BLOG: Guest blog - Reflections on the World Forum on Natural Capital

Richard Spencer, ICAEW, Michelle Lapinski, The Nature Conservancy & Tony Juniper.
 

I had the pleasure of attending a fascinating World Forum on Natural Capital in Edinburgh, Scotland, the first major global conference on this increasingly important topic. The interest among the private sector at Rio+20, the United Nations Earth Summit in Rio in June 2012, and emerging developments in the field inspired the Scottish Wildlife Trust in partnership with the United Nations Environment Programme (UNEP), The Economics of Ecosystems and Biodiversity (TEEB) for Business Coalition, International Union for Conservation of Nature (IUCN) and the World Business Council for Sustainable Development (WBCSD), to congregate a multi-stakeholder delegation to discuss natural capital.

Evolution of the dialogue

Until recent years, this dialogue has been separated into discussions on either the economy or ecology. These formerly disparate discussions have now emerged into a unified debate on the importance of safeguarding natural capital. Economists, accountants, business, NGO and government representatives who acknowledge the growing link between the health of the economy and state of the natural system, gathered to discuss the need to integrate the value of, and impacts on natural capital into national and corporate accounting systems. This dialogue embodies (1) safeguarding nature’s services and the raw materials we depend on, such as commodities, flood protection, hydrological cycles and climate regulation; and (2) understanding and reducing impacts such as pollution and effluents that degrade the value of the natural system.

Because financial markets do not ascribe monetary value to the naturally occurring benefits we derive from the ecosystems and biodiversity, nor assign costs to the impacts, the state of the natural capital that supports our societies and businesses is at risk of continued mismanagement and degradation.

Whether it is damage due to flooding, poor harvests and diminishing supplies, declining bee populations, the collapse of fisheries, environmental clean-up, or health costs – we are already witnessing the indirect impact of deteriorating natural capital on national and corporate finances.

Valuation as a solution

It was widely accepted by the delegates at the World Forum that valuation of both the benefits derived from as well as costs of impacts on the natural system offers a promising solution to sustain the earth’s ability to continue supporting social and business demands. Assessing the true price of investments, development plans or strategic choices - can lead to a more comprehensive and accurate understanding of trade-offs – resulting in more informed decision-making with less impact on the natural system. Applying economic principles to derive the value of natural capital holds pragmatic potential to strengthen the business case for a careful assessment and management of such assets.

University of Oxford Professor and Chair of the Defra Natural Capital Committee, Dieter Helm, spoke about the importance of institutionalizing natural capital assets into the economy like any other capital stocks that need to be measured, managed and properly maintained to prevent asset depreciation. Further, in the absence of integrating natural capital in balance sheets we do not have insight into our true situation and are unable to make sound decisions regarding economic development. However, in order to integrate natural capital into economic models, national and business accounts, there is a need to develop reliable methodologies to give business and governments the right tools. In addition, Jochen Zeitz, Director of Kering, Chairman of the board’s sustainable development committee and former CEO of Puma, articulated the need for more case studies to demonstrate the benefit of valuation methodologies and to strengthen the business case for natural capital accounting.

International, national and business level efforts to integrate natural capital into mainstream practices and accounting systems

There are many notable initiatives on an international, national and business level that are exploring the connection between environmental and financial costs. In an attempt to address poverty and loss of natural resources, the World Bank is developing meaningful national indicators to measure and manage growth, while accounting for natural capital. In many low income countries natural capital makes up over one-third of national wealth, which is dependent on a healthy state of the natural system. Incorporating natural capital into national accounting enables better decision-making regarding trade-offs to foster long-term sustainable economic development (e.g. understanding the broader value of a wetland prior to land conversion for agriculture purposes).
The UK government established a natural capital committee that reports to the head of finance and advises the government on the state of natural capital in England. This enables the prioritization of decisions regarding the use of natural assets while integrating their value into mainstream accounting. The committee created a framework and methodology for natural capital asset accounting and will advise on reversing damage to natural capital. In November of 2013, the Scottish government released a set of natural capital indicators - metrics to track the country’s performance next to traditional indicators such as GDP.
Julia Marton-Lefevre, Director General of IUCN, spoke about the organization’s international work with over 190 countries, and its goal to incorporate the value of natural capital into mainstream decisions by 2020.
While governments are attempting to add meaningful metrics to their balance sheets, TEEB for Business Coalition, a UNEP project and a global multi-stakeholder platform, is driving the development of methodologies for broader valuation in business and creating a protocol to enable business to quantify impacts on the natural system.
The Institute of Chartered Accountants of England and Wales (ICAEW) is engaging the accounting community in navigating and refining methodologies, and actively participating in relevant developments, such as TEEB for Business Coalition and the Natural Capital Coalition. ICAEW is one of the TEEB for Business Coalition’s founding organizations and is on its board. The Head of Sustainability at ICAEW, Dr. Richard Spencer, articulated the need for leadership, standardized measuring tools, and the involvement of the accounting community to develop and refine acceptable methodologies for natural capital accounting.

