In the coming years, accountants working within rural businesses will need to get used to very different looking balance sheets. They will soon need to produce a standard set of accounts as well as natural capital accounts. And accountants need to start gathering high-quality data now to enable this.

Featured as a case study in the recent Global Accounting Alliance (GAA) publication Why nature matters to accountants: a guide to building resilience and value through nature-positive action, Oxbury Bank champions natural capital accounting. 

Nick Evans, Managing Director, and Carolien Samson, Head of Sustainable Banking at Oxbury, explain that farmers must adapt to changing climate conditions through sustainable practices, such as better soil health and lower chemical use. And they must account for it. The importance of accurate data in agricultural supply chains cannot be underestimated.

The role of financial analysts

Financial analysts within organisations already play an important part in gathering and interpreting carbon data to assess risks and opportunities posed by climate change, but taking a step on from that the GAA has now issued advice on ways analysts can begin accounting for nature and biodiversity, too.

Evans believes that rural businesses will benefit from accounting for nature, saying: “In the future, good farmers will be better off because they will benefit from carbon credits, biodiversity credits and water credits. These will be a feature of farmers’ P&Ls going forward.”

The operational perspective

In February 2021, Oxbury received its banking licence and extended its first loan a month later. With loans only available to farmers and participants in the rural economy, from a purely operational perspective, accounting for nature is front and centre to all lending decisions. 

“First, we are a bank and all banks are obligated to comply with both TCFD (Task Force on Climate-related Financial Disclosures), and probably from 2025/26, TNFD (Taskforce on Nature-related Financial Disclosures) on the natural capital side of things,” says Evans.

“Second, three-quarters of the loans are long term, with an average of 21 years. Only 20 years ago the weather was already significantly different from how it is today. And in 20 years’ time it is going to be different again. For every single credit we underwrite, we look at how the farm will be impacted by climate change or rising sea levels.” 

He points out: “If farmers are not compliant and can’t sell their crops, how are they going to pay us back? From a bank resilience point of view, accounting for nature is also really important. Good bank practices and good farming go hand in hand.”

Third, Oxbury is convinced that farmers who are adopting different management practices and farming in a slightly different way are actually better farmers. “This is not proven yet. But, for example, higher soil organic carbon leads to better yields and resilience against diseases,” he says.

A shift for accountants

Soon accountants will be accounting in the profit and loss for biodiversity and water credits, Evans explains. “There’ll be stocks of carbon on the farm, stocks of water and so on. Do we think that accountants and the accounting profession will be different in 20 years’ time? 100%. They’ll produce financial accounts in the way they do today. And they’ll produce natural capital accounts, too. Ultimately, of course, those two will be merged.”

So, if farmers apply less nitrogen, there might be a yield reduction, but on the other side of the natural capital balance sheet, they might have a higher soil organic carbon content. It is a question of real balance – with nature in the loop – and it will be a case of tweaking one side and looking at the impact it has on the other. Accountants will bring added value – not just to farmers but across the sectors.

Of course, other sectors might not be so linearly aligned with nature, but that does not mean they should not be preparing to report in this way, too. 

Samson says: “If you’re in the food and restaurant trade, at some point, what you’re measuring comes back to something that happened on a farm; or there might be risks associated with the practices somewhere in your supply chain. We are starting to truly understand what local conditions could mean for the different players in the supply chain.”

Evans adds: “Reporting on Scope 3 emissions means reporting on carbon in companies’ 

supply chains. Ultimately, everybody in the food processing sector will need to understand what it will take to cut farmers’ emissions – carbon being most relevant because that is where we have regulation today.”

Listed companies are already having to produce carbon statements in their corporate reports but, as Evans says, it will not be long before they will have to prove the detail of those statements. That won’t be possible unless farmers are collecting that data – and the same will apply to biodiversity and water.

Samson points out there’s already a lot of work going on around water. “The default thinking in the UK was that, if there were a drought in the UK, crops would be brought in from other countries. This might no longer be possible,” she says. “People might not call the availability of water natural capital, but they now understand the true value of that water.”

Progress across sectors

Different sectors are at different stages of the natural capital journey – but the destination is likely to be the same – simply because of supply-chain impacts and the inevitable shifts in reporting requirements.

Food processing companies are already incentivising the farmers that supply them to adopt greener production – be it in relation to feed, storage or waste disposal. The result for farmers is improved profitability, or at least lower costs, by farming better.

And the more on track farmers are, the more resilient they are and the better bank clients they become. But it is not just about ‘the doing’, it is also about ‘the accounting’ for what farmers do. Oxbury wants its clients to collect quality data that can go into the accounts. And that is an important distinction from what may have gone before.

Accountants are going to need that quality data to produce natural capital accounts. And that does not mean just emissions data, that means numerous data sets related to nature from the primary producer.