Dorothy Maxwell’s new book, Valuing Natural Capital: Futureproofing Business and Finance, explains the scale and severity of natural capital depletion, and suggests how we might incorporate its value into a sustainable economy

Natural capital provides goods and critical ‘ecosystem services’ essential for a functioning economy, businesses and society. These include fresh water, productive land for food and fibres, fish, fuels, minerals, sequestration of greenhouse gas (GHG) emissions, clean air, protection against flooding, plants for pharmaceuticals, biodiversity and recreation (as illustrated in figure 4). These include renewable and non-renewable resources. Financially valuing natural capital is typically based on the social costs and benefits to affected stakeholders. For example, this could be local communities drawing from the same natural services as the business, for example, a watershed feeding the fresh water supply. Hence, natural capital is fundamentally linked with social capital.

Figure 4. Examples of nature’s services
 
Figure 5. Links across environmental, social and economic domains

 

As illustrated in Figure 5 the environment and its ecosystem services sustain societies that are part of the economy. A key challenge for business is accounting for capital beyond ‘private capital’. This is particularly the case for natural capital as the costs and benefits are to society, as well as the business. Maintaining and enhancing natural capital, where it is lost or degraded, is recognised as essential for sustainable economic growth and the prosperity of business, communities and societies. The problem is that the social costs or benefits of nature's services are externalities not adequately captured in the market.

Scale of the problem

The systems that provide natural capital are degrading and malfunctioning. Looking at the balance of natural capital in planet Earth's bank, we draw down more cpaital each year than the earth can replenish. More than 60% of the vital services provided by nature are in global decline because of overexploitation. Figure 6 illustrates our overshoot per anum of renewable resouces and ability to sequester GHG emissions. It shows we are using the equivalent of 1.5 planets that we do not have!

The latest scientific assessment of the Earth’s natural systems in the Living Planet Report 2014 shows human demand has already exceeded much of the planets ability to replenish. This concludes that:

  • whilst population has risen fourfold in the last century, the water footprint has increased sevenfold;

  • shortages are forecast in 200 of the world’s estimated 263 river basins;

  • wildlife populations have more than halved since the 1970s;

  • freshwater species are declining fastest, with three quarters lost since the 1970s.

Figure 6. State of the planet from Living Planet Report 2014

 

Evidence studies and business identify urgent natural capital risks including a lack of freshwater, productive land, biodiversity, malfunctioning natural cycles for climate regulation and generation of phosphorous and nitrogen (used in fertilisers for crop production). Four of nine so-called ‘planetary boundaries’ have been crossed as illustrated in the Stockholm Resilience Centre’s Planetary Boundary model in Figure 7.

Business for Social Responsibility outline key challenges natural capital malfunction is causing: The issue today is that too few companies perceive of natural capital risk – or ‘ecosystem malfunction risk’– and its adverse business effects.

Figure 7. Status of the nine planetary boundaries

 

For exmaple:

  • corporate facilities cooled by ocean water have had to shut down because seawater temperatures have exceed engineering specifications, such as on the coast of the eastern US and coast of France.

  • coastal towns, such as in New Jersey during Hurricane Sandy or New Orleans during Hurricane Katrina, which have been catastrophically flooded, with subsequent linkages to the dismantling (and dysfunction) of coastal ecosystems and the ‘green infrastructure’ that previously offered coastal areas greater protection and resilience.9 (Aron Cramer, President and CEO, Business for Social Responsibility).

In its Global Risks 2015 report,10 the World Economic Forum identified four of the top 10 risks as sustainability related – water crises, failure of climate change mitigation and adaptation, extreme weather events, biodiversity loss and ecosystem collapse. According to McKinsey’s Resource Revolution, 2013 report, concerns over the future availability of natural resources, for example, food, water, energy and certain minerals, has become particularly acute since 2000 mainly because of rapid growth in demand. Accompanying this have been commodity price increases so significant they eliminate reductions in
average commodity prices from the past 100 years!11 In the words of the environmental economist Robert Costanza: If ecosystem services were actually paid for, in terms of their value contribution to the global economy, the global price system would be very different from what it is today. The price of commodities using ecosystem services directly or indirectly would be much greater. 

Ecosystem services

The direct and indirect value or benefits people receive from ecosystems. These services are defined as provisioning, for example, food and freshwater; regulating, for example, climate regulation and flood control; and cultural, for example, recreation and aesthetic.

Social capital

Social capital is the trust across communities and other stakeholder groups businesses interact with. It includes shared values, relationships, reputation, brand and social licence to operate that makes trade, finance, and governance possible.

Externalities

The consequence of an activity that affects parties other than the company undertaking the activity, for which the company is neither compensated nor penalised through the markets. Externalities can be positive, e.g. payments for protecting a watershed, or negative, e.g. health problems for local residents associated with air pollution from a factory.

This is an extract from Valuing Natural Capital: Futureproofing Business and Finance (DÒ Sustainability, April 2015) is part of the DÒ Shorts Sustainable Business Collection.
Ethical Corporation readers can use code ECDM15 to save 15% at www.dosustainability.com. (Offer ends 15 August 2015.)

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