Natural Capital Accounting

She knew something was wrong when the accountants arrived. In those days (2010), biodiversity conferences were populated largely by nature lovers, environmentalists, self-taught Buddhist masters, and underpaid researchers. So when reports of ecological bean counters bustling through with “natural capital” and “eco-financing” schemes appeared, Jane Gleeson-White — an author who has devoted much of her career to studying accountants — took note. “If even the accountants — by definition, the most conservative, backward looking group, and proudly so — were now realizing there was something really wrong with their system … then this was something I needed to pay attention to,” said Gleeson-White. “I realized that this was a whole new kind of movement equivalent to the Industrial Revolution or Renaissance.” For most of empirical history, nature has been kept off the balance sheets. Neo-classical economic models were designed to exclude nature, ignoring it entirely, or, at best, treating it as an externality. This is a strange paradox given that more than half the world’s economic output, or some US$44tn, according to the newly birthed Task Force on Nature-Related Disclosures (TFND), is moderately or highly dependent on nature. Yet nature’s default value — whether for natural goods (fish, timber, fresh water, etc.) or natural services (pollination, water purification, carbon storage, flood protection, garbage disposal etc.) — is zero. “Today’s industrial capitalism exhausts the stocks of the natural and social worlds without valuing them or accounting for their depletion,” writes Gleeson-White. “It liquidates its capital and calls it income — in other words, it is the greatest Ponzi scheme ever perpetrated.” As natural capital depreciates, frameworks that treat nature as a free and limitless commodity are increasingly regarded as irresponsible, if not an early death-wish. Can natural capital accounting — a growing movement to make nature a visible part of statistics, economics, and international balance sheets — help save the natural world? Climate Change vs. Nature-Based Risk Natural capital is notoriously difficult to price because much of it is mobile, invisible, and silent. It eludes traditional categories of ownership, productivity, and valuation. Because nature is so readily accessible, much of its worth to society is entirely excluded from market prices. Not only have we failed to conceive of nature and its services as financial assets, but, in many cases, we actually assign them a negative value thanks to the perverse effects of government subsidies. The Dasgupta Review — a seminal report commissioned by the UK government to unravel the economics of biodiversity loss — glumly reports that “global subsidies for energy, agriculture, water, and fisheries are conservatively in excess of US$4–6 trillion annually. Rents on the use of those resources are therefore negative, meaning that we are encouraged to exploit them even more profligately than open access resources.” In recent decades, climate change has claimed center stage in policy debates and corporate governance reform. Any Fortune 500 Company worth its marketing budget has pledged to go to net zero tomorrow. Yet, most climate-change financial risk models do not account for other forms of nature-based risk, which, in some ways, are considerably more threatening. Unlike climate change, which is responsive to technology and political action (at least in theory) other nature-related risks — biodiversity loss, mass extinction events, water scarcity, soil degradation, deforestation, etc. — present far less comforting hypotheticals. While global GDP has increased by nearly 15x in seventy years, the reverse can be said for our natural capital supply. Since the 1970s, 14 of 18 categories of natural services, including purification of water, air quality, and disease regulation, have measurably declined. Humans have impacted the earth so irreversibly that a group of Earth scientists now identify the mid-twentieth century as the start of the Anthropocene epoch — a new geological age dominated by man. First, The Bad News One defining trait of the Anthropocene is species extinction. Current extinction rates are estimated to have risen to 100–1,000x the average historical extinction rate, marking the 6th great biological extinction since life began. Conservative estimates predict that the population of terrestrial vertebrates will halve in about 40 years. In 2012, ecologist Roger Bradbury predicted the end of biodiversity for the oceans: “Coral reefs will be the first, but certainly not the last, major ecosystem to succumb to the Anthropocene,” wrote Bradbury. “They have become zombie ecosystems, neither dead nor truly alive in any functional sense, and on a trajectory to collapse within a human generation.” Nine years later, as the world sits on the precipice of 1.5 degrees of warming, the Great Barrier Reef is expected to experience 90% irreversible losses. Reach 2 degrees, and just 1 percent will remain. Meanwhile, the rest of the ocean is losing oxygen caused by nutrient pollution. The volume of water with zero oxygen has quadrupled in the past fifty years, leading to large dead zones like those in the Gulf of Mexico. What would happen if the entire ocean turned into a dead zone? “The biogeochemical cycles, planetary gas (for example CO2) cycles and nutrient flows stemming from deaths in the oceans would rapidly cascade toward major, abrupt changes in ecosystems on land and in river systems; to an extent that one could reasonably envisage a steady major long-term decline in terrestrial biodiversity through extinctions.” What can the standard responses to climate change — commodity taxation, regulation, resource pricing, etc. — offer in the face of such damage? Now, The Good News (Sort of) His wife Charlotte, scion of a fallen southern planting family that once sent missionaries to China, tells him, “There’s a Chinese saying, ‘When is the best time to plant a tree? Twenty years ago.’” The Chinese engineer smiles. “Good one.” “‘When is the next best time? Now.’” — Richard Powers, The Overstory Some countries that have been exceptional