What is Natural Capital?

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Capital, most often financial capital, represents how much money is available. Financial capital also generally refers to saved-up wealth, often saved in order to one day start or maintain a business and purchase goods. Everyone wants capital, and generally more of it. Capital represents security, success, and future gains. Currently, however, the pursuit of financial capital over other essential capitals, like human capital and natural capital, is threatening businesses across the globe.
The most common economic model used today was created during the start of the Industrial Revolution, over 250 years ago. This model sees financial capital reliant on the productivity and supply of labor. Back then, the more people working in a factory and the more efficient their machines were, the more productive a factory would be and, hence, the more financially lucrative a company could become. This model was also based on the past presumption that natural resources were unlimited, and that their vital life-support services would always be in abundant supply. Today, this is no longer the case. The ability of the planet to support life is in decline and there is a surplus of people. In our new world, the life-support services of our planet have grown quite expensive.
This has forced businesses to reevaluate how they measure and manage their environmental impact. In order to value natural systems, the term “natural capital” was developed. Natural Capital refers to natural systems that support companies and their consumers, like ecosystem services (water filtration, flood-control, soil conservation, oxygen), natural resources (clean water, soil, minerals), and biodiversity (genetic diversity, life resiliency, biomimetic resources).

History of Natural Capital

E.F. Schumacher, the economist and author of seminal work Small is Beautiful (1975) was the first to use the term and metaphor “natural capital.” His concept closely identifies with work by ecology economists Herman Daly and Robert Costanza, and the Biosphere 2 project, where a mini-Earth was created to study lifesystems. The idea of natural capitalism, an economic model created by Paul Hawken, Amory Lovins, and Hunter Lovins, also expanded the usage and understanding around natural capital.

During the Rio Earth Summit in 1992, governments, NGOs, and private sector leaders met to discuss global environmental issues and proceeded to set up new conventions on biodiversity, climate change, and desertification. Two decades later at the Rio+20 Summit, many private sector leaders recognized that the increasing pressures of population growth and climate change on earth’s limited natural resources would dramatically raise commodity prices. Widespread ecosystem damage would result in disruption to their businesses and to the economy as a whole. In response, another convention was formed, the Natural Capital Declaration (NCD). The Natural Capital Declaration was a commitment from banks, investors, and insurance firms to change their business models to reflect the importance, or materiality, of natural capital for the financial sector.

The concept of natural capital and natural capitalism has also been used by politicians like Ralph Nader, Paul Martin Jr., and agencies of the UK government including the London Health Observatory. In addition, the World Bank now takes into account the extraction of natural resources and the ecological damage caused by CO2 emissions when calculating the genuine savings rate of a country.1 This echoes the belief that natural capital measures play a key role in money supply and inflation measurements in the modern economy.

Why Natural Capital (Finally) is Being Counted

A 2013 report by Trucost, experts in environmental data and environmental risk analysis, estimated that the world’s primary production sectors (agriculture, forestry, mining etc) and primary sectors (steel, pulp and paper, petrochemicals etc) have total environmental costs of about US$7.3 trillion. That’s 13% of global economic output. This is due to costs from contamination of water supplies, loss of fertile land to soil erosion and drought, and supply chain disruptions from deforestation and overfishing. The report also predicts, that left unchanged, these costs could skyrocket to $28 trillion by 2050–not counting the economic damage expected from climate disruption.2

That number, the total incurred costs from climate disruption due to the huge release of heat-trapping gases into the atmosphere, is up for debate, mostly because if we fail to make major changes, worldwide bankruptcy is certain. Valuing natural capital in economic models is a step to changing that current reality.

Trucost’s report reflects other reports that echo the same warning to account for natural capital. According to TEEB for Business, the global fishing sector is at risk at losing $80-100 billion in income and 27 million jobs.3 The cumulative global loss from inefficient global fisheries over the 1974 to 2007 period is also estimated at $2.2 trillion.4

Another report by the World Resources Institute (WRI), showcases how forest and mountain ecosystems provide water to 2/3 of the global population and provide the water that most businesses depend on for their operations. The report mentions that 79% of planned hydropower installations built to accommodate the increasing global need for electric power, will be built in areas that are already water scarce or stressed.5 Things do not look promising.

How Natural Capital is Being Counted

Because our current economic models are based on those created during the Industrial Age where natural resources were regarded as unlimited, how to actually value natural capital has been a challenge. Some institutions, like the Dutch multinational banking and financial service company Rabobank, developed advanced ways of calculating emissions and water in order to reduce credit risk.6 What began as a way to manage financial risk, has now developed into a way for the bank to accommodate added risk not shown in the bank’s loan book.

