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Natural Capital: Putting a price on nature

  • Written by  Mark Rowe
  • Published in Nature
Natural Capital: Putting a price on nature
14 Nov
2018
Natural capital is a way to quantify the value of the world that nature provides for us – the air, soils, water, even recreational activity. Advocates say this is crucial if biodiversity is to have any clout in a world governed by raw economics. Others believe the concept merely turns the natural world into a commodity. Is natural capital our last chance to halt the carnage mankind inflicts on the environment or are its supporters naively dancing with the devil?

In summer, the west coast of North Uist in the Outer Hebrides is swathed with the glorious technicolour of flowers on the sea meadows, or machair. This dense, carefully maintained floral carpet of up to 45 species of flower per square metre is a perfect habitat for the endangered great yellow bumblebee, found only here, in Orkney and a few other flower-rich parts of the Highlands. Some may criticise the amounts of money being spent on safeguarding a single species of bee; in raw economic terms, the machair is unprofitable as the crofters that use the land graze sheep with little commercial value. ‘The question that gets asked is why should we bother looking after the machair?’ says Dieter Helm, professor of energy policy at the University of Oxford and chair of the Natural Capital Committee. ‘But you quickly realise that the way to preserve the bee is to look after the machair. The reality is that the costs of maintaining the machair are far outweighed by the benefits – and benefits in material terms. The machair serves a public good in preserving a favourable landscape for the bumblebee. People benefit from knowing the bees are there. Visitors come, giving a tourist benefit. The flowers protect the soils. The economic case for maintaining the machair is very strong. In contrast, if you plough it up, it’s gone for ever.’

The arguments used by defenders of the natural world have changed over the decades. Originally they tried appealing to governments and industry that nature was worth saving for its own sake. As that fell on deaf ears, they resorted to more utilitarian arguments. Save an endangered species? Good: wildlife watching provides income from tourism. Stop cutting down the rainforest? Good, again: you make more money in the long-term from tourism and food supplies than from trees turned into garden tables.

Now there is a more nuanced concept taking hold and the bees of North Uist are an ideal example. The phrase ‘natural capital’ is an umbrella term for economically quantifying the world’s stock of natural assets – plants, animals, air, water, soils, minerals – which yield benefits that make human life possible. The concept is abstract. Traditionally ‘capital’ has been thought of as physical – the machines, tools and equipment used in the production of other goods. Increasingly though, the case is being put that our wealth and wellbeing also rely on natural capital. ‘The economy exists and prospers as a result of the enormous amount of “stuff” that nature gives us for free,’ says Helm.

This stuff includes clean air, water purification, energy, shelter, medicine as well as the ‘raw materials’ we use in the creation of products, such as wood, plants, animals, fungi and micro-organisms. Further benefits include flood defences, climate regulation, pollination of crops and prevention of soil erosion.

But the benefits can be even more intangible and include cultural services such as recreational and spiritual value and a sense of place. ‘If you destroy a heathland, it’s not just the biodiversity that loses out but the people who use it for walking or for bird watching,’ says Chris Williams, senior programme manager at the New Economics Foundation (NEF). ‘The effect this may have on them doesn’t get taken into account. Natural capital puts an existence value on nature, not just a substance value. We need to make nature more prominent in decision-making by putting an economic value on the services nature provides.’

In short, natural capital is another way of looking at the long-standing problem facing the planet and mankind: that humans are depleting natural resources faster than the Earth can replace them, cutting trees faster than they mature, harvesting more fish than oceans replenish, and emitting more carbon into the atmosphere than forests and oceans can absorb. The case for natural capital is that if we abuse all this, we risk degrading the services that natural ecosystems provide, which in turn support our economies. ‘The idea is that natural capital not only informs better decision-making but it also makes sure that nature is factored into that decision-making,’ says Williams.

A further driving factor is that, according to Williams, ‘not many people in NGOs are economically literate. They talk from an idealistic perspective while at the same time working with oil, gas and fishing industries that have to think about their businesses and jobs. The attitude on both sides has been that you can either have economic growth or a healthy environment, you can’t have both. The notion of natural capital is to reconcile these two goals.’ 

