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Biodiversity on the balance sheet

Published on September 06, 2022

As we explore the wide-ranging repercussions of the latest Intergovernmental Panel on Climate Change (IPCC) report, Jill MacKeith, sustainability management consultant for Nature Positive, explores the relationship between ecology and economics and the role of carbon accounting.

Ecology and economics: two words that these days conjure up quite different images and seem wholly distinct. In fact, they have become so separated from each other that many people may not realise that they share the same root meaning from the Greek:

Ecology: from the Greek oikos, meaning “household”, “home” or “place to live”

Economics: from two Greek words, oikos and nomos meaning “accounts”.

In ancient Greece, ethics formed the foundations of economic theory and this can be traced back to sources such as Socrates, Plato and Xenophon. However, in more recent decades, the strong linkage that economics had with ethics has virtually disappeared.

In our modern everyday lives, most households work hard to make sure that they do not expend more capital than they have to draw on. We all know the consequences of being overdrawn at the bank. Unfortunately for nature, economic theory treats it as an ‘externality’: something on which the production or consumption of goods and services imposes costs or benefits that are not reflected in the prices charged. This hides and excludes all the underlying stocks of (natural) capital that underpin the creation and delivery of goods and services. It also means that prices do not capture the full cost of those goods and services.

However, as Dasgupta (2021) notes,

We are all asset managers. Individuals, businesses, governments and international organisations all manage assets through our spending and investment decisions.

Collectively, however, we have failed to manage our global portfolio of assets sustainably. Estimates show that between 1992 and 2014, produced capital per person doubled, and human capital per person increased by about 13% globally; but the stock of natural capital per person declined by nearly 40%.

According to the Convention on Biological Diversity, natural capital can be defined as the world’s stocks of natural assets, which include geology, soil, air, water and all living things. It is from this natural capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.

There is wide ranging consensus that it is our unsustainable use of natural capital that has driven the development of the climate and ecological crises.

Natural capital accounting: Valuing nature

The concept of natural capital accounting (NCA) can be traced back to the 1970s, when environmental economics became an established field in the academic world. The actual development of natural capital accounting practices has really happened at pace over the last decade. In 2011, the UK conducted a National Ecosystem Assessment, which was the first analysis of the natural environment in terms of the benefits it provides to society and continuing economic prosperity. In 2012, the United Nations adopted the System of Environmental Economic Accounting (SEEA), which enables a link to be made between a nation’s natural capital and the system of national accounts, representing a move beyond solely using metrics such as gross domestic product (GDP) to measure a nation’s wealth.

Also in 2012, the UK Office for National Statistics published a strategy called Accounting for the value of nature in the UK, with the aim of incorporating natural capital in UK environmental accounts by 2020. This commitment was reiterated in the UK government’s 25 year environmental plan. As a result, in the latest aggregate UK accounts, both non-monetary and monetary ecosystem service estimates are presented together to help understand the link between physical changes in the production of services and changes in value. Additionally, in the UK habitat accounts, the condition and ecosystem service accounts are presented together to enable the relationship between natural asset and ecosystem service delivery to be better understood.

The correlation between sustainability and financial performance

Research by Yilmaz (2021) shows that the simultaneous pursuit of sustainability practice and strong financial performance does not cause conflict between the two but rather, they directly support each other.

Additional research by authors at Harvard Business School found that firms with good ratings on sustainability issues significantly outperformed firms with poor sustainability ratings financially. Furthermore, UK government research from 2019 has shown that 70% of UK people want their money to go towards making a difference to the planet. These findings mean a win–win for the business world and for the planet. But the big question is: how do we achieve this with conviction and transparency?

Corporate climate and nature-related financial disclosures

The Task Force on Climate-related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board, an international body that promotes stability for the global financial system. The TCFD developed recommendations on the types of information that companies should disclose to support investors, lenders and insurance underwriters in appropriately assessing and pricing risks related to climate change. As of 6 April 2022, over 1300 of the largest UK-registered companies and financial institutions are required to disclose climate-related financial information using the TCFD’s guidelines.

