We need to measure our impact on the natural environment in our custody, but businesses are grappling with the complexity involved.
As more companies say they want to play an important part in conserving our natural world, natural capital accounting could become critical. It may form the next wave of sustainable finance KPIs and at some point, become a mandatory, regulated requirement.
Currently, natural capital accounting is both complex and non-compulsory, meaning that the majority of businesses are not doing it.
But why should we place a value on nature? In the same way that measuring the value of something helps to improve it, placing an economic value on nature gives us a greater understanding of why and how to protect it.
This is demonstrated in the value of pollinators such as bees, birds and butterflies, which are estimated to be responsible for between $235 billion and $577 billion worth of crops every year. With these pollinators in decline, natural capital accounting can highlight the impact that this will have on crop production and be used to implement solutions.
It’s easy to place commercial valuations on natural resources such as corn, timber, copper and oil, but it’s a lot harder to do that with the supporting ecosystem and how it contributes to human economic activity. So, is it possible to put a number on the role of trees in offsetting carbon? Or, on the flipside, can we account for the loss of carbon sinks caused by deforestation?
Natural capital accounting is trying to do just that, but what are the barriers we need to overcome to implement it?
Doing the job: a new kind of accounting
The Natural Capital Protocol or the UN's System of Environmental Economic Accounting (SEEA), show us ways to relate the value we get from natural ecosystems to the wider economy. But it’s proving to be tricky for companies that are already struggling with other reporting responsibilities such as CO2 emissions.
In our global survey of 450 business leaders, only 23% of our respondents are using natural capital accounting, and 79% say it would be one of the three most challenging disclosures to comply with if regulations made it mandatory.
SMEs in particular seem to be avoiding the issue: just 8% of companies with annual revenues of $250 million - $499 million see natural capital accounting as a top priority, compared with 24% of companies with annual revenues of $1 billion - $4.99 billion.
So natural capital accounting is a job that’s waiting to be done, but is proving difficult to implement.
The problem is complexity
The idea of natural capital accounting has been around for decades, but implementing it has been a slow process. One problem is the complexity involved. David Radermacher, vice president of sustainability at E.ON, believes that with many companies still struggling to report CO2 emissions as part of the Greenhouse Gas (GHG) Protocol, new reporting requirements surrounding natural capital accounting could be difficult.
“The GHG Protocol is very simple, and it’s only about one KPI in the end: CO2 equivalents,” says Radermacher. “It’s 20 years old and many companies are still struggling to report Scope 1, 2 and 3 emissions. Where will it go with new reporting requirements where the scientific foundation is not clarified or specific enough?”
Greenhouse gases can be measured with one metric, but natural capital accounting is multi-faceted. The KPIs needed to measure a business’s impact on biodiversity, for example, can be far-reaching and complex, involving anything from water use to waste absorption. KPIs may also be site-specific. For example, using a certain amount of water in a water-stressed area could have a greater impact than it would somewhere else.
Should we have a synchronised approach?
Given this complexity, a synchronised, standardised approach, such as the SEEA, could make it easier for companies to adopt natural capital accounting.
“The challenge with accounting is to make sure that there is a harmonised, standardised approach,” says Christine McGrath, SVP and chief impact & sustainability officer at Mondelēz International. “Everybody’s ambition is similar, but companies, investors and regulators need to be able to compare apples with apples. This is one of the things that everybody I talk to is pushing for, because it's either complicated or it's new in terms of having to do accounting for it.”
As well as helping with adoption, McGrath explains how this standardisation will also improve the system. “The more harmonisation we have, the sooner companies can put the right data systems in place,” she says. “And that will increase robustness in terms of the traceability of data and the right accounting metrics.”
Pilot projects are an education opportunity
Some businesses are not waiting for standardisation, and are already taking steps towards protecting natural capital and trialling how to quantify results.
Danish offshore wind company Ørsted, for instance, has announced a partnership with Dutch NGO ARK Nature to test rewilding principles in the ocean. Because offshore wind farms take up marine space, Ørsted aims to deliver renewable energy that has a net positive biodiversity impact, such as supporting the development of shellfish reefs. The company says it will study the impact of all of its initiatives and use what it learns to eventually scale up successful pilots across the world.
Banks play an important role
Banks and institutional investors will play a vital role in providing the sustainable finance that makes climate-positive projects happen.
The World Bank Group, for example, has set up the Global Program on Sustainability (GPS). This promotes the use of high-quality natural capital data and analysis to help governments, the private sector and financial institutions to make decisions and move financial flows away from projects that have negative impacts.
The GPS has supported initiatives such as the Mexico Connecting Watershed Health with Sustainable Livestock and Agroforestry Production Project, which aims to strengthen integrated landscape management at three watershed sites in Mexico. The project used the GPS to refine its datasets and understand the benefits of vegetation recovery.
Time to get going
To really make a difference, we need many more of these types of projects. But our survey shows that just one in five companies are prioritising a structured approach to protecting natural capital as part of their short-term sustainable transformation plans.
As the consequences of resource extraction and waste on the natural environment become more obvious, natural capital accounting’s profile will grow.
Despite the complexity involved, companies don’t need to wait for a framework to act – they can take steps now. They can start by assessing the environmental impact of their activities and developing a strategy to have a net-positive impact.
Natural capital is finite. It’s time to become accountable for it.