‘In the world of conservation, people often think in black and white,’ adds Dr Anne Guerry, lead scientist and chief strategy officer at the Natural Capital Project, a Stanford University-led partnership of WWF,the Nature Conservancy, the Chinese Academy of Sciences and the University of Minnesota. ‘Often, conservation-minded people think of human impacts on the environment as a bad thing and setting aside protected areas as a good thing when in fact there are lots of shades of grey. If we re-frame that thinking to include awareness of the many ways that nature sustains and fulfils human life, we can begin to make more informed choices with better outcomes for both people and planet.’

Natural capital demands a different way of looking at how global economic systems are valued. ‘People say we should just let the market sort things out but it hasn’t done that, it’s only exacerbated things,’ says Williams. ‘Markets and GDP are no indicators of true value, otherwise a hedge fund manager or a footballer wouldn’t be worth far more than a paediatric heart surgeon. A processed sandwich full of palm oil will be cheaper than something from a farmer’s market, but the cheapest thing should be the one that is the most sustainable.’

Geographical 2018 11 BiodiversityHotspots(Mapping: Ben Hennig)

Biodiversity Hotspots
The hotspots of biodiversity identified by Conservation International aim to draw a picture of the richest and the most threatened reservoirs of plant and animal life. Shown in this map are the major biodiversity hotspot regions in relation to the global population distribution. The map shows a gridded population cartogram which gives equal space to each living person. It therefore is a representation of the most threatened unique ecosystems in their setting in and around human populations. This gives one insight into the immediate human impact on these vulnerable areas of the world’s biosphere.

MARKET FAILURE

If you’re looking for evidence to back up the assertion that humans are depleting the planet’s resources you are spoilt for choice, but WWF’s Living Planet Report 2014 is a good place to start. This showed that population sizes of vertebrate species – mammals, birds, reptiles, amphibians and fish – have dropped by more than half in fewer than two human generations. The report also calculated that we need one and a half Earths to regenerate the natural resources we currently use and that 60 per cent of ecosystem services – water supplies, fish stocks, fertile soils and storm protection – are already in decline because of human impact.

With a global human population on course for nine billion by 2050 the UN Food and Agriculture Organization (UNFAO) has forecast that the world needs to produce at least 50 per cent more food by then, compared with 2009. Over the same period, global meat consumption will increase by 65 per cent to 460 million tonnes a year. ‘We are living beyond our means,’ says Helm. ‘If we dip too far into this natural capital there will be grave consequences.’

Environmental Accounting
The embedding of the concept of natural capital into industry and businesses will see corporate responsibility taken to meaningful – and long overdue, suggest critics – levels of scrutiny. The key to applying natural capital is the development of a new wing of the bean-counting profession: environmental accounting. As the obligations countries signed up to through the Paris Treaty begin to work their way through national legislation, companies will be required to account not just for their own immediate carbon emissions but for those from joint ventures, subsidiaries and other organisations. They will also have to set operational boundaries – the scope of emissions, from direct to indirect, such as from purchased electricity, accrued via employee travel, waste, contractor vehicles and product use. ‘The question is, where do you stop?’ asks Williams. ‘If you are a shoe company you can probably quantify how much water is used to raise the cow that provides the leather you use. But do you then also calculate the impact arising from desertification from overuse of the rivers by your industry?’

The accountancy sector is aware of the issue. Qualifications for ACCA, the global accounting body, now include environmental reporting and in 2015, ACCA, together with Fauna & Flora International and KPMG, published a major report on the subject called ‘Is Natural Capital A Material Issue?’ This concluded that a three-level approach for quantifying carbon and other environmental impacts was likely to prevail. Scope 1: a company’s own emissions; scope 2: emissions that include those of their supply chain; and scope 3: the end-products a company produces and the environmental impact these have. The report concluded that scope 3 would prove the most problematic.

LEGISLATING FOR CHANGE

Natural capital also appears to be part of a long-term strategy among environmental legislators and campaigners. This process has been underway for longer than you might think. The major environmental treaties of recent decades, such as the Rio Earth Summit of 1992 and the Paris Climate Treaty (ratified in 2016), incorporate the concept of natural capital. Article Six of the Paris Treaty calls for ‘environmental integrity, transparency, including in governance, and [parties] shall apply robust accounting’ – which means accounting in the literal, professional sense for environmental impacts. Legally binding measures set to emerge from Paris will make banks and other lenders consider the environmental impact of the operations they fund, from the building of dams to paper mills. For those lenders and companies keen to do their homework, there is also the Natural Capital Protocol, a non-binding 136-page framework that generates data for business managers to inform decisions.

