Can business learn to speak the language of natural capital?

There’s a language barrier wedged between our current economic system and the natural world. Most financial models value essential natural components such as water and air quality at zero, or “free”, when accounting for profits and losses. This makes it difficult for ecologists, policymakers and environmental groups to communicate the case for greater investment in protecting them. They struggle to speak the language of capitalism and, as a result, demands for growth are prioritised over the protection of natural assets.

It’s a problem that the theory of natural capital claims to solve. By translating our ecosystem into financial values that the business world can easily digest, natural capital evaluations are designed to encourage organisations to preserve the environmental resources their operations depend upon, making better decisions for both their own sustainable growth and the long-term health of our planet.

In a relatively short time, the concept has captured the imagination of environmental, business and political groups. But some campaigners believe that there is a fundamental flaw in the language and logic of the natural capital movement: by putting a price on nature you risk opening it up to further market commodification.

Pavan Sukhdev, the environmental economist who led a global study on the economics of ecosystems and biodiversity, believes this is a fundamental misreading of the concept which conflates placing a value on something with putting a price tag on it. “The deep green people who have an issue with the language of natural capital are actually making the same jump from value to commodification that they state that they don’t want ... They’ve equated one with the other,” he says.

In recent years, pioneering approaches to natural capital by companies such as General Mills and Puma have shown how the concept might actually work in practice. In 2011, Puma became the first company to establish an environmental profit and loss account, which measured the financial value of ecosystem services to Puma’s entire business, from the production of raw materials through to the point of sale. Puma’s parent company, Kering, now plans to establish a similar account across the group by 2016.

Other companies have followed suit, including Yorkshire Water, which developed a profit and loss approach with Trucost, which helps companies identify the hidden costs of unsustainable use of natural resources. Monetary values were applied to quantify how negative environmental impacts such as water abstraction and waste disposal, and benefits such as operational energy recovery techniques, affect the balance sheet. Yorkshire Water believes this process has helped board members, suppliers, customers and other parties to better understand the company’s important environmental role.

This year looks set to be a pivotal one for the development of natural capital. The Natural Capital Committee, an independent body that advises the UK government on the state of the country’s natural resources, is due to publish its third annual report in the next few months. It is also trialling an experimental accounting framework that organisations can use to put a value on the resources they use and their impacts on the natural environment.

Meanwhile, the European Commission’s Natural Capital Accounting programme is developing its own framework to help companies determine what form of natural capital accounting to adopt, and the global multi-stakeholder Natural Capital Coalition is working on a natural capital protocol. Then there’s the World Business Council for Sustainable Development’s Ecosystem Valuation Initiative.

Although all these initiatives could help to address gaps in reporting mechanisms, skills and standards, some observers fear that their proliferation risks muddying the waters, potentially leading to government developing one set of metrics while businesses work with another. It could also prove overwhelming, discouraging some businesses from engaging with natural capital.

“They’re waiting to see which one of them becomes de facto,” explains Stephanie Hime, lead specialist in natural capital at accountancy firm KPMG. She says it is crucial to keep the financial community engaged with the concept as it develops or there is a risk that “sooner or later you will find two groups of people talking about money in a way that is overly complicated, to the point where you’ll be comparing valuations that shouldn’t really be compared, and the financial community ultimately reject what’s been developed”.

The Natural Capital Coalition aims to build on existing valuation methods rather than develop new ones. Richard Mattison, chief executive of Trucost, believes there are signs of increasing overlap elsewhere. “There is collaboration between the World Bank Waves [Wealth Accounting and the Valuation of Ecosystem Services] programme and the Natural Capital Coalition, which is great because hopefully we’ll be able to harmonise measures of how you account for GDP adjusted for nature with measures of how you account for profit adjusted for nature,” he says. “And ultimately that is really where we need to get to.”

Although natural capital has hurdles to overcome, Sukhdev is convinced it will become mainstream business practice in time. “My only fear is that people should not lose a sense of purpose – as in, what is this for?” he says. “We’re doing this in order to ultimately conserve the underlying natural fabric which feeds our society, feeds human beings and keeps the surface of the earth alive.”

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