Natural Capital Accounting – Making the Invisible Visible

Have you spent any time lately reading the financial statements of a business or other organization? If you have, you probably noticed that they contain a lot of information – there are balance sheets, with information on assets and liabilities; there are income sheets, with information on income, profits and losses; and there are statements of cash flows, with information on operations, investments and financing. These financial statements tell you a lot about what matters to companies – they reflect business decisions, and they inform future decisions.

However, increasingly, companies are seeing that there are other things that also matter a lot – things that aren’t seen in their financial statements: natural capital.

Natural capital refers to the natural environment and its ecosystems from which we extract ecosystem goods (such as wood, minerals, water) and ecosystem services (such as pollination, flood control, air purification, climate moderation) for our use. Every day, companies around the world produce goods and services for use by consumers and other companies. Producing, consuming and disposing of these goods and services often cause negative impacts on the environment. Companies are increasingly looking to measure, value and understand how their operations and products impact the environment, and how that in turn can impact their business – a practice called Natural Capital Accounting (NCA). This practice has the opportunity to not only help companies manage risk, but to identify new opportunities and advantages.

Natural capital accounting refers to the practice of accounting for natural capital use, degradation and/or improvement caused by a company’s activities, and integrating that valuation into corporate decision-making processes.

While NCA makes visible the otherwise-invisible costs of nature, it is far from a magic trick or a slight of hand. These costs and values of nature are real – and companies are beginning to show them in their financial statements because they see value in considering nature in their decision-making.

Today SP released a Policy Brief "Nature, it's in our Business" (see it here) that shows the benefits of NCA, demonstrated through four select case studies. Our analysis shows that companies that see their impact and dependence on nature, and integrate those impacts and dependencies into their decision-making, give themselves a number of advantages – key among them are increased innovation; enhanced and new collaboration; and environmental-and financial-sustainability.

While these leading companies see benefit in valuing nature, there may soon be even more reasons for companies to measure and value natural capital – pollution pricing. While some jurisdictions already have carbon pricing for some industries (see Quebec and British Columbia for examples), it is increasingly likely that the coming years will see regulators price pollutants, such as carbon and some ecosystem services, creating a serious risk for businesses that do not already monitor and seek to mitigate pollution.

Natural capital accounting is still an evolving practice, with lots to perfect and learn, but those companies taking baby steps or big leaps in this direction are seeing real returns now, even in the absence of pollution pricing. As pollution pricing increases (see Canada’s Ecofiscal Commission for some ideas on how this can happen in an advantageous way for our economy), more and more companies will see the natural capital that’s currently largely invisible in their financial statements and decision-making. And while natural capital accounting is not magic, some of the results seen by the four companies we’ve profiled have been nothing short of amazing.