Integration of natural capital into economic systems is likely to be driven by national and regional legislation. The EU already has laws to preserve this ‘capital’ in the form of the Water Framework Directive for fresh water, the Marine Strategy Framework Directive for the seas, the Air Quality Directive and the Habitats and Birds Directives which target wildlife and the space it needs to survive. Meanwhile, in the UK, the Office for National Statistics now publishes natural capital ecosystems accounts – earlier this year these valued the UK’s natural capital at around £761 billion.

Natural capital is already producing benefits in the UK, Williams argues, pointing to its deployment in the Solent (on the south coast of Britain) where it has quantified the benefits of clean water. ‘It used to be the case that if regulators said water quality had to be improved, the water company would respond that this would cost them money to implement. The government would then conclude this would affect growth. Now we’ve been able to show in quantifiable ways that improved water quality helps fishermen, helps the shellfish and benefits human health. That doesn’t affect growth negatively, it improves it.’

Tony Juniper of WWF points to catchment areas on Dartmoor, where water companies work with wildlife organisations to prevent peat entering the water course, thereby ensuring cleaner water arrives downstream requiring lower purification costs. ‘We’re already seeing companies joining the dots on this,’ he says.

Such a shift in mindset appears to underpin natural capital. ‘We’ve ended up in a situation where we use public money to pay water companies to clean up the muck that gets put in it,’ says Helm. ‘If we put a value on water, we change the way in which it is viewed.’

Further afield, the natural capital ethos has been practically applied. Belize has recently established the world’s first coastal management plan to feature a sustainable approach by quantifying and valuing coastal and ocean resources. The country’s coast includes spectacular atolls, lagoons, mangrove forests, seagrass beds, coral reefs and more than 1,000 cayes; it is also home to 35 per cent of the population and endangered species such as the West Indian manatee. The coastal plan reduces the area of habitat at high risk by 20 per cent, while also expanding economic opportunities, tripling the area for coastal development and tourism infrastructure, doubling that for marine aquaculture and holding steady the area for lobster fishing.

Yet Belize is a small country. Can natural capital approaches become embedded in the world’s major polluters? Guerry of the Natural Capital Project is optimistic and points to the fact that China has already zoned 49 per cent of its land into Ecosystem Function Conservation Areas (EFCAs). The intention is to use EFCAs to alleviate poverty while mitigating flooding, securing water supplies, renewing soil resources, reducing dust and sandstorms, and conserving biodiversity. ‘This has been spurred by the massive landslides and floods in 1998 that killed thousands and rendered 12 million homeless. They know if they pay attention to the kinds of approaches we are describing they may be able to develop sustainably without harming the very ecosystems that underpin healthy economies and healthy communities,’ says Guerry.

The True Cost of Clothing
In 2011, the clothing company Puma commissioned a specialist accountancy firm, True Cost Accounting, to audit its entire supply chain. Puma said the intention was to provide impetus for it and its suppliers to use more sustainable materials such as recycled polyester. The accounts showed that the direct ecological impact of its operations equated to £6.2m, but a further £74.7m fell within its entire supply chain. Meanwhile, the luxury goods company Kering began placing its audited environmental profit and loss account on an open-source platform in 2013. The account values Kering’s environmental footprint and that of its supply chains in monetary terms. It reveals that in 2017, the most significant impacts were generated in the supply chain (90 per cent), in particular from the production and processing of raw materials (76 per cent of the total). Leather was by far the biggest driver of impacts followed by wool, cashmere and metals such as brass.

SUPPLY AND DEMAND 
What does all this mean in practice for industries that use natural capital to meet our demand for goods and services? Rather than looking to the industry you might expect – the fossil fuels industry – advocates are focusing on sectors such as apparel, food and beverage, and finance that use both primary and secondary resources. The apparel industry has long operated on a business model of low-prices, low manufacturing wages, quick production and just as quick obsolescence, in turn creating further demand for manufacturing resources; it seems as far removed as any industry from sustainability. The NGO China Water Risk calculated that 40,000 litres of water can be required to grow 1kg of cotton, just 1kg of textiles produces 600 litres of wastewater and the average Chinese apparel factory discards 27.2 tonnes of usable, excess textiles every week. Greenpeace’s 2012 report on the impact of textile production in China found that hazardous waste included dye-related chlorinated anilines (which are toxic to a wide range of organisms and include known or suspected carcinogens) and perfluorooctanoic acid (a highly persistent and bioaccumulative toxic chemical).