Jochen Zeitz leveraged natural capital accounting as a tool to measure impacts and identify solutions across the business and supply chain at Puma. Assigning values to environmental impacts across the value chain provided insight into various business risks, strategic decisions, incentives and supply chain solutions in the areas responsible for the most significant costs. The usefulness of the valuation methodology compelled Kering to roll out the Environmental and Profit Loss (EPL) account across 20 other Kering brands.
Dr. Adrian de Groot Ruiz, Director of True Price (an organization specializing in valuation), presented a case study where environmental and social values were embedded to derive the ‘true’ price of a cup of coffee. True Price’s valuation technique enables the identification of the most socially and environmentally cost intensive stages of a product, highlighting opportunities to bring these costs down to the true price. This approach allows for innovation at a product level, improves risk management and could protect profit margins in the future as broader costs are embedded in pricing systems (e.g. scarcity of commodities, taxes, pollution and social costs, etc.).

Are we on track?

Although there are many commendable initiatives on national, international and business levels, these initiatives lack harmonization and have not yet reached a critical scale. The world is confronting many systemic challenges and as such there is a need to accelerate the development and implementation of solutions to sustain current living standards.
James Griffiths, Managing Director of Natural Capital at WBCSD, discussed the Vision 2050 and Action 2020 framework (vision and roadmap for business in a resource constrained world) highlighting the need to act sooner if we want to realize the vision. Interestingly, WBCSD and the Stockholm Resilience Centre analysed the effectiveness and feasibility of various options that could protect ‘societal must-haves’ and foster development that respects a set of fundamental planetary boundaries. Some of these options (which range in terms of efficiency and effectiveness) include investments in natural capital, subsidy reforms, payments for ecosystem services and taxation. However, leaps forward are required in both business and public policy to pave the way for the radical changes needed to sustain people and economies in the longer term.
Peter Bakker, President of the WBCSD, addressed the current systemic crisis – economic turmoil, social tension, pressure on resources, etc. - and urged business and government to take immediate action. He articulated the need to engage business to invest in natural capital, scale solutions; understand risks related to its operations, the potential of stranded assets; and the inescapable depreciation of value if broader costs are monetized. Valuation, monetization, and disclosures of broader risks are essential components of managing impacts on natural capital. Furthermore, the lack of large scale leadership on these issues and current systemic challenges are barriers that need to be eradicated.

What do we need to move forward with institutionalizing natural capital?

Several challenges and needs were echoed at the Forum:

• Stories & definition – A broadly accepted definition and common objectives on what we are embedding within the concept of natural capital, and what we are trying to achieve. There is a need for meaningful stories that engage and resonate with people to prompt interest and cooperation on these important issues. 
• Business case - A better defined business case for accounting for natural capital, more case studies documenting the benefits of applying valuation, and sharing of best practices. 
• Methodologies and data – Well developed and consistent methodologies that are reliable, replicable and acceptable by business. There is a need for access to better quality data, which influences the effectiveness of methodologies.
• Leadership, collaboration and scale - This dialogue includes complex issues, and there is substantial need for leadership and collaboration that spans multidisciplinary roles - ecologists, accountants and business representatives, politicians, NGOs and academia - to refine solutions that can be broadly implemented. Furthermore, there is a need for more coordination of efforts and scaling impact across sectors and geographies to truly institutionalize natural capital.
• Systemic change – Ultimately, changes at a systemic level are required to: foster ‘outside the box’ solutions on how business accounts for impacts and dependencies on nature; encourage more sustainable business models (e.g. closed-loop systems); support businesses whose operations respond to social and environmental challenges; and accelerate investment in businesses that generate net positive benefits. Here, governments are instrumental in redirecting subsidies, creating appropriate incentives and shifting pricing schemes to close the gap between cost and scarcity; while businesses need to innovate solutions. 

Moving forward

Most of the 500+ delegates who attended the Forum agreed that we should have a price on nature; however, there was general consensus that this is not the end goal, but rather, a tool to inform decision-making on natural capital asset management. It is also widely accepted that there are many complex variables changing the game for business, and the need to understand how social and natural capital will impact strategies and growth in the decades to come.
Regardless of the location of operations – whether in a resource rich or constrained geographic location – business must understand the full impacts, dependencies, potential risks and true costs to the natural system that span the value chain. Businesses can begin by mapping out value chains to determine the origin of key products and ingredients to understand their traceability and identify risks related to core operations. Subsequently, shadow-pricing and valuation methodologies can be applied to assess the magnitude of various risks and opportunities. Mapping value chains and monetizing risks enables the development of scenarios that provide insight into what corporate finance would look like if invoices were administered on behalf of the natural system, or simply, if it stopped providing its services.
As stated by the late Kenneth Boulding, renowned economist and intellectual, “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.” It is imperative to assess value chain impacts, relevant risks and integrate natural capital into business decisions to preserve the flows and capital that – rather invisibly – add to the bottom line.

Agnieszka Rum Moore is a CBSR Associate and Independent Consultant and was a delegate at the World Forum through the scholarship scheme organised in conjunction with the Rotterdam School of Management, Erasmus University

Videos from the World Forum can be seen here.

Images from the World Forum can be seen here.