Could financial institutions hold the key to accounting for natural capital?

Accounting for natural capital is critical to correct the massive built-in flaw in the modern world’s prevailing economic system – the fact that it largely ignores natural capital, despite being inescapably dependent upon it.

The concept is taking hold. Initiatives like Wealth Accounting and the Valuation of Ecosystem Services (WAVES) and The Economics of Ecosystems and Biodiversity (TEEB) provide strategies to help tell the whole story of the world’s capital. The Global Canopy Programme, UNEP Finance Initiative, and the Sustainability Study Centre of FGV (a Brazilian higher education institution) working together have convened the Natural Capital Declaration. Our thinking: financial institutions have considerable indirect ecological footprints through their customers and directly through their purchasing decisions - it makes sense that the institutions we go to for future wealth and security should invest in activities that protect, rather than erode, natural capital.

Signatories are committing  to work towards ‘embedding’ or ‘integrating’ natural capital considerations into the decision-making processes of all financial products and services, including loans, investments and insurance policies.

Developing a workable methodology for financial institutions to account for natural capital is not going to be simple in practice – but we must move in this direction.  What barriers should we expect and how can we overcome them?  Could the shift by financial institutions to integrate natural capital accounting into decisions be the tipping point?

Author bio: 
Christina is the Communications Coordinator at the Global Canopy Programme. She has worked in conservation since 2004 when she joined Taiwanese NGO Wild at Heart Legal Defense Association. More recently, she co-ran a wildlife centre for the Whale and Dolphin Conservation Society (WDCS) in Scotland, and coordinated the media work of the Royal Society for the Protection of Birds (RSPB) in south east England. Her work has included writing, translating, lobbying and film-making, with a particular emphasis on birds and Taiwan’s Indo-Pacific humpback dolphins. She studied Mechanical Engineering and Chinese at the University of Edinburgh, and has an MSc. in Sustainable Development from the University of Stirling.



Taking natural capital

Taking natural capital effects into consideration when making financial transactions seems like a good idea.  My fear is that ENGOs involved in the RIO+20 conference may confuse this idea with their opposition to having financial institutions commodify ecosystem services and natural capital (i.e. using market mechanisms to conserve nature and the support it provides to support our socioeconomic system).  This private enterprise approach has had negative impacts in third world countries and their local institutions.  There was a informative program today on "Democracy Now" about this topic.

Here in New England the sector or catch shares approach to managing public trust fishery resources has created a lot of controversy between commercial fishermen and saltwater anglers and between different sectors of the groundfish industry.  In this  system the groundfish quota or total available catch is determined by scientists, while the various fishing industry sectors divide up this quota based upon a formula developed by the Fishery Management Councils.  Since we have too many vessels, chasing too few groundfish in New England, there are equity issues in dividing the quota.  In theory the catch shares concept prevents overfishing of public fish resoures by dividing the precautionary catch targets amongst the different sectors.  Implementing this scheme has been difficult in practice. Fisheries natrual resource economists feel that this is the solution to our overfishing challenges for groundfish in New England.

The RIO+20 ENGOs use such experiences as the basis for their opposition to the commodification of natural capital and ecosystem services.  Some  traditional economists and conservation organizations see the free market approach as the pathway to future sustainability.  I don't share this point-of-view and see a need for an ecological economics perspective.

Tim Gieseke

A barrier is the traditional

A barrier is the traditional accounting foundation based on original cost and entropy.  The accounting world expects everything to deteriorate and become worthless as this is the case for human constructed infrastructure.  But the natural economy, through biology has created natural capital that has no initial cost (for humans) and then it appreciates in function and value as time passes.  Since humans have a tendency to create scarcity, where none existed previously, inflation and the purchase cost of the natural capital also increases.  It may be a paradigm shift barrier to move from the comfort and understanding of how infrastructure orderly crumbles in a finite period of time to understanding the continual abundance of natural capital that has the capacity to endure infinitely.  The field of ecological economics has matured enough to begin the framework and understanding of economic value of natural capital, perhaps this progress has not brought along enough ecological accountants that can begin to decipher the accounting system of natural capital.  But this will move along as the economic value of ecosystems has always existing in a big way and no economic system can endure with such as large externality dangling off the edge.