‘Natural capital’ is the stock of natural ecosystems which yield a flow of ecosystem services with an economic value to humanity. For example, forests sequester carbon which helps regulate the climate; healthy soils are necessary for agricultural production; wetland areas purify water for drinking; there are many more examples.
At present, in national and corporate accounting these natural capital assets are often not included on the balance sheet, meaning that changes in natural capital are not accounted for and the preservation of biodiversity and ecosystems are not valued or prioritised sufficiently by companies or governments.
Underpinning the idea of ‘natural capital accounting’ is the supposition that natural capital can be just as important as financial capital, and so stocks of natural capital should be accounted for by governments and companies.
At the recent Rio +20 conference on sustainable development there was much support and interest for natural capital accounting: “Rio has provided an opportunity for countries and the private sector to step up their commitment to natural capital accounting and to demonstrate its potential benefits to a global audience” (World Bank President of Sustainable Development, Rachel Kyte). What we wish to highlight here is that ‘natural capital accounting’ will require different approaches at national and corporate levels.
At a national level, the approach is conceptually straightforward: take an inventory of all the natural capital in the country (see for example the UK’s national ecosystem assessment), and calculate the ‘Total Economic Value’ of this stock of natural resources – total economic value being the value derived by people from a natural resource (financial and non-financial values). This could be done by working out the net present value of the recurring flows of value from the asset, calculated using ecosystem valuation methodologies. The government can then be held responsible for maintaining these stocks of natural capital – changes in natural capital implying a change in national wellbeing.
Accounting for natural capital at an organisational level requires a wholly different approach, as illustrated by the following example of a grouse hunting estate:
Scottish grousing estates make money from rearing grouse chicks, releasing them onto the estate moorlands and selling the right to shoot these grouse to individuals willing to pay for this right. They rely on natural capital: a good stock of invertebrates for the grouse to feed on, healthy heathers to provide habitat for the grouse; and an evocative natural landscape to attract clients to the estate.
Suppose a pair of golden eagles are annual nesters on the grousing estate. The golden eagles hunt grouse, causing the estate to lose a proportion of their stocks of grouse, and lose potential hunting income (this is an illustrative example; we wish to make no point regarding the extent to which birds of prey predate on game birds).
From the ‘total economic value’ of natural capital perspective, the eagles are an asset; the golden eagle is a highly valued endangered species in Scotland, and generates tourist revenues from wildlife watchers. But, for the individual grouse estate, the golden eagles appear to reduce the value of the natural capital of the estate – they lead to an annual loss of income – so cannot be treated as an asset.
So, were we to account for the natural capital of this grousing estate, are the eagles a natural capital asset or a liability?
Under current financial accounting principles we could not treat the eagles as an asset: the eagles have negative value to the estate. If we were to treat the eagles as a liability, then the natural capital accounting process would have served only to justify the possible persecution of the eagles, in explicitly demonstrating that the eagles’ presence reduces the value of the natural capital the estate relies on. What this example demonstrates is that if the oft-repeated assumption: ‘biodiversity is good for business’ is not the case in every situation, then the concept of natural capital accounting proves to be somewhat problematic.
While for national income accounting countries will include the ‘total economic value’ of a resource in their accounts, at an organisational level it is only the financial value of a resource which is accounted for in accordance with accounting principles.
In situations where a natural capital asset is also of financial value to the organisation, it will presumably already have been accounted for in the accounts of the company. In the situation where a natural capital asset is not also a financial asset, as in the examples of the golden eagles, there is no way within current accounting principles to recognise the value of this asset in the financial statements.
A suggested treatment of this class of natural capital asset in financial accounts will be discussed in a following post.
Ecometrica’s David Jarrett is participating in an ACCA webcast on the valuation of assets and liabilities in natural capital accounting on the 9th October 2012 at 9.30am, with representatives from ACCA, Gaia Values and Flora and Fauna International.