INSIGHT: Natural Capital Accounting: What's all the fuss about?

INSIGHT: Natural Capital Accounting: What's all the fuss about?
News & Blog | Blog | Insights Posted 17.09.13

If you are looking for the next big thing in sustainability, you needn’t look much further than natural capital accounting.

No matter where you look, governments and NGOs are pushing for it, companies are interested in it and a few inspired leaders are even trying to implement it.  But why?

Well in a world where resource scarcity is becoming increasingly important to companies and organisations, they are looking for a strategic way of evaluating this environmental risk, and what impact it might have on their business and operations. 

In short, managing this risk, like any other, is becoming critical in business terms. But what is natural capital and how do we or should we account for it?

Simply put, there are four natural capital accounting categories (air, water, land and biodiversity) and all are interdependent. These provide us with the crucial renewable and non-renewable resources and environmental services which benefit society as a whole. 

Our ability to account for these environmental assets and their rate of depletion (commonly referred to as stocks and flows) is variable. In a limited number of cases (such as fossil fuels) our thinking is already advanced, albeit that significant challenges still remain.

However, we are failing to account for many more environmental services, especially those which are less visible for example clean air provided by forests, flood protection provided by wetlands and crop pollination provided by bees.
You might ask the question: why should this be critically important to all of us?  The reality is that understanding overall stocks of natural capital and monitoring stock changes is vital at a national level. 

This understanding  informs policy interventions and highlights whether countries are really creating new wealth and well-being, or simply converting one form of capital (natural) into another (e.g. financial or engineered). 

Correctly undertaken, this identifies if ‘critical natural capital’ is being lost – in other words: are our actions truly sustainable?

For companies, however, natural capital is not just about managing risk. Engaging with this rapidly evolving issue is about looking at the opportunity to transform a business and its business model. It is about looking at how the business operates and delivers a new type of growth for the future viability of the company: one that allows for a new type of “good growth” to occur, where advancement of the company can be done in balance with nature.
For most companies (aside from agriculture and a few other primary industries like forestry and extractive type industries) the natural capital under direct company control is typically a tiny fraction of that under their indirect influence (e.g. via supply chains).  

The impacts on natural capital come largely, therefore, from a company simply using the resources it needs to run its business. Understanding the impacts of commercial decisions is where companies need to become better informed, in order that the consequences of actions can be better managed. 

As a result, all companies would benefit from measuring their impacts on natural capital more effectively.  In doing so, they will better understand which impacts and which natural resources and services are strategically important to their businesses in the short and long term – and so be able to focus on them.
 It is clear that, over time, we will see companies make radical changes to their environmental accounting for resource use along their entire value chain. 

Companies that embrace natural capital accounting are likely to come to grips earlier with the major challenges and opportunities of the 21st century. 

Events like the inaugural World Forum on Natural Capital taking place in Edinburgh in November are critical catalysts in this as well; they will not only help educate business leaders and raise the profile of the issue but also provide a spotlight on businesses that are already starting to report on and show how we are using our precious natural capital.

Alan McGill is a Partner at Price Waterhouse Coopers. He will be presenting in the session entitled 'What synergies exist between private and public sector natural capital accounts?' on Day 1 (Thursday 21 November) of the World Forum.

This article first appeared in 2Degrees



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