Ecometrica's David Jarrett ‘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.


  1. I would love to hear your views on the very complex issue of tuna resources in the West and Central Pacific Ocean. These resources are shared by the countries in whose EEZ the resources are located, as well as in “areas beyond national jurisdiction” (ABNJs, otherwise known as the High Seas). While some fishing by Pacific Island countries occurs, most is done by distant water fishing nations (Taiwan, China, EU, US, Korea, Japan). They pay some money as access fees to the Pacific Countries in which they fish, but they seem to have less concern for the sustainability of the resources. Meanwhile many of the Pacific Island Countries feel that this really is the only valuable natural resource they have, and therefore its sustainability is vital to their future. Rather than selling the access rights cheaply, they need to do this Natural Capital Accounting, to determine the true worth of the resource, and reduce access and therefore the level of catches. So optimising the returns to their economy while ensuring the resource remains commercially viable, and available for future generations.

    1. Hi Kelvin,

      I think we need to be very careful using the term natural capital accounting as a universal term for capturing any and all information about the environment. In the case that you are referring to, Statistics Netherlands have produced environmental accounts focussing on resource rents of gas reserves in the North Sea and the potential flow of finance that could come from their exploitation and the rate at which it should be done. They don’t call this natural capital accounting but it can be construed as a natural capital account. I have spoken to a number of people on England’s Natural Capital Committee and there are a number of views on natural capital accounts. One is that any accounting framework that is applied to environmental information can be construed as a natural capital account – for example carbon accounts. Another view is that natural capital accounts have to be integrated with standard financial accounts in decision making to be considered accounts. The crux of my argument is that there is no standard and internationally recognised definition of a natural capital account but everyone seems to have their own idea about what it can include and this can be counter-productive and cause confusion.

  2. ….very interesting and thought-provoking. . . Granting the basic difference in national and organizational level accounts (the former based on total economic value vs. the latter being based on the financial value of the natural capital) the implication is that there would be two sets of natural capital accounts, one taking up the total economic value and the other which aggregates the total financial value of all organizations in a particular country. Is this assumption correct?

    1. Interesting example; I would be interested to hear of more examples like this one, especially more ‘mainstream’ examples since grouse hunting is a rather niche industry.
      As for the company perspective, the idea is that companies start practicing Natural Capital Accounting just as they do with Financial Accountig. Therefore, it should be seen from a Natural Capital perspective i.e. wealth of biodiversity and of ecosystems and their services. In this case both the grouse and epecially the rare golden eagles should be seen as assets (since they are seen as assets from a natural capital perspective). However, the amount of grouses and eagles being shot down should be seen as liabilities. In this case, in both Natural Capital and Financial accounting, the shot-down grouses and eagles will be an expense in the P/L account because they represent a loss in biodiversity (from a Natural Capital perspective) and a loss in inventory (from a Financial Accounting perspective of the estate).

  3. Interesting but I fear futile! The methodology for calculating the value of ecosystem services is improving but still highly subjective in many ares e.g. biodiversity. Even if can calculate a number, what does society do with it, do we truely accept the value and then make rational decisions for the common good?
    I think these are the questions we need to focus on in addition to the calculation method.

  4. Indeed, ecological assets are poorly accounted for at the moment. This situation is in urgent need of redress as poor management of these assets can generate risks to countries’ economic performance. The overuse of natural resource and service flows from ecological assets can over time lead to a reduction in their productive capacity (e.g. through overgrazing or overfishing). Recent research from Global Footprint Network and the Financial Initiative of the United Nations Environment Programme demonstrates that the risks associated with ecological asset depletion can in many cases be significant enough to affect a country’s credit worthiness. Better measurement is a crucial first step in ensuring better management.

  5. Your example reveals the complexity of natural capital valuation as a whole. Perhaps a dual perspective on macro and micro valuations would assist in delineating value. Macro valuations could consist of the ecosystem condition and function and there the grouse habitat would be valued by the state in that it increases the ecosystem value and could be reflected in that level of metric. A property tax reduction (or similar state-level valuation) could be implemented. At the micro level, the value of individual outputs -such as grouse, eagle, clean water, etc. can be incorporated at the appropriate and more complex value plane. In other words, we can value the factory (capital) and value the product (outputs).

