Awareness of the importance of natural capital is growing, but corporate reporting must evolve to meet information needs, says ACCA’s Rachel Jackson.
Natural capital, derived from biological diversity and ecosystems as well as natural resources such as fossil fuels – has huge importance for business and society. Biodiversity and ecosystems give rise to ‘ecosystem services’; these include access to food and water, protection from threats such as floods and disease, recreational opportunities, and services like photosynthesis that maintain conditions for life on Earth.
These benefits have enormous value for society and business. Conserving forests, for example, avoids greenhouse gas emissions worth US$3.7 trillion. The loss of pollination services from bees in Britain could cost the UK economy an estimated £1.8bn.
However, as highlighted in a new report, Is natural capital a material issue? by ACCA, KPMG and Fauna & Flora International, the benefits are rarely considered by companies. This is because of the traditional focus on financial measurement for determining materiality. As a result, biodiversity and ecosystem services (BES) issues are rarely included in annual reports and accounts.
Some existing financial reporting standards, such as those relating to agricultural or intangible assets and impairment, can be applied to natural capital. However, in practice, many significant risks and opportunities cannot be quantified, cannot be easily valued and are excluded.
The lack of a standardised business case for considering BES issues is another barrier. So, too, is a basic lack of awareness among accountancy and business communities. Nevertheless, there are signs of change. A handful of companies in sectors with high environmental impact are now reporting in substantial detail on BES. In addition, some businesses are exploring new valuation techniques; mining giant Rio Tinto, for example, is testing the use of economic valuation of environmental impacts in informing its business decisions.
Given the importance of BES to business and society, CFOs and accountancy professionals have an important role to play in developing new valuation, accounting and reporting approaches. CFOs, for example, need to engage with experts to understand the extent to which their organisations depend on natural capital – including the degree to which company revenues, costs and going concern status rely on natural capital, directly and indirectly. CFOs should also:
Accountancy professionals are also encouraged to engage with experts, to follow and track new guidance, and to call on accountancy standard setters to provide guidance specifically on how to address natural capital within annual reports and accounts and sustainability reports. Accountants could contribute to the development of natural capital accounting methodologies, piloting new approaches with clients and sharing their experiences with regulators.
Such work needs to take place now. Biodiversity and ecosystem services are already in decline globally. In the 50-year period to 2050, the costs of cumulative losses of ecosystem services are estimated to be equivalent to 7% of gross domestic product. As the world’s population grows, so the risk of BES losses will continue to increase.
Rachel Jackson, Head of Sustainability, ACCA.
This article first appeared in ACCA's Accountancy Futures journal, issue 6, January 2013.