What is natural capital, why it is important and how natural capital protocol can lead to better interaction with nature
26th February 2021
Author: Azhar Amir - professional writer who has worked for organizations such as UNDP, FAO, UNODC, and UNICEF
Defining natural capital?
The term “Capital” is usually used by the Economist to describe a stock of anything that has the capacity to generate a flow, that benefits and valued by the people (EEA, 2015; Costanza & Daly, 1992). The capital stock takes different identifiable forms, the five capitals (Human, Social, Financial, Manufactured and Natural capital) are defined from where we derive goods and services for our lives. Each form of capital generates services, either independently or in combination with other capital stocks, used to transform and enhance human welfare. The Organization for Economic Co-operation and Development (OECD) defines Natural Capital (NC) as “Natural assets in their role of providing natural resource inputs and environmental services for economic production” (OECD 2005). Similarly, World Forum on Natural Capital states natural capital as a “stock of natural assets which include geology, soil, air, water, and all living things”. (WFNC, 2015). Atkinson & Pearce (1995) define NC as the stock of renewable and non-renewable natural assets (e.g. air, water, minerals, plants, animal, and soil) that combine to yield a flow of benefits to people and businesses.
Why natural capital matters
In 1972, the book “Limits to Growth” was published that tell us by end of the 21st century, if we continue to grow at the same rate in terms of natural resource usage world might be on a collision course with calamity. Therefore, taking nature for granted can have grave consequences. We all rely on natural capital; oceans, minerals ecosystems, and atmosphere. We also heavily depend on services natural capital provides like fuel, food, fiber medicines, and services like water filtration, erosion control, and climate regulation. However, most of these services provided by the nature are unpriced or economically invisible. These invisible dependences on natural capital possess significant unmanaged risks and stability of businesses. In today's world where we have scarce resources, those businesses that fail to adapt will lose competitiveness.
In recent times the emergence of NC reflects the recognition, that the environmental system plays a vital role in outlining human well-being and economic output (Zhang et al. 2007). It is considered as the foundation of economics, businesses, and agriculture in particular. The flow of benefits provided by NC comes in the form of ecosystem services and these services provide basic conditions for human existence (e.g. food production, water, climate regulation, etc.). Therefore, NC is the most fundamental of the core forms of capital i.e. social, manufactured, financial and human. According to (Nature Conservancy and Corporate EcoForum, 2012) report, nature provides an estimated $72 trillion worth of free goods and services.
However, at the same time, natural capital sets ecological limits for our economic system. According to UNEP, human activities pertaining to the misuse of natural resources are costing approximately 6.9 trillion to the global economy per year, which translates to nearly 11 percent of global GDP and if current trends continue it is estimated to reach $28 trillion by 2050.
Despite the fact that nature provides services and key inputs critical for business yet, in the current business model natural capital is economically invisible because benefits it provides are not priced. Consequently, this value has not yet been properly integrated into the economic and social system and neglected by the decision-makers (TEBB, 2012).
Secondly, currently, businesses value and measure their impacts and dependencies on natural capital in different ways, this uniformity prevents consistency, comparability, and mainstreaming adoption of these approaches.
In order to address these all challenges, in 2012 The Natural Capital Coalition (NCC) a global, multi-stakeholder open-source platform to support the development of methods for natural and social capital valuation was founded. In 2015 NCC consortium led by World Business Council for Sustainable Development (WBCSD) lunched initiative called “Natural Capital Protocols” (NCP) to support the uptake of natural capital measurement, management, reporting, and disclosure in business and investor decision making. The NCP is an internationally standardised framework and decision-making tool and its aim is to provide a standardised framework for business to measure, value their impact positive and negative (direct and indirect) and dependencies on natural capital.
What can be done? Natural capital thinking
Natural capital thinking can vitalise policymakers, businesses, and society to recognise that environment is something that can be valued and incorporated into decision making process. The Natural Capital Approaches demand an urgency of action to maintain both nature and achieve prosperity by setting ecological limits and putting values on nature.
TEEB (2012). The Economics of Ecosystems and Biodiversity in Business and Enterprise. Edited by Joshua Bishop. Earthscan, London and New York.
Zhang, W., Rickettsb, H. T., Claire, K. C., Karen, C. K. & Swinton, M. S. (2007). Ecosystem services and dis-services to agriculture. Ecological Economics. 6 (4) 253 – 260.
Nature Conservancy and Corporate EcoForum (2012). The new BUSINESS IMPERATIVE: VALUING NATURAL CAPITAL.
Atkinson, G and D Pearce, 1995, Measuring sustainable development. In Bromley, DW (ed.) Handbook of Environmental Economics, Blackwell, Oxford, UK, pp 166-182
The Organization for Economic Co-operation and Development (2005).