Natural capital: rethinking the concept of value and why this matters for business

As mass vaccination starts, bringing hope to many businesses for 2021, what has the pandemic taught us about our existing business models and their suitability for the future? Whilst each business experienced the disruption caused by the pandemic in a different way, every business now needs to consider one key question: what do we really value?

Traditional methods of valuation

CFOs, the accounting bodies, and regulatory authorities have traditionally expressed value in purely financial terms, with balance sheets including a combination of physical and cash-related assets and liabilities. Whilst this will always be important, growing awareness of the Climate Crisis and public support to ‘Build Back Better’ after the pandemic suggests that many of us now place far greater value on certain non-financial assets. Nature provides many of these assets for free.

How valuation might look in the future

Reflecting on the experience of lockdown, how highly do you now value the natural environment around you, the people you work with, and the social interactions currently on hold?

“The cost of preventing further pandemics over the next decade by protecting wildlife and forests would equate to just 2% of the estimated financial damage caused by Covid-19.”1

In this first of a series of three articles, we will look in turn at the concepts of natural, social and human capital and why they are important to businesses seeking a more sustainable future.

Natural capital

Often described as the world’s stock of natural resources, natural capital includes geology, soils, air, water, and all living organisms. Some natural capital assets provide us with free goods and services, often referred to as ecosystem services. These services include water catchment and waste recycling, pollination, and propagation. Three of these (breathable air, clean water, and fertile soil) underpin our economy and society and make human life possible.

Whilst our personal appreciation of nature during 2020 may have been necessarily very local, many businesses have witnessed on a global scale the fragility of their markets and supply chains when faced with an unforeseen crisis in the natural world. On top of the pandemic, 2020 saw the bushfires in Australia and severe hurricanes and cyclones affecting the USA, China, and India, amongst many. Maybe this will remind business and society to truly appreciate the value of the natural world?   

Natural Capital Accounting

CFOs are increasingly trying to place a value on natural capital. This helps businesses assess their risk or opportunity when faced with an unexpected event be it wildfires or a pandemic. For those businesses relying on the provision of a natural resource or ecosystem services such as pollination, any severe and unexpected disruption could be disastrous. Being able to express this risk in financial terms helps businesses evaluate potential mitigation strategies. This could include the investment case to provide more sustainable alternatives. Assigning a monetary value to natural capital (and also social and human capital) can be tricky. Whilst substantive progress is being made, standard methodologies for quantifying and valuing natural capital are still work in progress.2   

Looking for the natural capital value in your business

The natural world is currently supporting huge parts of our economic activity for free and is paying the price. The continuing growth in global population, and middle income consumers in particular, places these ecosystem services under increasing pressure. The cost of these services, referred to as ‘externalities’, was estimated in 2013 to be $4.7t per year.3 As they become internalised to businesses – possibly through taxation, regulation, or scarcity – business models will need to adapt.

Take the opportunity now, as you look forward to a post-pandemic future, to check whether nature is giving your business a helping hand. Recognising this contribution early on and building it into your business strategy gives you the best possible opportunity to plan for a more sustainable future.

To find out more, email Mark or ring us on +44 20 8187 7040.

REFERENCES

  1. Dobson, A.P. et al., July 2020, Ecology and economics for pandemic prevention, Science
  2. Natural Capital CoalitionImproving Nature’s Visibility in Financial Accounting, Natural Capital Coalition [Accessed 19/01/2021]
  3. Natural Capital CoalitionNatural Capital at Risk: The Top 100 Externalities of Business, Natural Capital Coalition [Accessed 19/01/2021]

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