Economists have also teamed up with ecologists to measure the wealth of ecosystems and the services these ecosystems provide, which support the global economy. For example, researchers attempted to place a dollar figure on the value of the Canadian Boreal Forest. If left intact, the forest has an estimated value of $3.7 trillion due to being one of the planet’s greatest atmospheric regulators and because it stores more carbon than any other biome on Earth.7 The annual value for the ecological services of the Boreal Forest is estimated at $93.2 billion, or 2.5 times greater than the annual value of extracting its natural resources.8

Puma, the footwear manufacturer, was also one of the first companies to take stock of their environmental profits and losses. This culminated in their 2010 Environmental Profit and Loss Statement Account, which was a premier attempt to measure, value and report the environmental externalities caused by a major corporation and its entire supply chain. The Environmental P&L internalized externalities and monetized the worth of ecosystem services, plus the cost of direct and indirect negative impacts on the environment.9 Many businesses have now adopted similar forms of accounting for natural capital, although reporting is still voluntary and the metrics for this reporting are not standard across the industry.

Herein lies one of the greatest challenges of incorporating natural capital into the business bottom line and world economies. Without agreement on methods of valuating and auditing the global forms of natural capital like the value of clean air, water, and soil, it is almost impossible to measure the “ecological deficit.” The Tower of Babel effect of so many entities creating their own environmental metrics and natural capital valuations stresses the need for a standardized form of accounting for the services ecosystems provide, and the financial loss if those ecosystems do not survive. Fortunately, academics and organizations are working hard to develop widely-accepted ways of measuring natural capital. I just hope agreement is reached before the costs are too great.

Other Types of Capital, Like Spiritual

Most recently, the concept of Spiritual Capital has spurred research and business applications. The concept involves quantifying the value to individuals, groups, and society of spiritual, moral or psychological beliefs and practices. Some scholars, like Robert Barro, see spiritual capital as merely another term to describe the power and influence generated by religious beliefs and practices, while others, like Danah Zohar, define spiritual capital as the broad sense of personal, social or cultural beliefs and meanings that stimulate creativity, encourage moral behavior, and motivate individuals.10

An emerging definition, based on the research by Samual Rima, defines spiritual capital as a metaphysical impulse that animates and leverages other recognized forms of capital to build capacity for advancing the common good.11 Currently, this can be seen in the blossoming of mission-driven businesses and start-ups that support the growth of human, spiritual, and financial capital.

Regardless, there remains speculation if quantifying spiritual capital actually adds to a business’s bottom line. However, the U.S.’s most profitable, privately-owned fast food company, Chick-fil-A, believes that there is benefit in accounting for spiritual capital. Chick-fil-A is the only fast food company to close all their locations on Sunday, and considers this policy a reflection of how spiritual values affect the company’s ability to create value in a highly competitive marketplace, in addition to connecting to its broader corporate culture and philanthropic endeavors.12

The Future of Capital

Spiritual capital may be commonly integrated in time, but the fact that the concept exists reflects an evolving conscious that recognizes there are additional aspects to value, just as much if not more than the value of money.

The valuation of natural capital has become not only popular, but also necessary, as our world becomes more and more unstable from anthropocentric activity. The integration of natural capital into company balance sheets is an inevitable step towards valuing nature and natural processes on par with human progress and economic growth. If natural capital were incorporated into every country’s GDP and every company’s financial account, then who then would be the world leaders? I’m sure the global economic landscape would become a very different picture, and perhaps, a more stable, equitable, and beautiful one.

 

1. The World Bank. (2010). Adjusted Net Saving.
2. Corporate EcoForum. (2013). Valuing Natural Capital Initiative.
3. Short, K. (2012). Exploring Seafood Sector Evaluation of Ecosystem Services to Guide Investment in Fisheries Rebuilding.
4. United Nations Environment Programme (2010). Nagoya 2010: Hardwiring biodiversity and ecosystem services into finance.
5. World Resources Institute. (2010). Thermal Power and Hydropower Plant Locations and Water Stress Level.
6. International Integrated Reporting Council. (2013). Business and Investors explore the sustainability perspective of Integrated Reporting.
7. Baianu, I. C. (2010). Complexity and Dynamics: Complexity Theories, Dynamical Systems and Applications to Biology and Sociology.
8. Anielski, M. & Wilson, S. (2009) Counting Canada’s Natural Capital.
9. PUMA. (2010). PUMA’s Environmental Profit and Loss
Account for the year ended 31 December 2010.

10. Helias, S. E. (2011). Spiritual Capital. Rupt.
11. Rima, S. D. (2013). Spiritual Capital: A Moral Core for Social and Economic Justice. Gower.
12. Yale School of Management. (2010). Chick-fil-A: Adding Value by Closing on Sunday?

About Rochelle March

Rochelle is a dual MS/MBA graduate student at Bard, and currently does research for the Natural Resources Defense Council on issues relating to climate change impacts on public health. She also blogs about other sustainability topics on her website, earthoffoxes.com, and invites you all to read an article or peruse her nature-inspired t-shirt designs and illustrations.