This article was originally published on Olam.
“It could be argued that we are misusing the term “Capital” within Natural and Social Capital. Whilst at The World Forum on National Capital, most of the corporate applications of natural and social capital accounting are focused on the flows to and from the capitals rather than accounting for the capital itself. We believe that broadening the measurement to include the assets (capitals) and liabilities, from a balance sheet perspective, would support the uptake of natural and social capital accounting and provide insights into the current state of the capitals.
A financial balance sheet provides stakeholders with an understanding of what the company owns (assets) and owes (liabilities), and whether it is solvent and can meet short-term debts (i.e. working capital). A natural and social balance sheet would meet similar needs, highlighting whether a company’s operations are sustainable or unsustainable when assessed against predefined boundaries such as planetary boundaries. Measuring only flows is like measuring the activity of our economy with the GDP. We observe the level of activity, but we don’t know if this relates to a reduction of capital or not. We have the choice of either creating a flow by consuming the capital or by using only the interest generated by it.
Let’s take an example to illustrate our case, land natural capital. We used a case study in Africa for a perennial crop production to derive the capital value of the related land used. The valuation technique is based on the discounted future production value or, said differently, the fertility of the soil and its capacity to sustain production. And the underlying impact metrics are based on open sourced impact measurements. The discount rate used was estimated based on the soil erosion rate, which provided an interesting insight that the soil will be depleted in under 100 years. Land capital is indeed finite, not only in term of area, but also in term of quality. We can only identify this issue by measuring stocks (i.e. the asset from a balance sheet perspective). The results obtained shows that the current value of land natural capital is roughly 9’200 USD/ha (see figure below), which is far above market value (below 1’000 USD/ha).
Using scenarios based on agricultural practices, we estimated the value of land natural capital based on intensive production and best practices, adjusting mainly the discount rate in line with erosion rates and loss of fertility. Not surprisingly, intensive production decrease significantly the land capital, decreasing its current lifetime…”
Read on at Olam.