State of Green Business: Companies take stock of natural capital

One of a series of excerpts from the 2013 State of Green Business report (download here).

The idea of natural capital — the limited stock of Earth’s natural resources that humans depend on for our prosperity, security and well-being — has been around a long, long time — since the 1973 publication of E.F. Schumacher’s book, "Small is Beautiful." (Franklin D. Roosevelt didn’t use the exact term, but he referred to “the fact that the natural resources of our land — our permanent capital — are being converted into … wealth at a faster rate than our real wealth is being replaced. … That is the unbalanced budget that is most serious” — in 1937.)

Natural capital creates value through ecosystem services, the “free” deliverables provided to business and society by a healthy planet, including clean water, breathable air, pollination, recreation, habitat, soil formation, pest control, a livable climate and other things we generally take for granted because we don’t directly pay for them. In 1997 researchers estimated the annual economic value of 17 ecosystem services for the entire biosphere at $33 trillion. In today’s dollars, that’s about $47 trillion — more than two-thirds of current global GDP, estimated at $69 trillion.

All that is pretty academic, literally and figuratively. Natural capital and ecosystems services rarely have been discussed inside companies, let alone calculated in their financial statements.

In 2012, that began to change. One of the more surprising outcomes of the Rio+20 United Nations conference was the focus on natural capital, culminating with the signing of a Natural Capital Declaration by 39 global financial institutions — primarily from Europe and South America, but no major U.S. banks. The declaration committed them to develop methodologies to value and account for nature’s vital role in the global economy, and integrate those methodologies into their institutions’ financial decisions. It is unclear whether that means making loans based on a company’s impacts on such things as water quality, soil erosion or flood protection. Still, it’s an important first step. It will take time for this to filter into company accounting and reporting.

A 2012 report by KPMG and the Association of Chartered Certified Accountants brought the concept of natural capital to chief financial officers. KPMG and ACCA conducted a survey, with more than half of CFOs and CEOs saying they had included natural capital concerns in their company’s business-risk evaluations. Forty-nine percent identified natural capital as a “material issue” for their business and linked it directly to “operational, regulatory, reputational and financial risks.” But few companies yet integrate these things into their accounting systems, let alone report such information to investors.

Next page: Not just a buzzword