact more than the finances of the organization – it results in a decline in the biodiversity of an area, impacting the local community and greater society, which may take years and significant investments of time and financial capital to remedy, where this is possible.

The Taskforce on Nature-related Financial Disclosures (TNFC) encourages us to integrate Nature into our decision making. What opportunities or risks will result from recognizing, measuring and reporting on Natural capital, and subsequently incorporating this capital into our business decision making?

Why value Natural Capital?

Before starting this journey, you may want to reflect on why you are considering the valuation of the Natural capital that contributes to your business. This is not an easy or simple road to travel, and your measurement methods and results may be questioned by third parties. If you are unable to generate improvements in the Natural capital employed over time, this could also be damaging to your brand, impacting financial results.

The overriding benefit of valuing natural capital is that the execution of your future business strategies, and the resulting value generated, will be improved by the consideration and integration of Natural capital information into your business reporting.

How best to integrate Nature into our decision making?

To enable inclusion of natural capital into our future decision making, we need to ensure that we are maintaining, and (ideally) not further depleting, these resources. Maintenance of natural capital provides a solid base against which new innovations can be implemented.

Following are 4 suggested steps on this path:

1. identification of the natural resources within your ecosystem, and determine material impacts;
2. measurement of consumption and residual value in a consistent and comparable way;
3. strategy development for replenishment/regeneration/renewal to restore and improve the ecosystem;
4. finally implementation of the strategy and measurement of the results.

The over-riding goal should be to ensure future generations continue to benefit in the same way that we do from our ecosystems.

Who will benefit from valuing natural capital?

Every business that invests the time in determining the base line value of the natural capital that contributes to their business, and then continues to measure the improvements in their ecosystems as a result of the initiatives that they implement, will benefit from this exercise.

The benefit will come directly from the improvement in the environment that supports and underpins the business, and improvement to the business’s brand, where the results of the improvements are shared with the business and wider community.

Benefits for other related parties may be:

Investors perspective – the International Sustainability Standards Board exposure drafts on general sustainability and climate related disclosures are specifically targeted towards investors. Activist groups are encouraging laggard companies to improve their sustainability reporting, and to eliminate ‘greenwashing’ and otherwise promoting ‘green’ credentials that can’t be supported.

Companies that value their natural capital and accurately report this in their annual financial statements (either through note disclosures, as intangible assets, or through an additional, separate combined capital income statement and balance sheet) will attract capital where their management of this resource leads to equivalent or higher returns to stakeholders, as this information is valued by the investor community;

Employee, Customer, Supplier, Community and other Stakeholders perspective – each individual and business is driven to make decisions about the allocation of their scarce resources, including their time. These stakeholders are essential to the success of the business, and many have an interest in whether the business is being operated in a sustainable way.

The value of the business measurement of natural capital, and subsequent improvement in annual results, will be of value for many of these stakeholders, and may be reflected in higher sales volumes, employee retention/less turnover, supplier concessions (payments, discounts, flexibility, priority etc.) and positive press and brand recognition.

Lender’s perspective – lenders have their own internal metrics to meet in relation to their clients, and funding opportunities – KPI’s and resulting remuneration benefits are more frequently being linked to these internal metrics.

Clients who measure and report natural capital assets may be more likely to assist their lenders in meeting the financier’s reporting targets via funding granted, business sector focus (or lack of focus), and the public perception of the lender’s support for the environment and sustainable goals.

Donor’s perspective – charities and not for profit organisations are not exempt from the recognition of the natural capital that contributes to their service offering – they could also benefit from the inclusion of this information in their marketing and financial information.

Donors are often also investors – as more natural capital reporting is incorporated into corporate business financial statements, there will be an expectation that larger charities should be able to report on the same basis, and this will then flow through into this sector. It may be that those charities who are early to adopt this reporting will be able to attract donations ahead of those who have not invested time into the measurement of their natural capital.

It may also be that the charities that measure and recognize their natural capital will be more successful in attracting volunteers and other stakeholders to assist in providing the goods and services in accordance with their mission.

Government perspective – with the implementation of legislated emission reduction targets, and other environmental guidelines and protections, it is possible that future Government tenders and contracts will be required to favor organisations that are measuring the improvement in the natural capital utilisation, in addition to the required sustainability reporting and disclosures.

Measuring natural capital takes time - not only to identify the elements to measure and develop the base line, but to continue to measure and build results. Some results may only improve on an incremental basis, resulting in measurable improvements taking considerable time to appear.

Don’t let this deter you from commencing your natural capital journey. New technologies are being developed that may make the measurement task easier and more robust, for example, some measurement of biodiversity may be undertaken by drones in future, providing detailed maps showing and numerically reporting the measurable improvement over time.

It is incumbent on all of us to include nature in all of our strategic decision making - considering natural capital and the benefit it provides to each business is just the start.

Michelle Wilson

4 September 2022