People and Planet in the Accounts: recognising natural capital – sustainability is not a given
The BSI is setting a standard for accounting for natural capital. The project’s lead, Ece Ozdemiroglu, explains why the standard is crucial for financial sustainability in business.
“If you talk about natural capital to a group of companies and explain the concept, they start thinking about it differently,” she explains. “You have physical assets and assumptions about the rate at which they depreciate. You include them on the balance sheet and put money aside for their replenishment and maintenance. You could do that for natural capital, but you don’t. There’s always a moment of realisation from those companies.”
Strong business case for natural capital reporting
Natural capital, in a nutshell, is the world’s natural assets, such as soil, air, water, geology and all living things. These provide humans with many resources, known as ecosystem services, that allow us to thrive. This includes the food we eat and the water we drink, but also building materials, medicines, natural flood defences, stored carbon and crop pollination. Most businesses are reliant on some form of natural capital to operate, so there is a strong business case to monitor and report on natural capital.
“Businesses often don't know what impacts, dependencies, risks and opportunities they have,” says Ozdemiroglu. “It's an unknown, which is a very big risk. This motivates a lot of companies.”
As organisations realise how dependent they are on natural capital, they’re more likely to consider the environmental impacts of their decision-making. Reporting on it through natural capital accounts encourages such decision-making across the organisation.
“It's actually taking the company through that process of asking questions they haven't asked before. What are my assets? What assets do I depend on? What if I don't own them? What are they doing for me? What are they doing for everyone else?”
Land-owning businesses such as agriculture firms are ahead of the game, exploring the idea of ‘public money for public goods’ and what activities they can do to benefit wider society. “The Environmental Land Management Scheme is going to do that in England, the carbon markets are going to do that, etc,” says Ozdemiroglu.
“Everything is kind of falling into place because they're all linked. You need this type of evidence and approach to respond to calls from public policy and from customers who want better evidence for more environmentally friendly, responsible products. Not just physical products, but financial products as well,” she explains.
The standard ahead of the practice
Ozdemiroglu has been instrumental in putting together the BSI standard on natural capital. Standards are usually the result of a critical mass of practice, Ozdemiroglu explains – they are there to demonstrate what good practice looks like. “You want good practice to accumulate, so you can see what good practice is. In this case, the standard is kind of ahead of the practice.”
There is, however, plenty of good practice going on, but not all of it is currently in the public eye. Businesses don’t necessarily want to communicate their maintenance of natural capital, as it’s not necessarily clear what the implications around that information might be.
The hope is that this standard will encourage more organisations to start looking seriously at natural capital when it comes to the decisions they make and how they invest their money to protect it. The standard was developed with input from businesses via user survey and a panel led by Ozdemiroglu is writing the standard itself. As of 26 November, the standard has also been open to consultation.
“I think it will help with transparency,” says Ozdemiroglu. “It does have accounting documentation requirements. Just like financial reporting standards, these are principles-based. Each company interprets it differently. Profit and Loss accounts look a bit different. And I think this would be the same.”
Good practice, not a universal approach
The standard will not supply companies with universally applicable values for different natural assets – this is not the right approach, explains Ozdemiroglu. The value of nature is context-specific, and businesses should engage with its complexity. The standard does pull together several references to help guide organisations, however, including Defra’s ENCA, which helps to create ballpark values. The standard will provide a framework for how to assess, analyse and report on this. It will emphasise the need for transparency around what data is included and why.
“By showing what good practice looks like, the standard will enable businesses to compare across the accounts of different companies, but also, over time, for the same company.”
Ozdemiroglu is hopeful that it will encourage greater adoption of natural capital measurements and reporting across the business spectrum. The first movers in this area have predominantly been land-owning and land-based companies - second movers will be a broader base. “The second movers are more concerned about the cost of doing something than first movers.”
Natural capital reporting is somewhat untested in supply chain-based companies, Ozdemiroglu admits. “We try to keep that balance right in the standard, which is why we're emphasising the requirements for documentation, rather than being very prescriptive about the boundary.”
The standard includes scopes for various outputs. The team wants to encourage compatibility and transparency, but without setting the bar so high that it becomes costly to comply with. “But you can't keep it too low, because then you won't achieve your compatibility, transparency or objectives. It's a fine balance between the two. We'll see what the public consultation says if we got that right. But that has been our aim.”
Ultimately, however, Ozdemiroglu believes that companies will come round to the idea that natural capital should appear in their accounts because it matters to an entity’s financial sustainability.
“It's for us now to show companies that their sustainability is not a given; that their dependence on nature is part of their financial thinking. We did that with one of the clients, and their CFO said: ‘Oh, I hadn't realised soil is a financially material asset. I'm going to look after it.’ He went on to sign off a five-year soil improvement project. They're now going to monitor it in the accounts to see if there's any difference. Things like that give me hope.”