The sector has responded with initiatives such as the Zero Discharge of Hazardous Chemicals (ZDHC) Group which provides supplier training, develops industry standards for chemical management information capture and monitors industry compliance. Then there is the HIGG index, a self-assessment standard for monitoring environmental and social sustainability through the supply chain, founded by the Sustainable Apparel Coalition. However, it has also been accused of tokenism. ‘Unfortunately, natural capital is a concept that is vulnerable to being done badly,’ says Helm.

The public should not be excluded from scrutiny, argues Helm. The uncomfortable reality is that 96 per cent of the impact of a garment sits with the customer, far more than that derived from the factory or even the growing of the cotton. This is because the greatest footprint comes from the number of times we wash clothing along with our tendency to throw out wearable clothes.

A similar scenario emerges around timber, particularly hardwood. ‘Engaging with the timber industry will have little effect,’ says Helm. Instead he says we should look at where the demand for timber comes from. At the moment this is still primarily the United States and Europe. ‘We can either take the ivory approach and ban the import of mahogany,’ says Helm, ‘or you apply natural capital and put it in the accounts [of the nations who purchase it]. That will weaken demand for it.’

The food and drink sector faces similar challenges. The UNFAO has declared that livestock farming is a major driver of deforestation, and that the rearing of livestock for meat, eggs and milk generates 14.5 per cent of global greenhouse gas emissions. The industry responds by arguing that reducing the sector’s emissions is complicated. ‘There is no prototype for a genetically modified ruminant that does not produce methane,’ asserts Dr Jonathan Scurlock, a senior climate advisor at the UK National Farmers’ Union. ‘You can minimise but you can’t abolish the emissions.’

By way of mitigation and preservation of the natural capital on which farming draws, the UNFAO and the International Meat Secretariat point out that the dairy sector has potential to utilise its role as a carbon sink, in the form of rangelands and grazing land, both significant sequesters of carbon.

Can you Code Biodiversity
In an attempt to make the concept of natural capital more tangible, WWF scientists have helped develop software tools that enable companies and governments to gauge and mitigate their impact on the resources they use. These include InVEST (Integrated Valuation of Ecosystem Services and Trade-offs), a free programme that models and maps the delivery, distribution and economic value of ecosystem services and biodiversity. This helps decision makers visualise the impacts of decisions and identify trade-offs between environmental, economic and social benefits. The InVEST software includes a generator for developing scenario maps that enable users to compare how ecosystem services are affected under different possible business plans.

WWF and its partners recently carried out a climate, ecosystem and economic assessment using InVEST in the Heart of Borneo, an area of mountainous forests with exceptional biological diversity. More than two decades of unsustainable logging, fires, plantation development and mining has led to a dramatic decline and degradation of forest and freshwater ecosystems. The assessment highlighted how conservation and sustainable land management could help create a green economy and contributed to the decision to designate the region as a Strategic National Area, the first such area in Indonesia.

DEALING WITH THE DEVIL 

Not everyone is comfortable with the idea of putting a financial value on nature though. The concept of natural capital is seen by some as being a dangerous one, that by shoehorning nature into a narrow economic model you turn it into a tradeable commodity. Bram Büscher, a professor in the sociology of development and change group at Wageningen University in the Netherlands, argues that natural capital reconceptualises nature from something intrinsically ‘good’ to a commodity that can be traded and substituted at will. ‘[Natural capital] is a dangerous illusion that masks the way capitalist growth undermines conservation,’ he writes in a blog on The Conversation. ‘Capital in a capitalist economy is never invested for the sake of it. The aim is to extract more money or value than had been invested. Otherwise it would not be capital.’

George Monbiot, the environmental writer and campaigner describes natural capital as ‘morally wrong’ and based on misconceptions. Attaching a price to an ecosystem, he suggests, is to effectively put it up for sale. Writing in The Guardian earlier this year, Monbiot described as ‘deluded’ the idea that we can ‘defend the living world through the mindset that is destroying it.’