TCFD disclosures are focused on risk, resilience and opportunities in terms of climate change. This is intended to pinpoint how climate change could affect revenue and costs, to challenge long-held assumptions of future value – both where value might be eroded and where it can be created – and to provide a clearer understanding of where and how to make low-carbon investments.

Building on the model of the TCFD and realising that nature and climate are inextricably linked, the Taskforce on Nature-related Financial Disclosures (TNFD) was launched in June 2021. The TNFD follows the same principles as the TCFD and has developed an integrated risk management and disclosure framework aligned with the TCFD’s recommended disclosures. The TNFD released version 0.2 of its beta framework for nature-related risk and opportunity management and disclosure on 28 June 2022. This release builds on the first iteration published in March 2022 and features the TNFD’s approach to metrics and additional guidance for market participants to start pilot testing the guidance on disclosures.

While some contend that it is impossible, or even harmful, to put a price on nature, Dasgupta argues that not pricing the impacts and extraction of natural capital in the production of goods and services has led to pricing distortions and market failures. This is because nature’s worth to society, the true value of the various goods and services it provides, is not reflected in market prices because much of it is open to all at no monetary cost. Dasgupta states further that this is not simply a market failure: it is a result of broader institutional failures too. Governments almost everywhere exacerbate the problem by paying people more to exploit nature than to protect it and prioritise unsustainable economic activities.

By taking a natural capital approach, we can, as a society, help tackle the global climate and biodiversity crises by diverting financial flows from activities and subsidies that harm the planet to ones that reverse biodiversity loss and damage to our climate. Natural capital accounting and the combined stimuli of TCFD and TNFD present a very real market-led opportunity for us to return to managing our ‘household’ in alignment with the root meanings of ecology and economy.

Jill MacKeith is a sustainability management consultant at Nature Positive, which helps businesses and those who invest in them to manage the risks and opportunities arising from their impacts and dependence on nature.

References

Annett, A. (2018). Restoring ethics to economics, IMF.org https://www.imf.org/Publications/fandd/issues/2018/03/point2 (accessed 21.06.2022)

Alvey, J. (2011). The ethical foundations of economics in ancient Greece, focusing on Socrates and Xenophon. International Journal of Social Economics. 38. 714–733.

Chapman, A., Wheatly, H. (2020). Crisis Support to Aviation and the Right to Retrain. New Economics Foundation. https://neweconomics.org/2020/06/crisis-support-to-aviation-and-the-right-to-retrain (accessed 22.06.22)

Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review. Abridged Version. (London: HM Treasury).

Dorward, A., Oliver, E. (2022), P542 Economic Principles, SOAS, Centre for Development, Environment and Policy. https://www.soas.ac.uk/cedep-demos/000_P542_EP_K3736-Demo/module/pdfs/p542_module_introduction.pdf

HM Government and UK Aid (2019). Investing in a Better World: Understanding the UK public’s demand for opportunities to invest in the Sustainable Development Goals

Yilmaz, I. (2021), World Journal of Entrepreneurship, Management and Sustainable Development, ISSN: 2042-5961. Article publication date: 5 April 2021. Issue publication date: 26 July 2021

https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/Banking/lu-do-sustainable-banks-outperform-driving-value-creation-through-ESG-practices-report-digital.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1031805/CCS0821102722-006_Green_Finance_Paper_2021_v6_Web_Accessible.pdf

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ARTICLE AUTHOR

Jill MacKeith

Sustainability Management Consultant, Nature Positive

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Jill is a sustainability management consultant for Nature Positive. Using her master’s degrees in environmental science from Trinity College, Dublin, and sustainable development from Technological University, Dublin, Jill helps our clients understand the actions required to reduce their impacts on nature. Jill has over 18 years of project management expertise and is a certified APM practitioner. She has worked across a range of sectors, including rail, research, financial services, local government, hospitality and the built environment.

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