Natural capital: the 21st century’s elephant in the boardroom

“Natural” capital will be as vital a business concern in the 21^st century as adequate financial capital was in the last century, according to the Chartered Institute of Management Accountants (CIMA). How can businesses account for this new “elephant in the boardroom”?

According to HRH The Prince of Wales, better management of the planet’s natural capital is vital: “In stark financial terms, all the evidence demonstrates a simple fact: we are failing to run the global bank that we call our planet in a competent manner. We no longer just take a dividend each year; instead, for some time, we have been digging deep into our capital reserves…The ultimate bank on which we all depend – the bank of natural capital – is in the red [and] the debt is getting ever bigger.”

‘Two planets needed’

Addressing this deficit will require action by accountants and financial professionals worldwide. But what exactly is natural capital and how can it be enhanced?

According to CIMA’s report, “Accounting for Natural Capital,” natural capital is the foundation on which our economies and societies are built, comprising “elements of nature that produce value, directly and indirectly, for people, such as forests, rivers, land, minerals and oceans. It includes the living aspects of nature, such as fish stocks, as wel as the non-living aspects, such as minerals and renewable or non-renewable resources.”

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The Australian Bureau of Statistics has estimated the nation’s natural capital as worth $4.7 trillion as of fiscal 2012, exceeding the value of produced capital at $4.6 trillion.

However, the World Wide Fund for Nature has estimated that natural capital is being depleted at 50 percent more each year than the earth can replenish. With the global population rising to an expected 8 billion by 2030, it is estimated that two planets will be required to sustain current lifestyles.

The impact on business is already apparent, with the Natural Capital Coalition estimating that the top 100 environmental externalities cost the global economy around US$4.7 trillion a year.

Accounting for nature

Managing the risks associated with our dependence on natural capital requires developing standardised methodologies. Although such an approach is currently lacking, the Natural Capital Coalition and others are working on a harmonised framework, while some organisations have developed their own methods.

In Britain, DIY retailer Kingfisher has strived to be “net positive” across four core areas of its business including timber, where it aims to create more forests than it uses and to source all wood from responsibly-managed sources. Other companies active in measuring environmental impacts include German sportswear maker Puma and U.S. giants Coca-Cola and Dow Chemical.

Accountants can contribute by supporting the adoption of natural capital accounting in their organisations and ensuring such externalities are reflected in data collection, decision making, risk management and reporting.

In the new century, building a sustainable business has never been more important and management accountants have a crucial role to play in driving this change.