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BS 8632: new standard for natural capital accounting

Author: ICAEW Insights

Published: 30 Jun 2021

The new British standard outlines a set of principles to bring a uniform approach to preparing natural capital accounts.

After three years of development, BS 8632 Natural Capital Accounting for Organisations has been published. The new standard outlines how entities can measure and report on their impacts and dependencies on nature and how they maintain their natural assets. 

It sets out natural capital accounting as a multi-disciplinary effort with the finance function at its heart. The process is very similar to preparing a more traditional set of accounts, says Ece Ozdemiroglu, director at Economics for the Environment Consultancy (EFTEC), who was the convener of the panel of experts who wrote the Standard. “Accountants tell you the rate that assets are depreciating and how quickly you need to have resources in place to manage or replenish those assets. But they don't tell you how to do it. It's the same for natural capital accounts.”

An organisation's impact and dependencies on nature is not just a regulatory matter, stresses Ozdemiroglu. It's not a CSR matter either. It's a financial sustainability matter. That's been the biggest shift in thinking around natural capital. Accountants and financial advisors are well placed to lead that shift in thinking within an organisation, she says.

“The standard puts a lot of emphasis on the framework and principles, but mostly controls the process and the quality through documentation, in a similar way to the financial accounts.” 

The somewhat coincidental launch of the standard in the same week that the UK government formally responded to the Dasgupta Review on biodiversity highlights how much momentum is building around the need to report on natural capital. 

“People are demanding better performance, and they're not just demanding that from products. They're demanding it from policies, and they're also demanding it from financial products, not just consumption products and services. There are lots of policies coming through at the moment, such as the Environment Bill, green finance, biodiversity net gain and so on. The finance sector is also responding.” 

As interest in natural capital increases, both the private and public sectors will need metrics by which to measure progress and compare different sectors and organisations. It’s why the standard has to provide a comparable framework, but with the flexibility for bespoke applications.

The standard includes two scopes for natural capital balance sheets and income statements. Scope one covers what the organisation has immediate responsibility for: its actions and assets. Scope two covers the impacts and dependencies through the value chain of the organisation or on assets owned by others. Organisations are required to document which scope they select and why, amongst other requirements, to ensure the resulting accounts are comparable. Organisations are able to apply one or both scopes in a way that best reflects their activities and the assets they impact or depend on. 

“We're not saying: ‘an organization of type x must always do scope one or scope two’, we're saying, select the appropriate scope to your purpose and organisation, but document why you made that decision,” says Ozdemiroglu. “We want to see the materiality assessment, if one has been undertaken, what the results have been, what kind of impacts and dependencies have been included in the account.”

Ozdemiroglu hopes that the standard will help natural capital issues be seen as part of the overall financial sustainability of a typical organisation and placed at the heart of the business. “It should be a matter of life and death for the organisation. People pay a lot of attention to financial accounts. They should pay the same attention to natural capital accounts.”

Defining natural capital:

Natural Capital Balance Sheet

Accounting for the dependencies of the organization and its value chain on natural capital assets – shows the asset values (benefits the assets provide over time into the future) and liabilities (what the organization is committed to spend to maintain the assets). It has the following supporting schedules: asset register, risk register, materiality assessment, physical flow (of benefits), monetary flow (of benefits) and maintenance cost schedule.

Natural Capital Income Statement 

Accounting for the positive and negative impacts of the operations of the organization and its value chain on natural capital assets. It has the following supporting schedules: the enhancements (improvements in the quality and quantity of natural capital assets due to the operations) and deteriorations (decline in the quality and quantity of assets due to operations).