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The business case for natural capital investment

Author: ICAEW Insights

Published: 17 Apr 2023

The mindset is shifting around nature: businesses are starting to understand that it is as much of an asset as people, machinery and intellectual property.

Businesses understand that they depend on capital, from money and manufactured capital to human and intellectual capital. Some businesses are starting to understand that nature should be treated as a capital asset, too. 

This is especially true for sectors such as agriculture, forestry and utilities, which are more aware of their dependence on land and natural resources to provide their products and services. The argument is that natural capital should be treated as any other asset that can depreciate. 

“Various businesses will have a priority capital,” says Ece Özdemiroğlu, founder and CEO of Economics for the Environment Consultancy (eftec). “It might be machinery, or human capital. For some businesses, nature is their priority capital.”

The critical questions for those businesses are: why aren’t they measuring the quantity or quality of those capitals? And why aren’t they investing in them? This, says Özdemiroğlu, is a conversation that comes up time and again with clients. “I’m starting that conversation not to tell them how fantastic nature is, but to make it clear that whatever they want to do as a business won’t be possible if they don’t take nature seriously.”

Businesses still have a habit of seeing nature and the environment as a regulatory or marketing matter. They may see it as something to acknowledge in company reports as investors are interested in environmental, social and governance. Ultimately, it is viewed as a cost item; something to minimise. 

Once businesses reframe the conversation about their dependency on nature around its business implications, the response becomes obvious, says Özdemiroğlu. ”That’s the most natural instinct,” she says. “We need to shift the mindset so that it is viewed as capital. It’s a good thing; it’s an investment opportunity.” 

When businesses go through that mindset shift, there then comes a process of exploration and learning that eftec often gets involved in for clients: what should they invest in? What does nurturing natural capital really mean?

“Lots of our clients come to us unsure of what assets they even have,” says Özdemiroğlu. “It’s not on the balance sheet. They ask if we can create an asset register for them and show how they depend on nature.”

Guidance from Capitals Coalition, International Auditing and Assurance Standards Board and Taskforce for Nature-related Financial Disclosures lay out methods for measuring natural capital, looking at it in terms of impacts and dependencies. In Özdemiroğlu’s view, much analysis looks at the impacts, not at the dependency side of things. “Businesses need to understand how dependent they are on natural assets in order to make a profit. Sometimes they realise that they’re dependent on assets that they don’t actually own. It’s somewhat revolutionary for a business to be thinking about investing in someone else’s assets.”

Water companies, for example, are considering whether to invest in land that will hold water, other than grey infrastructure. Özdemiroğlu mentions a farming client that had been considering machinery such as tractors with electric equivalents to reach their net-zero commitment, but had not considered doing anything to improve the quality of the peatbog on their land for them to stop emitting carbon. 

“It’s not a productive capital asset in the traditional sense: they can’t grow on it; they can’t get cash flow out of that land. Therefore, it wasn’t being factored into financial management decision making. Once we could show them that if they invested in improving the quality of the bog, they would absorb much more carbon than they were emitting, they reconsidered their investment priorities.”

The mindset change around nature will continue to grow and develop, says Özdemiroğlu. The particular accounting approaches to measuring and monitoring natural capital may change over time depending on whether the science changes around natural assets. 

“We’ve changed our methods many times over the years. We mustn’t fixate on particular methods and metrics. We have to accept that nature is very complex. It is location and context specific. Therefore the analysis that accompanies it has to be complex.”

For now, it’s important that businesses understand that nature is an asset and inaction – or the wrong action – could be costly. Businesses could be stuck with assets or technology that is no longer usable due to the impacts of climate change or biodiversity loss. A farmer that carries on with business as usual may find their crop yields fall dramatically due to persistent droughts, for example. 

“Inaction now could leave you locked into the wrong investments over time. But I don’t believe that short termism is as big an issue as people think. Any business that wants to survive will think long term,” says Özdemiroğlu.

It’s why, once businesses reframe their mindset and see nature as an asset, their investment and accounting priorities will follow suit.

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