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Start Natural Capital Accounting: What Do We Owe the Environment?
27 May 2019

Natural Capital Accounting: What Do We Owe the Environment?

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In a world that is focused on sustainability, where environmental issues and climate change take center stage, the days of “business as usual” seem numbered. What might have been the clearcut line dividing the economy and nature has become increasingly blurry. It used to be that just a few of us recognized that economic profitability is not the only thing that matters. Now, more and more organizations seem to be “in-the-know.”

To truly talk about PROFITABILITY we have to include a valuation of natural resources when we are calculating our results. This is a powerful message emanating from both private and public sectors: laws addressing non-financial data, increasingly strict criteria for investment ratings, and the relentless transformation of the financial sector towards responsible investing. Environmental performance indicators are currently the holy grail of inputs for risk evaluation and corporate decision-making. To this end, a significant number of initiatives have emerged that focus on assessing the dependence and impact of economic activity on natural capital. The first step is to ensure everyone is is speaking the same language.

A common language for paying off our debt with Mother Earth

It is relatively well-accepted that ecosystem services represent the common language that is needed to include natural capital in the decision-making process. Ecosystem services are comprised of the assets and services provided to us from the environment and on which the foundation of economic activities rely. The world’s stocks of environmental assets and services represent our natural capital. In order to be able to perform an inventory of the ecosystem services that can be included in our internal accounting, we can turn to the Common International Classification of Ecosystem Services (CICES). There are also a number of tools that can help directly quantify ecosystem services, tools like  ESTIMAP – a suite of models that can be used to assess three ecosystem services in Europe.

Herramienta para cuantificar los servicios ecosistémicos de la Comisisón Europea / Imagen: European Commission, Joint Research Centre. Institute for Environment and Sustainability

In order to be able to include ecosystem services in the accounting processes of business and governments, we need to transform them into monetary units. There are standards like the System of Environmental-Economic Accounting – Experimental Ecosystem Accounting (SEEA EEA) to assist with this task, that seek to establish the criteria that can be used to translate environmental flows and assets into economic terms. A number of related initiatives have emerged in parallel, like The Economics of Ecosystems & Biodiversity (TEEB), which aims to position biodiversity and ecosystem services in mainstream decision-making, or InVEST, a series of open-source models to map and assess ecosystem services.  

The degradation of the ecosystems serves as an economic regulator in the supply and demand of natural capital, which is why we have to account for it if we want to really know the economic value of a specific ecosystem service. The Natural Capital Protocol is a framework that facilitates the identification of an activity’s impact on natural capital and incorporates it into the definition of the key natural resources.

Natural capital debt: tailor-made for a sustainable economy

With all this information available, organizations can now fairly accurately determine the debt they accrue with the ecosystem, thus enabling them to make strategic decisions about how to account for their obligation, efficiently off-setting their impact, and ensuring economic sustainability. Still, as of today, calculating arrears with the ecosystem is a bit like tailor-making a suit.

A pesar del esfuerzo económico y logístico que supone desarrollar herramientas para cuantificar la deuda de una empresa con la naturaleza, la inversión tiene un retorno incalculable / Imagen: Qinghill en Unsplash

The quantification of ecosystem services and their economic valuation requires more detailed information and the collection of specific data that is sometimes not currently available. Furthermore, the development of tools to calculate our level of indebtedness with nature involves diverse communities of professionals where scientists and economists work hand in hand with decision-makers. Even so, this current lack of data and the need for collaboration among multidisciplinary groups is a less worrying concern in that organizations are increasingly obliged to integrate data collection and collaboration with external parties into their business activities.

Even when the development of specific, custom tools to calculate the natural capital debt and define strategies to reduce it and compensate for it represents an extra investment in resources, it is certainly a significant step toward attaining a more sustainable economy. There are already organizations that are convinced that this is the right path, and they are developing tools that are able to integrate all the aspects we’ve mentioned, using public-private financing as a funding mechanism.

Finally, once again it seems that transforming our production model so that it is better integrated with the environment is only a question of resolve. Should we start?

Sandra Magro


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