‘Time to Take Stock’: improving decision making by measuring the state of natural capital assets

Point Advisory, in collaboration with the Capitals Coalition, The University of Pretoria, IDEEAGroup and eftec, is pleased to launch Time to Take Stock, a working paper that helps organisations implement natural capital accounting in order to improve risk management.

The estimated USD125 trillion of annual contribution that natural capital provides to the global economy (Kubiszewski et al., 2020) can only be managed with proper measurement. Despite being ranked consistently by CEOs as one of the top 5 global risks (World Economic Forum, 2021), measuring the state of this natural capital remains a challenge (Lammerant et al., 2021). As a result, managers do not effectively integrate natural capital risks with their existing financial and non-financial analysis, risk assessments, operational procedures, product development systems and related business applications.

Recognising this challenge, governments and businesses have been working to address these issues. Among their efforts are The Economics of Ecosystems and Biodiversity (TEEB, 2010) whose lead, Pavan Sukhdev, described a simple aim: to make nature visible in decision making. Picking up on this mandate, the Natural Capital Protocol (Natural Capital Coalition, 2016) was developed to increase the use of natural capital thinking in business by an order of magnitude. To this end, it covered a broad range of potential approaches that can be used to conduct “natural capital assessments.” About the same time, the paper Developing Corporate Natural Capital Accounts (eftec et al., 2015) drew from the accounting field, to increase the visibility of nature.

Now is the time to take stock of these efforts and begin working towards a clear, precise and pragmatic concept of “natural capital accounting,” or “corporate natural capital accounting (CNCA)” when applied to business or public organisations. A definition for CNCA is proposed that draws from financial accounting and ecology.

Definition of corporate natural capital accounting (CNCA)

CNCA is the systematic process of identifying, measuring, recording, summarising and reporting the periodic and accumulated net changes to (a) the biophysical state of natural capital assets and (b) the associated values of natural capital to business and wider society. CNCA requires:

A. An asset inventory recognising the biophysical properties and dynamics of each asset category
B. Measurement techniques that use spatially explicit data and apply the principle of ecological equivalency (like-for-like)
C. Recording rules based on double-entry bookkeeping from financial accounting
D. Asset-specific biophysical statements of performance and position
E. A defined scope according to organisational and value chain boundaries

This is one of many definitions and understandings of corporate natural capital accounting. We encourage discussion of the definition of CNCA leading to increased standardisation of processes and guidelines. 

A sequence of standardisations are necessary for undertaking CNCA. We expect all to be the subject of ongoing debate and refinement. The seven CNCA standardisations are:

  1. Defining the natural capital stock as an asset
  2. Developing “natural capital asset registers of stocks” using classification systems
  3. Measuring changes in the state of natural capital using appropriate methods specific to each asset category
  4. Employing recording rules for accounting events and linked journal entries
  5. Summarizing the biophysical state of natural capital with a statement of natural capital position
  6. Summarizing net periodic biophysical changes in natural capital with a statement of natural capital performance
  7. Using valuation or other analytical methods to link the stock-based accounts and integrated datasets with complementary value framing perspectives

CNCA requires sequentially following the seven CNCA standardisations. Moreover, CNCA standardisations 1—6 underpin implementation of standardisation 7 (Figure 1). Without natural capital asset information, undertaking valuation can be counterproductive to its purported intent of showing the critical importance of natural capital for decision-makers.

Figure 1: Sequential nature of the 7 CNCA standardisations

The seven CNCA standardisations help ensure that CNCA considers all natural capital assets, including ecosystem types (e.g., forests, wetlands, coral reefs) and their components (e.g., timber, soil, water, species, gases, chemicals). Because of the use of classification systems, the 7 CNCA standardisations also ease measurement of both interactions among components within ecosystems as well as interactions among ecosystems. Moreover, when resources limit measurement to an incomplete set of components (e.g., soil, water), the standardisations provide a framework for incorporating additional data or improving methods at later dates. In total, the application of the 7 CNCA standardisations will improve valuation, support better integration of risks into decision making, enhance opportunity identification and improve the interoperability of data.

While the methods that are applied to implement the 7 CNCA standardisations are in growing use, the core thinking underpinning them has not been synthesised in a way that enables practitioners to recognise the benefits of CNCA nor to see how CNCA interfaces with existing natural capital efforts such as the Natural Capital Protocol, Science Based Targets for nature, CDSB’s Biodiversity Guidance, British Standard 8632: Natural Capital Accounting by Organisations, and the Global Reporting Initiative. This paper provides the framing to address these gaps.

To date much of the work on natural capital assessment and accounting has emphasized monetary values rather than changes to state of natural capital assets themselves. Consequently, the distinct features and benefits of effectively measuring changes in natural capital assets are neither adequately surveyed nor widely known. This working paper aims to support the natural capital community of practice by capturing these features and benefits so they can best complement the ongoing natural capital efforts.

The full publication can be found here. For questions, please contact John Finisdore.

Time to Take Stock was written by:

John Finisdore, Point Advisory

Dr. Joël Houdet, Department of Business Management, University of Pretoria

Carl Obst, IDEEA Group

Ian Dickie, eftec