Is this the year to start valuing natural capital?
In 2015, businesses, governments and nonprofits worked together to achieve several historic milestones, including the launch of the Sustainable Development Goals (SDGs) and the Paris Agreement at the 21st session of the Conference of the Parties.
This year brings new hope that business and governments will continue to embrace the value of nature in decision-making, investments and financial reporting by measuring and accounting for their direct and indirect impacts and dependencies on natural capital. Natural capital is one of the planet’s most valuable assets, but many of nature’s services are essentially "invisible" because they are not traded on markets, nor is their value captured by traditional accounting systems.
Globally, government and corporate accounts are missing more than $40 trillion from their balance sheets, likely a conservative estimate of the total value of natural capital worldwide. This value is too great to ignore and poses significant risks to companies and governments.
For example, a recent analysis of over 1,000 global primary production and primary processing sectors estimated the unpriced costs of natural capital degradation at $7.3 trillion, about 13 percent of global economic output in 2009. Estimated risks to business overall would be even higher if all upstream sector impacts were included.
If managed well, natural capital is a long-term asset, does not depreciate and can represent a cost-effective way of achieving multiple development goals, such as food and water security, climate change mitigation and adaptation. A well-managed forest, such as Rwanda’s Nyungwe forest, can regulate water for drinking, agriculture and hydroelectricity, store carbon, support pollinators and provide recreational opportunities. The private sector is already realizing the economic benefits of restoring and conserving valuable natural capital.
Several recent developments suggest that 2016 is the year natural capital measurement and accounting will be more widely adopted by businesses to manage risks and dependencies, avoid impacts and costs, identify economically efficient business alternatives, develop sustainable product strategies and engage stakeholders more efficiently:
The Natural Capital Protocol will be launched in July. The Natural Capital Coalition developed this framework to help companies measure their risks and dependencies on natural capital. A range of contributors, including EY, have collaborated to develop the protocol and are pilot-testing it.
Several SDGs have ambitious targets related to natural capital. For example, goal 15, known as "Life on Land," sets a target to integrate ecosystem and biodiversity values into national and local planning, development processes, poverty-reduction strategies and accounts by 2020.
In the months preceding COP21, businesses committed to maintaining and securing natural capital as a cost-effective way to reduce climate emissions, support climate change adaptation and advance sustainable development. For example, numerous companies, members of the We Mean Business Coalition, committed to remove commodity-driven deforestation from supply chains by 2020.
The White House issued a memorandum in October directing federal agencies to incorporate the value of natural infrastructure and ecosystem services into their planning, investment and regulatory decisions.
What is new and different now?
Some observers feel that this natural capital "hype" is a recycling of previous global commitments and sustainability pledges. However, there are several key differences:
Nature is no longer only in the domain of environmental ministries, NGOs, donors or foundations but is increasingly a priority for finance ministers and CEOs across a range of sectors.
Methods and tools for measuring, valuing and accounting of natural capital offer the quantitative scientific and economic approaches needed to assess risks and dependencies, measure progress toward sustainable development, and advance financial incentives to maintain natural capital.
We suggest several actions for governments and businesses to capture and maintain natural capital benefits:
Provide decision-makers with the tools and information needed to manage the risks and benefits of natural capital, including natural infrastructure. Tools such as the Natural Capital Protocol and the World Bank WAVES program help businesses and governments identify how to integrate natural capital into their accounting and decision-making processes.
The Environmental Protection Agency’s Strategic Agenda to Protect Waters through Green Infrastructure seeks to expand the use of natural infrastructure through community partnerships and the exchange of information to meet stormwater management obligations in the Clean Water Act.
The recently launched WBCSD Natural Infrastructure for Business platform also offers tools for business decision-makers considering natural infrastructure projects. The capability and needs related to measuring and accounting for natural capital will vary, so multiple, flexible, yet rigorous approaches and the right partnerships will be needed to measure natural capital dependencies and support effective decision-making.
Set science-based targets for natural capital. These targets are critical for guiding efforts to measure and monitor progress and manage dependencies and risks. They should consider the constraints and opportunities associated with an individual company or country, be developed for different natural capital aspects, and lie within safe boundaries by considering thresholds at which natural capital assets are overused or exploited beyond recovery.
Develop metrics that matter. Business needs to use data derived from natural capital measurements to develop meaningful metrics that support better decision-making. For example, to convey a hydropower company’s dependency on a forested watershed, metrics should convey days of operation lost or costs of turbine repair per year as a result of sedimentation of waterways occurring after deforestation.
Facilitate the integration of natural capital into accounting processes. The values and benefits of natural capital will be realized only when fully integrated into accounting and decision-making platforms. For example, identifying where and how to integrate the value of nature into the accounting process, such as input/output tables, is not straightforward. Harmonization of tools and language among accountants, scientists, economists and business leaders will be necessary for bridging these gaps.
Identify opportunities for maintaining and securing natural capital in a complex world. New business opportunities will arise and new strategies will be needed to capture the value of natural capital for businesses and governments. City governments and companies (PDF) are paying for ecosystem services to secure clean water supplies rather than paying for expensive greywater treatment facilities and processes.
Similarly, reinsurance products might be priced differently if the benefits and values of natural infrastructure for reducing risks from certain hazards were more fully integrated into risk models. Identifying how and where the values of natural capital can be integrated into existing and new financial mechanisms will help catalyze incentives needed to maintain natural capital.
Monitor and report on natural capital progress. Communication is important to share data, trends and progress toward desired goals so that solutions, tools and investments can be scaled up.
Many of these actions are being taken, but often in isolation. Collaboration between business, government, multilaterals and NGOs will be necessary to create synergetic tools, approaches and reporting mechanisms compatible for assessing progress toward sustainable development. The time for these actions is now — we have the commitments and momentum for a natural world that provides benefits to all parts of society.