We are all familiar with the concepts of human capital and financial capital, which identify the various types of inputs required to produce goods and services. But another form of capital that we’re hearing about more frequently is natural capital.
There is no one definition of natural capital, but there are a couple of explanations in particular that help to clarify what it is.
The World Forum on Natural Capital defines it as “the world’s stocks of natural assets, which include geology, soil, air, water and all living things”.
These combine to create what are referred to as ecosystem services, which create “the food we eat, the water we drink and the plant materials we use for fuel, building materials and medicines”, according to naturalcapitalforum.com.
But natural capital extends to less obvious ecosystem services, such as the climate regulation and natural flood defences that forests provide.
Peatlands provide ecosystem services by storing billions of tonnes of carbon; and insects, crucially, pollinate crops intended for human and animal consumption.
The definitions also extend to intangibles, such as the inspiration that we take from wildlife and the natural environment.
The Forum for the Future includes natural capital as one of five areas of capital – a model it describes as a framework for sustainability:
1. Human capital consists of people’s health, knowledge, skills and motivation – all things that are needed for productive work.
2. Social capital includes the institutions that help us maintain and develop human capital in partnership with others, for example, families, communities, businesses, trade unions, schools and voluntary organisations.
3. Manufactured capital comprises material goods or fixed assets contributing to the production process rather than being the output itself, for example, tools, machines and buildings.
4. Financial capital enables the other types of capital to be owned and traded.
Unlike the other four forms of capital, “it has no real value in itself but is representative of natural, human, social or manufactured capital, for example, shares, bonds or banknotes”, the forum states.
5. Natural capital (which other sources sometimes refer to as environmental or ecological capital) comprises “any stock or flow of energy and material that produces goods and services”.
It includes resources (energy and matter) and processes needed by organisations to produce their products and deliver their services.
These include sinks, such as forests and oceans, which absorb, neutralise or recycle waste, and renewable resources (timber, grain, fish and water), non-renewable resources (fossil fuels) and processes (climate regulation and the carbon cycle) that enable life to continue in a balanced way.
Like other forms of capital, the value of natural capital can be increased or decreased based on actions taken.
The term natural capital was first coined in 1973 in Ernst Schumacher’s seminal critique of mainstream economics, Small is Beautiful.
Schumacher argued that the modern economy was unsustainable, that natural resources were subject to eventual exhaustion and that nature’s resistance to pollution was limited as well.
It was at the 2012 Rio Summit that an international accord to deal with climate change, preserve biodiversity and promote sustainability started to attract a meaningful number of signatories.
At the summit, 50 countries and 86 private companies committed to “factor the value of natural assets like clean air, clean water, forests and other ecosystems into business decision-making and countries’ systems of national accounting.”
Natural capital gained more significance at governmental level when it was enshrined within the United Nations’ Sustainable Development Goals (SDGs) in 2015, since to make progress against the SDGs, nations must increase their stock of natural capital.
(SDGs refer to 17 interlinked goals to create a “blueprint to achieve a better and more sustainable future for all”. They were established at a UN General Assembly with a target date of 2030 for reaching all the SDGs.)
Meanwhile in the UK, a Natural Capital Committee (NCC) was set up to advise the government on natural capital, including ecosystems, species, freshwaters, soils, minerals, the air and oceans, as well as natural processes and functions.
In its final report in November 2020 (the committee ran from 2012 to 2020), the NCC highlighted three key achievements:
1. A 25-year environment plan and essential statutory framework;
2. The design of a robust asset-based framework for measuring progress; and
3. The embedding of natural capital in policy decision-making.
Treasurers need to be aware of natural capital from two different perspectives.
1. Governmental
As businesses plan new activities, they will need to be aware that governments at all levels will increasingly focus on how these activities will affect the stock of natural capital and, in the UK, the impact on the 25-year environment plan.
Through the work of organisations such as the NCC and the UN’s System of Environmental Economic Accounting (SEEA), there will be more consistency and transparency over how use of natural capital is calculated.
As such, it is important that treasurers are able to take these into account when making capital and operating expenditure decisions that impact the environment.
2. Investment decisions
As businesses consider different projects, they will increasingly need to consider the impact on natural capital.
Examples of natural capital being quantified
1. South West Water worked in collaboration with farmers to improve water quality instead of investing in cost-intensive technology.
2. TractoTechnik – this German machine manufacturer valued and compared the natural capital impacts of its trenchless pipe laying with open construction. The natural capital assessment meant that the environmental performance of the trenchless technology could be expressed in financial terms.
3. Kering, the luxury fashion group, is a pioneer of the environmental profit and loss, and uses it as a tool across its brands to evaluate in monetary terms its environmental footprint (see graph, above). The group also analyses different irrigation systems to support sustainable cotton cultivation while securing quality on supply.
What these examples show is that natural capital provides a framework enabling companies to communicate credibly and fulfil their corporate responsibility.
As with Kering, it is possible to establish a baseline and use it in a reporting context to measure progress against environmental goals.
Companies that identify and manage their natural capital and environmental impacts plus related risks can present themselves positively to both the investment community and other stakeholders.
The ACT is working with other bodies, such as the Institute of Chartered Accountants in England and Wales, to improve the use of natural capital and to support toolkits and methodologies that will enable businesses to extract more value from their analyses.
If you would like to get involved, please email technical@treasurers.org
Naresh Aggarwal is associate director in the Association of Corporate Treasurers’ policy and technical team
