Natural Capital

Natural capital (also sometimes referred to as environmental or ecological capital) is the natural resources (energy and matter) and processes needed by organisations to produce their products and deliver their services. This includes “sinks” that absorb, neutralise or recycle wastes (e.g. forests, oceans, etc.); resources, some of which are renewable (timber, grain, fish and water) whilst others which are not (fossil fuels); and processes, such as climate regulation and the carbon cycle, that support life.

It is considered complimentary to more traditional forms of capital such as:

• Human Capital (people’s health, knowledge, skills and motivation – all things that are needed for a productive workforce)

• Social Capital (institutions that help us maintain and develop human capital in partnership with others such as families, communities, businesses, schools)

• Manufactured Capital (material goods or fixed assets which contribute to the production process including tools, machines and buildings)

• Financial Capital (which enables the other types of capital to be owned, valued and traded.) Unlike other types, it has no intrinsic value itself but is representative of natural, human, social or manufactured capital and includes shares, bonds or banknotes.

The World Economic Forum defines it “the world’s stocks of natural assets – soil, air, water, grasslands, forests, wetlands, rocks and minerals – and all of its living things, from mammals and fish to plants and microbes”. These combine to create ecosystem services, which create the food eaten, the water drunk, and the plant materials used for fuel, building materials and medicines. There are less visible ecosystem services such as climate regulation, natural flood defenses provided by forests, the billions of tonnes of carbon stored by peatlands, and the pollination of crops by insects. There are also intangible cultural ecosystem services such as the inspiration taken from nature. Like other forms of capital, the value of natural capital can be increased or decreased based on actions taken.

There is currently no standard methodology for calculating natural capital (although there are examples of public companies that have reported income statements and balance sheets that are focused on natural capital (including Kering and SCA)). However, the Capitals Coalition has established a protocol and the following guidance:

The basic steps to derive the value of a company’s actions in relation to natural capital are:

A company is likely to be dependent on natural capital not just directly but also through suppliers and customers.

UK Government methodology

The UK’s Department for Environment, Food and Rural Affairs has set out guidance for those looking to apply natural capital – Enabling a Natural Capital Approach.

The guidance includes a four-step template on how to apply natural capital along with useful tools and case studies to help businesses understand what natural capital they are responsible for.

There is also guidance on creating an accounting framework to bring a systematic, standardised approach to recording information on natural capital and the services it provides. It seeks to answer a number of key questions:

• what are the assets we own, manage or have responsibility for?

• what condition are they in?

• what services do they provide?

• what is the value of those services now?

• what is the expected value of those services into the future?

The figure below shows how these questions are addressed by natural capital accounts.