stewards of environmental assets are beginning to demand recognition and payment for their efforts. Last month, Gabon, one of the last remaining reserves of tropical rainforest in Africa and home to 60% of Africa’s surviving forest elephants, became the first country to receive payment from the UN for protecting its rainforest. “People say you can’t be paid for what is a natural process,” says Tanguy Gahouma-Bekale, permanent secretary of Gabon’s national climate council, referring to Gabon’s rare status as a carbon sequester. “But we say No. It’s more than 30 years of policy that have preserved our forests. This is not a natural process; it’s a vision.” Indeed, preservation requires forward-thinking national policy and capital investment, not to mention opportunity costs. Today, only 20% of protected areas are being well managed due to underinvestment. Some researchers estimate that it would take a mere $140 billion annually — less than a third of global government subsidies — to protect 30% of the world’s land and ocean areas by 2030. Critics complain that selling carbon credits from a standing forest is just a paper exercise for the rich (Norway funded the initial tranche of $17m to offset its carbon emissions) and does nothing to offset emissions in the developed world. Yet this ignores the fact that preservation is easier (and cheaper) than restoration and should be rewarded for the many financial risks that it alleviates (reduced commodity yields, disrupted supply chains, output losses due to natural disasters and disease outbreaks, etc.). How can we expect any rational financial actor, much less distressed countries, to preserve their forests if every financial incentive points towards logging? We need only look as far as Gabon’s coastal neighbors (Ghana, Ivory Coast, and Sierra Leone all replaced their forest reserves with cash crops) to see how distorted price signals determine national policy. Even the Amazon rainforest, the world’s largest tropical rainforest, is now a net carbon emitter thanks to continued logging and burning policies (it has lost 1/6th of its volume since 1992). In 2021, following reports that deforestation actually increased by 12% in 2020, a group of public and private actors formed the LEAF Coalition (Lowering Emissions by Accelerating Forest finance), which pledged to raise an initial $1bn to compensate countries for protecting tropical rainforests. “Right now, the economic development model only puts a value on trees when they are cut down,” says Ruben Lebowski, chief natural resource economist at the Environmental Defense Fund. “Leaf aims to create durable finance for a model that is consistent with standing forests and sustainable livelihoods for indigenous and local communities.” Sadly, corporate pledges represent a mere fraction (0.007%) of the necessary investment, and destruction of tropical rainforests, as grimly reported by the Dasgupta Review, “is to all intents and purposes irreversible.” What Is To Be Done? Bringing the natural world onto the books — whether on the balance sheets of companies, countries, or the world — could have an immediate impact on international policy and environmental behavior by helping companies directly measure and address their nature-related financial risks. The Task-Force on Nature-Related Disclosures, led by an international consortium of governments and corporations, hopes to provide a global reporting standard for nature-related risks by 2023. Its ultimate goal is to “enable investors, banks, insurers and companies to understand the financial risks associated with nature loss and degradation, and in turn, to integrate those nature-related risks in investment, credit, and insurance underwriting decisions.” Advances in geospatial data and blockchain technology, if incorporated into risk frameworks, could allow companies to trace the direct impact of commodity production on local ecosystems and individual species along the supply chain. Dennis van der Putten, Chief Commercial Officer at ACTIAM, one of the ten largest Dutch asset management companies, believes a standardized risk framework will allow companies to set more concrete environmental targets. “This will enable us to better assess the dependencies and impacts of our investments on nature. It will help us to monitor our zero-deforestation and zero-biodiversity loss targets and realize nature-positive investments.” Similarly, natural capital depletion could serve as an early warning sign of economic instability to sovereign debt investors. Financial institutions could assess material nature dependencies (such as a beverage company’s need for clean water or an agricultural producer’s dependency on pollinators) before deciding to invest, insure, or lend to a company. Consumers, meanwhile, could demand more accountability from companies, pressuring them to reduce their deforestation levels or chemical footprints. Other ideas for alleviating the worst effects of the Anthropocene include eliminating self-defeating government subsidies, forming a global risk pool, ramping up nature-based solutions, and assigning nature personhood (much like corporations), so that it at least has the legal recourse to defend itself. While each of these holds promise, nothing is likely to halt the relentless destruction of nature until it is readily convertible into direct financial losses. As leading environmentalist Tony Jupiter puts it, “twenty-five years of campaigning for nature for its own sake, because it is beautiful, because it should exist for its own reasons and because we have no right to destroy it,” was simply not enough. “We could carry on like this, with ideological purity preserved (on all sides), or we could open a new discourse, one that requires the skeptics to meaningfully engage, and on the field where future environmental battles will be won and lost — the field of economics. After all, it is not most environmentalists who have misunderstood the realities that come with ‘growth’ on a finite Earth, but most economists.” About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.


Full story: https://medium.com/limited-liabilities-by-colbeck/natural-capital-accounting-c42bee2862e9