  6. Thanks for all your observations, very interesting contributions. As Eliezer and Tim say, clearly delineating the difference between total economic value and financial value will be key to natural capital accounting.

  7. Very interesting. 3 comments:
    – isn’t this the issue of externalities? In this case a positive externality, which might or might not get properly compensated. A further thought: if there are environmental regulations protecting the eagle, should the estate be allowed to any type of compensation? I’m thinking of such dreadful issues as additionality which are common place in GHG accounting!
    – isn’t this a similar, but opposite (almost symmetrical) situation of what happens with financial accounting at national level and GDP? I mean doesn’t GDP still accounts for costs such as pollution control or remediation as an economic benefit? Should it really do that?
    – was thinking that eagle comes into national account as a plus and in estate as a minus – and potentially with a different absolute value. Similar things might also happen in financial accounting, like my debt (liability) is your asset, probably pondered differently because of a risk factor. How to account (profit/loss) and valuate the eagle is a good question – but we go back to the 1st issue of externalities. You can valuate it just by the cost to the estate, or you can valuate it by the willingness to pay of the Scottish tourists. They represent different ways to look at he problem. Can they be reconciled?

  8. Very interesting and a good perspective developed. Will look forward for your next post on this subject.

    One more thought – All the ills about environment like global warming, biodiversity loss & ecosystem destruction and thus loss of ecosystem services ultimately affect humans in more than one way i.e effect on health, availability of food & other materials, unfavorable climates etc.

    Our GDP accounting actually adds all the efforts required to combat such problems like additional health care, drought relief, equipment needed for pollution control etc. and puts them in plus column which also reflects as added GDP. Whereas actually expenditure on such activities should be reduced from GDP to arrive at a net GDP. This net GDP then will reflect the actual GDP after taking in to account the costs associated with byproducts of production & consumption processes.

    This approach to enhance Net GDP instead of conventional GDP can boost the cleaner processes & sustainable consumption etc. since the focus will then be on net positive concept than just absolute positive concept.

  9. Pedro, I entirely agree, this article is based on the concept of environmental externalities – hopefully to demonstrate that the idea of ‘natural capital accounting’ doesn’t necessarily address this problem, and we still must answer some version of the question with which you end your comment.

  10. Hi David,
    I am new to the “Sustainability Business” with an accounting background. I’ve been trying to find further training/courses on Natural Capital Accounting but haven’t been successful so far. Would you be able to recommend any online course that would give me a good a head start on the subject? Many thanks Flavia

  11. Hola a todos,
    Tengo una pregunta, Cuales serían las herramientas disponibles para realizar la contabilidad del capital natural?

  12. Hi Flavia, natural capital accounting is a very new idea, there aren’t any online training courses I know of. You might find some interesting information here:

    Hi Jennifer, again because natural capital accounting is a very new idea, there are various tools and ideas in development, is Ecometrica’s mapping tool which may be used for natural capital accounting in the future.

  13. David,
    should natural capital accounting also be applied to extractive industries. At present, Australia appears to account mined iron ore as an asset, with no concept of the resource having been depleted.
    In terms of the golden eagle, the grouse farm needs some hard data on how many grouse the golden eagles take, and they may also turn a net liability into a net asset if they advertise viewing rare golden eagles as an added feature of their grouse shoot.

  14. Why hasn’t natural-capital acounting taken off as a mainstream activity? Because while we very strongly believe in the prices of goods that are traded, we consider subjective any value assigned to non-tradable goods, such as natural assets. But even the belief in monetary values is based purely on faith, in the proper functioning of central banks and a certain market system (as evidenced by the current financial crisis). So what is needed is a firmer belief in the value of natural assets. Which is why an institutionally backed, public and democratic system of natural-capital accounting could be just the way forward.

  15. Great ideas but I should point out that grouse chicks cannot be artificially reared unlike pheasants. They are wild birds and the reason they are so valuable is that their numbers are purely dependent on nature – very cyclical, due to weather and disease (ticks) etc.

  16. Thanks David. It’s all a bit negative; you use the word ‘not’ three times in the second paragraph. Also I don’t like the suggestion that birds of prey predate on game birds.

    Keep up the good work

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