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Executive Perspectives

EXECUTIVE PERSPECTIVE: A turning point in recognizing natural capital risks?

Andrew Mitchell

25 Oct 2013

Two events in the UK’s House of Commons this week could mark a turning point in recognition of an invisible risk to the world’s economy – how natural capital underpins the security of our financial system.

On Monday, for the first time in its almost 900 year history, Parliament debated the importance of “the bounty of nature” to the economy. This surely must be a landmark in human evolution, let alone politics! For too long the services provided by natural capital, that’s clean air, fresh water, natural forests and oceans of fish, have been taken for granted, so businesses have squandered them as rapidly as a plunderer of family silver.

On Wednesday 23rd October 2013, MPs, NGOs, academics and businesses met in the House of Commons under the All Party Parliamentary Group on Biodiversity[i], to consider how governments should measure what we are all losing, in a process called “natural capital accounting”. So, are MPs in the UK’s House of Commons about to order nature’s precious vaults to be closed for business? Historic degradation of our woodland resource has left us with little natural forest cover – ancient woodlands cover only 2% of the UK land area, so isn’t it about time?[ii]

The subject of the Parliamentary debate was the first report of the UK Government’s Natural Capital Committee[iii], set up in 2012 and Chaired by Oxford economist, Prof. Dieter Helm. Sir George Eustice, newly anointed Environment Minister, welcomed the report[iv] and its 13 measures to better value nature in the UK, aiming to develop a set of national ‘natural capital accounts’ by 2020[v].

“Nature is the Bank upon which all cheques are drawn” said the Conservative Member for Richmond Park, Zac Goldsmith, “but most Chancellors regard it as a luxury add-on.” Barry Gardiner, Shadow Environment, Food and Rural Affairs Minister said “We use nature because it is valuable; we abuse nature because it is free”. So plenty of cross party consensus there. What was encouraging to see was that the debate demonstrated significant unity of purpose among the MPs who took part in what one described, as “one of the most fundamentally important debates before them in the 21st Century”.

The services nature provides that we use for free, are truly immense. Those lost from global deforestation are estimated to be worth between US$1.4 – 4.5 trillion each year, according to a UN report on the Economics of Ecosystems and Biodiversity[vi]. If it is so precious, why is abuse of natural capital not treated with the same accountability, as the abuse of financial capital?

The reason is that value of nature is invisible in our economy. In a wet country like Britain, we don’t value rainfall until it ceases to fall. We don’t price clean air until it is polluted. These ‘externalities’ are real and the costs are huge but no one wants to pay for them, and that has been good for business – because damage costs inflicted on nature accrue to us all, and not directly to the perpetrator.

And it’s not just about costs; managing natural capital to maintain it, delivers plenty of interest. Field margins for bees are cheaper than paying for artificial pollinators; marine coastal parks replenish fish stocks; secure forests upstream underpin energy security from hydro-power. The problem is, the world economy has been living off nature’s capital and now it’s running low, threatening the very basis of food, energy, water, climate and health security for everyone.

Accounting for nature is hard but several initiatives are under way that could transform the way governments and businesses manage their impacts and dependencies on nature in the future. The World Bank’s International Finance Corporation’s ‘standard 6’[vii] offers guidelines for project finance to quantify and minimise impacts for infrastructure developments, such as dams or roads. The System of Environmental – Economic Accounting (SEEA)[viii] is a set of environmental accounts for national governments; The Economics of Ecosystem and Biodiversity (TEEB) for Business Coalition[ix] is spearheading natural capital accounting for corporations; The Natural Capital Declaration (NCD) and its Roadmap[x] is doing the same for the financial sector.

The fact that 43 CEOs of major financial institutions signed up to the NCD Roadmap, committing themselves to work towards including natural capital considerations in their future lending and investments, is evidence of a growing sea change in thinking. The brainchild of UNEP’s Finance Initiative[xi] and Oxford based think tank, the Global Canopy Programme[xii], the NCD was launched in 2012 and now has four working groups each chaired by a Bank, undertaking the difficult task of building a framework and methodology for the financial sector by 2015.

If nature’s bounty is priced, could it not then be bought and sold like anything else? Here consensus crumbles. To the human spirit nature is priceless, but in global markets its value is zero. There is a danger that business could simply price nature into products, and continue eroding it anyway. Tough standards and regulation will be needed to set a level playing field but whilst nature’s net-worth stays off a Reuters terminal, the risk to us all remains as financially un-detectable, as an impending market crash.

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