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Written by Owain JonesMBA in Sustainability student at University of Saint Francis

Every company deals with capital when figuring out how to operate their business and observing how the business is performing. Companies in the United States operate under a capitalist economic system, where capital goods are owned by individuals who use them to create a product or service to sell for a profit. This is nothing new of course, but it then feeds in to how some people feel that the dwindling free natural resources of the world need to be accounted for economically.

This brings about the concept of natural capital, which was first foreshadowed by President Roosevelt in 1937 when he talked about how the Earth’s permanent capital, natural resources, were being transformed into wealth faster than the real wealth was being replaced. The term natural capital was first used by E.F. Schumacher in 1973 in his book “Small is Beautiful.” What natural capital does is essentially place a value on the things we amass from the Earth for free, like clean water, air, and trees. In the dollars of today, a 1997 research group valued the entire biosphere at $47 trillion dollars. It seems like this notion has been around for a while but it was only last year when there was the Natural Capital Declaration committed to by CEO’s of 38 financial companies of the world and The Association of Chartered Certified Accountants (ACCA). However, that did not include any of the large ones based in the U.S. as of yet. What these individuals are doing is implementing detailed recommendations that include:

  • The implementation of natural capital impact disclosure requirements for companies
  • Enforceable fiscal measures conducive to the valuation of natural capital
  • The setting of an example by governments through the requirement for public spending and procurements to report and eventually account for the use of natural capital.

 

What this may do for other companies is force them to implement natural capital into their financial planning and loans from these financial institutions could be influenced by it. A report by KPMG, ACCA, and Flora & Fauna International, titled “Is natural capital a material issue?”, gives finance professionals and accountants the idea of natural capital and how they can affect a change on the issue of the sustainability and helping the environment. The most influential people this report was directed to were company CFOs, of which KPMG and ACCA surveyed as part of the report. This survey yielded about half of the CFOs surveyed saying they have included natural capital in risk evaluations and 49% said it was only a material issue.

So what does this do for sustainability? Natural capital is simply a tool that can be used to show companies how they use natural resources because there is a value slapped on it. If a company’s natural capital severely decreases year by year it can identify a brutal sustainability problem. Some companies may see this as redundant, like General Motors who have created already lofty sustainability goals that will preserve their natural capital. However, the most important form of natural capital that we have is the kind that gives us energy, the fossil fuels of coal, oil, and natural gas. Valuing this as natural capital may give companies that thrive on those natural resources a better understanding of how exactly their activities are decreasing natural capital. This may give a very good economic understanding how unsustainable their activity is and shed some light on the needs to implement more sustainable operations.

For other companies natural capital may seem like a very good starting point to create an avenue to begin a sustainability initiative based on how their natural capital valuation may break down through the accounting department. Preserving natural capital as much as possible creates sustainability automatically, thus it may create an easier way for companies to understand sustainability as a whole. Many of the sustainability initiatives that are common place, like waste and energy use reduction, are only pieces to the preservation of natural capital. Sustainability encompasses much more than some people may think because it includes everything in the biosphere. In the end, it is natural capital that we need to sustain and we could have an end result of increased natural capital, because planting trees and increasing clean water and air will cause natural capital to go up.

The World Bank is one of the financial institutions that will need companies that are seeking loans from them to value their natural capital and inspect their reliance on it. The video below  is an example from the World Bank of how the Australian Government is using natural capital to help with sustaining the Great Barrier Reef, the world’s largest coral reef located off the Australian shore.

 

The World Bank also has many other great videos on their YouTube channel, including a very good summation video of natural capital that can be seen here.


 

Resources:

Natural Capital Declaration: http://www.naturalcapitaldeclaration.org/