Natural capital: Breakthrough or buzzword?

forests-why-matter_63516847We depend on nature. Forests, fisheries, water, soil, clean air, the ability of the atmosphere and the oceans to absorb CO2, minerals, biodiversity, pollination, the serenity of the wilderness: They make life possible. Not to mention more pleasant. Fine. That’s not news.

Lately, though, environmentalists and a handful of companies and consultants have tried to assign a dollar value to the products and services provided by nature. This idea is what’s called “natural capital,” at least as I understand it. I took a look at the idea in a story posted yesterday at Guardian Sustainable Business.

The story has already generated reaction, positive and negative. (Sometimes from people in the same organization.) Before you read it, I want to clarify what I meant to say–something a reporter shouldn’t have to do, but it may be helpful in this case. I didn’t mean to diss the entire notion of natural capital. It strikes me as potentially a useful idea, particularly when applied at a modest scale, and with some humility. Specifically, some companies and government agencies have found that by “investing in nature,” they can generate favorable returns when compared to other more conventional investments. For example, Coca Cola bottling companies have paid upstream farmers to take better care of their land, as a way of protecting water that the company needs to make beverages. A small nonprofit in Oregon called The Freshwater Trust has found that working with landowners to plant trees along riverbanks can improve water quality more effectively and at a lower cost than installing conventional pollution controls. (Here’s an example, a project the group administered for the City of Medford.) Most famously, Dow Chemical has worked with the Nature Conservancy to develop “green infrastructure” instead of “gray infrastructure” at a big facility in Texas. Maybe because I can get my head around them, these projects make sense to me.

What’s harder for me to understand are the more ambitious and complicated efforts to account for natural capital on a corporate or even a global scale. The calculations get complicated, in a hurry. (PUMA and its parent company, Kering, have spent years trying to measure their impact.) The numbers become less reliable when we start talking about billions or even trillions of dollars. Most important, the object of the exercise is…..what, exactly? Some people argue that valuing natural capital helps company identify risks or opportunities in its supply chain, but does an apparel company really need to hire accountants and consultants to understand that growing cotton will be harder in a water-constrained world than it is today? What’s more, as I explain in the story, the idea of “finite” natural resources, on which much of the analysis depends, is itself flawed. Yes, we may run out of this or that, but over time, inventive people are about to devise substitutes for scarce resource as the prices of those resources. This is how markets and innovation work. After,  the  stock of natural capital in the 19th century would have included whale oil for lighting and horses for transportation; they were, perhaps, finite, but they became irrelevant.

In any event, here’s how my story begins:

The corporate sustainability movement needs many things – scale, acceleration, a sense of urgency, science-based targets and goals – but one thing it surely does not need is another buzzword. Yet that is what “natural capital” is at risk of becoming.

At the GreenBiz Forum last month in Arizona, which attracted nearly 600 sustainability professionals, talk of natural capital was everywhere. The Nature Conservancy and the Corporate Eco Forum unveiled the Natural Capital Business Hub, which aims to “help companies uncover opportunities to enhance their bottom lines by integrating the value of natural capital into their strategy, operations, accounting and reporting.” Companies identified as Natural Capital Leaders – including Kimberly Clark, Freeport McMoran and Adobe – were praised.

So what, exactly, is natural capital? And why should companies care? Will accounting for natural capital drive meaningful change – or will it merely consume time and energy, occupy panelists at sustainability conferences and generate consulting fees?

Defining natural capital is relatively easy. “It’s the products and services that nature provides to business,” explains Libby Bernick, a senior vice president at Trucost, a consultancy that has popularized the idea. Forests, fisheries, water, soil, clean air, the ability of the atmosphere and the oceans to absorb CO2, minerals, biodiversity, pollination, even scenic landscapes upon which tourism may depend: all these are forms of natural capital.

The problem, as some see it, is that businesses and individuals use natural capital without paying for it. As Pavan Sukdev, a former banker who helped spread the idea, likes to say: “We use nature because it’s valuable, but we lose it because it’s free.” It’s a profound statement. Catchy, too.

But putting a price on nature’s products and services and then using those valuations to actually do something useful – well, that’s when things get fuzzy.

You can read the rest of the story here.

Comments

  1. Maybe it’s getting to be a buzzword, but as buzzwords go, it’s a good one for people to start throwing around. It will raise consciousness of the fact that our ecosystems and natural resources can be depleted or rendered useless by our carelessness. For most people, this idea is barely present in their minds. Even now, we are all treating the atmosphere as a giant dump for our waste gases.

    As far as valuation goes, why not let many different organizations and individuals calculate what a resource or ecosystem component is worth, and then average them out. That should give a good ball park figure. The point is not to come up with an exact figure, but to motivate us to treat our material surroundings as though they are precious, which they are.

  2. Bernie Burgener says:

    Marc,
    In order to get our collective heads around it, perhaps this helps:

    For most businesses it is still standard practice today to report on their ‘performance’ via a balance sheet and a p&l – period. We’ve done this for hundreds of years and know the metrics.

    It takes, however, not only ‘Financial Capital’ to make things, but also ‘Human Capital’ (as in “our people are our best asset” – why aren’t they on our balance sheet? Why are we not measuring whether our actions increase or deplete that asset’s value?) and ‘Natural Capital’.

    “We manage what we measure”, and a responsible enterprise must measure its use of, and impact on, all three of those resources. Practicing this kind of IMPACT ACCOUNTABILITY should be guided by asking the right questions and not limited by the available tools – we will develop those over time.

  3. Thanks for these thoughts Marc. Stimulating, as usual.

    Defining Natural Capital as “… the products and services that nature provides to business” seems to be confusing flows and stocks. In the similar way that we differentiate between an Income Statement (flows) and a Balance Sheet (stocks), I think it is important to differentiate between flows of ecosystem services and the stocks of Natural Capital that these flows originate from.

    Of course any economic analogy has limits when it comes to the real, physical world of Nature.

    The real question to me is “will focusing on Natural Capital allow us to avoid or escape some of the system traps we find ourselves in?”. For example, climate change is a classic tragedy of the commons. For climate change, Natural Capital seems to me to be a detour from the difficult, painful, yet inevitable step of putting a (real) price on carbon pollution and keeping the majority of fossil fuel reserves in the ground. Will businesses and other investors change their collective behavior based on a notional price on carbon? I suspect not, at least not at any substantive scale. A real price on carbon that affects cash flows is required.

    Finally, there is a danger in looking at everything through an economic lens. I understand the attraction of doing this, as it purports to take the sometimes nebulous concept of Sustainability and surround it with “hard numbers” that senior management can understand. But the problem with doing this is that we may be simply buying into a system that gives every indication of heading towards climate catastrophe.

    • Marc Gunther says:

      Thank you, Duncan. This is exactly the kind of thinking that will help bring some much-needed rigor to the discussion of natural capital, when it is useful, and when it is a distraction from the harder work–which includes politics, as you suggest.

Speak Your Mind

*