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How Business Values Natural Capital: Taking Stock and Looking Forward

March 05, 2014 |

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Nature is an essential economic factor. It provides a variety of renewable and non-renewable resources. We use timber as an input factor or food as a consumer good but nature also provides ecosystem services such as water filtration or erosion control that benefit society and economy at once. At the same time economic activity influences the condition and the functioning of nature through the so-called externalities. Neither benefits nor costs are adequately reflected in corporate accounting like the balance sheet or the consolidated profit and loss account.

Pilot projects such as the “The Economics of Ecosystems and Biodiversity” (TEEB) studies, initiated by the European Commission, aimed to highlight the value of ecosystem services and biodiversity for the society and provided new arguments against destruction and overuse.

Lately, the private sector has increased its efforts to measure and evaluate environmental costs, and – in the longer term – to incorporate them into accounting. At the beginning of 2011, chemicals group Dow Chemical and the environmental organization The Nature Conservancy announced plans to join forces with the aim to promote “the integration of the value of nature into business decisions.” The goal is to collect and evaluate all ecosystem services, from which the company is benefiting, and to incorporate the results into the operations of the company.

Furthermore, the World Business Council for Sustainable Development (WBCSD) has published the “Guide to Corporate Ecosystem Valuation (CEV)” in spring 2011. 14 companies, including Hitachi and Veolia, tested the approach presented in this guide: the economic valuation of natural capital as a possible support of decision-making processes. The focus laid on evaluating production or management options, as well as collecting experiences with the new tool.

Also in that same year, PUMA published the world’s first environmental profit and loss account (EP&L). The calculation focused on five environmental effects: Water and land use, greenhouse gas and air emissions as well as waste production. PUMA took the entire supply chain – including the commodity production – into account, resulting in external environmental costs of €145 million. This corresponded to around 70 % of the company’s profits in 2010.

This study aims to support this development by informing companies about the status quo of the discussions, existing approaches, methods, and case studies. The study can also serve as an initial guide to those companies who want to implement their own valuation projects. In the long term, the objective is to create a robust, general, and applicable framework for the economic valuation of natural capital in the corporate context. Further, recommendations are made on how existing methods could be improved, and on how policymakers can set incentives to accelerate the integration of this instrument into the corporate world.

Download the report here.

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