Mutinational companies, who face the implications of incorporating natural capital into their everyday business are also looking hard at the issue, something which critics of natural capital argue proves their point. Unilever has issued a sustainable agricultural code which incorporates several elements of natural capital, including soil health, soil loss, nutrients, pest management and biodiversity. 

Yet, while Unilever is widely seen as having a more enlightened approach towards its environmental impact than many other companies, it clearly considers te concept of natural capital to be in its infancy. ‘The world is in the early days of understanding and measuring natural capital in ways that can be systematically integrated into business decision-making,’ says a spokesperson for Unilever. ‘There are important questions about whether the valuation of natural capital will assist in the integration of natural capital decision-making, or whether it is preferable to understand the value of these resources independent of a monetary value being applied.’

Unsurprisingly, the NEF’s Williams disagrees with the critics. ‘There is a big difference between putting a price on something and valuing it,’ he says. ‘You can take a fish out of the sea, put it on a plate and put a price on it. But if you look at bees and their importance for pollinating the crops we eat, not for one moment is anyone going to suggest you buy up wild bees. There is no derivative market for bees.’

Tony Juniper, executive director for advocacy at WWF, is also sceptical of most criticism but cautions against seeing natural capital as a panacea: ‘It’s just one tool in the box, it has advantages and limitations. Not every element of nature has a clear and practical value and we need to recognise that.’

Natural capital supporters argue that it involves dealing with the real world and that it demands a pragmatic approach. The UK demand for new housing is a case in point, says Helm. ‘You can argue we shouldn’t build houses because they will impact on the environment – but try getting that one past the electorate.’ Far better, he suggests, to ensure these houses are built appropriately. ‘You don’t build on flood plains or on Sites of Special Scientific Interest, you just build where there is least damage. The economics of the cost of such locations to the builder and landowner – higher construction costs and lower house prices – should not be involved.’

Geographical 2018 11 EcologicalFootprint(Mapping: Ben Hennig)

Ecological Footprint
This map is a visualisation of the average ecological footprint per person in each country of the world. According to the Global Footprint Network: ‘The ecological footprint per person is a nation’s total ecological footprint divided by the total population of the nation. To live within the means of our planet’s resources, the world’s ecological footprint would have to equal the available biocapacity per person on our planet, which is currently 1.7 global hectares. So, if a nation’s footprint per person is 6.8 global hectares, its citizens are demanding four times the resources and wastes that our planet can regenerate and absorb into the atmosphere.’

1 August
The day in 2018 when humans used up our annual supply of renewable resources and started spending down the Earth’s natural capital. Also known as ‘Overshoot Day’, it arrives earlier every year (in 2014 it fell on 20 August). The date is identified by calculating mankind’s ecological footprint, adding up all human competing demands for productive areas, including for food, timber, fibres, carbon sequestration and infrastructure. Carbon emissions make up 60 per cent of humanity’s ecological footprint.

SHARING THE LOAD

The reality is that natural capital is still in its infancy. ‘Things have moved on a little slower than I expected,’ says Guerry. ‘I would have hoped five years ago we would be further down the road than we are. Critics say that natural capital involves making deals with the devil, monetising nature and ignoring the importance of protected areas. We certainly need protected areas but we also have to pay attention to all the ecosystems of which we are a part.’ Greater public engagement with the concept would certainly help. ‘Most people don’t know or understand about natural capital. If they don’t know enough, they won’t change their behaviour. Will people hear that bees are worth so many billions of pounds to the global economy and immediately plant wild flowers in their garden? I doubt most will. At the level of individuals, it is more about looking at our own consumption, seeing our own local rivers being polluted and raising awareness of that.’

Juniper is optimistic that natural capital offers a persuasive case for action in the developing world. ‘This might change the discussion in parts of the world where it has been very difficult to get any serious attention paid to nature and the environment,’ he says. ‘Many countries are not in a position to listen when you tell them they can’t develop because it will harm the environment. Instead, it has more influence if you show how clean water and looking after the environment creates more development and food security.’

Can we, as the public, also take matters into our own hands? ‘Unlike climate change, you can do natural capital at every level,’ says Helm. ‘The beauty is we can all get on with it right now. This is something we can all start with in our back gardens, in ponds. Natural capital is a concept whose time has come. We have to push this as hard as we can.’

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