Understanding Natural Capital and the Accounting for Nature Framework

20th August 2022

autumn leaves - understanding natural capital and the accounting for nature framework

juliana bedggood anthesis

Juliana Bedggood

Principal Consultant

Australia

The terms accounting for nature, environmental accounting and natural capital are increasingly popping up in business and climate conversations. As carbon neutrality turns mainstream and net zero targets are increasingly set, we are becoming accustomed to counting carbon and emissions reduction as a way to mitigate the worst effects of climate change.

However, this has also put a spotlight on the impact our economies and climate change have on biodiversity and our ecosystems. The widespread destruction of nature and dramatic loss of biodiversity is inextricably linked to climate change and for many industries poses just as big of a threat.

But unlike financial accounting or carbon accounting which are generally formulaic processes, accounting for nature is a complex process. How do you ‘quantify’ natural capital and measure change in the health of the environment? Here we explore what is meant by the term natural capital, why it’s important and how does the Accounting for Nature framework help us quantify nature?

What is natural capital?

Natural capital is generally defined as stocks of natural resources that are both renewable and non-renewable (e.g., plants, animals, air, water, soils, minerals) that provide valuable social, environmental and economic benefits to humans. These benefits are sometimes referred to as ecosystem services.

The earth’s natural capital is the most important input to the world’s economy. It is equally as important from a social and community aspect, not in the least as humans need clean water and fresh air to survive.

Since the industrial revolution and particularly over the last 50 years, the earth’s natural capital has been destroyed and degraded to levels that are unsustainable and, in some cases, past recovery. Massive loss in species biodiversity due to animal and plant extinctions, dramatic changes in forests and river ecosystems and ocean warming.

What are examples of natural capital?

Whether raw or ready-to-use resources, nature provides the majority of the capital businesses need for the production of goods and services and ecosystem services humans need to survive.

Some examples of natural capital include:

  • Native flora: Foods, plant materials used for clothing and fuel or building materials and medicines. Carbon sequestration, microclimate regulation (i.e., heat island effect) and shade for cattle provided by forests and trees. Natural flood defences and stormwater management (i.e., Water Sensitive Urban Design) provided by forests and other vegetation. Natural protection from zoonotic diseases and vector-borne diseases which may thrive under a changing climate.
  • Soil and Minerals: Soil to grow food, building materials and storing carbon. Minerals that are used in goods and services such as technology, for fuel, construction and medicines.
  • Native fauna: Animals farmed for food, textiles and medicines but also used for labour or pets. Keystone species such as bees and pollinators.
  • Fresh water: Water to drink and use for hygiene or sewerage and to grow food; but also for energy, production and construction.
  • Marine: Food, employment, kelp and mangrove forests for carbon sequestration; plus tourism and recreation.

The problem with traditional western economic systems is that these invaluable ecosystem services that we rely on to thrive and survive, are generally taken from nature for free.  Therefore, natural capital is not adequately (or at all) quantified or valued by governments, corporations and consumers.

In many parts of the world this ignorance and mismanagement of natural capital has created an economic liability, and social and ecological liabilities that need to be addressed.

natural capital waterfall ndevr environmental 2

Why we need to measure natural capital

Nature (and biodiversity), climate and human society are interlinked. On the one hand, climate change poses a threat to human well-being and planet health. On the other hand, nature plays a critical role in climate and human systems.

For example, as best described by Sir David Attenborough in A Life on our Planet:

“Forests are a fundamental component of our planet’s recovery. They are the best technology nature has for locking away carbon. And they are centres of biodiversity. Again, the two features work together. The wilder and more diverse forests are, the more effective they are at absorbing carbon from the atmosphere.”

Sir David Attenborough

IPCC’s Sixth Assessment Report suggests that maintaining the resilience of biodiversity and ecosystem services at a global scale depends on effective and equitable conservation of approximately 30% to 50% of earth’s environmental assets, including land, freshwater and ocean areas.

The ability to measure the biophysical condition of environmental assets as well as changes to that condition allows for nature, and our impacts, to become more visible. With that, we can:

  • Better understand the risks and opportunities of degradation and enhancement to the economy, human wellbeing and the climate.
  • Establish targets (known as Condition Targets in the AfN) and track progress towards those targets as a way to mitigate risks or capitalise on opportunities.

What is the Accounting for Nature standard and how does it help measure natural capital?

The AfN Framework is underpinned by four core documents that outline the rules and processes to follow. These robust documents ensure the highest integrity and transparency of the environmental accounts.

  1. The AfN Standard: The Certification Standard (‘Standard’). This encompasses all the rules and processes needed to be adhered to for the preparation and certification of compliant Environmental Accounts.
  2. Methods: Methods are separated by asset class such as soil, marine or native fauna and include detailed measurement, reporting and verification requirements. When preparing an environmental account, a specific Method must be chosen to adhere to for the account. *Note it is possible for project owners to develop their own Methods to be approved by AfN.
  3. Claims Rules: This section outlines the rules around Certified/Self-verified Environmental Accounts and the use of AfN’s specific logos for certification purposes.
  4. Audit and Verification Rules: The final section covers what is involved in audits under the Framework, and Accounting for Nature accredited Auditors.

Who is the Accounting for Nature framework for?

The AfN Framework can be used by any organisation or individual, who wants to understand whether actions are improving or degrading natural capital and who wishes to use a world leading, scientifically rigorous methodology to create a certified environmental account.

Over the past decade, the framework has been tried and tested through a collaborative effort by around 200 world-leading experts. The framework is typically used by farmers, indigenous land managers, private conservation organisations, businesses, impact investors, governments and regional natural resource management organisations.

Are biodiversity credits the new carbon credits?

The robust measurement of natural capital provides the foundation we need to value it in a fiscal sense. Regulatory frameworks such as Accounting for Nature now help us quantify nature to specific and verifiable standards and offer a new way of protecting nature while promoting economic growth.

Just as the carbon market has grown rapidly in the last five to ten years, there is real scope for biodiversity credits to evolve on a similar trajectory. In her recent National Biodiversity Conference address, Australia’s new Minister for the Environment and Water recently expressed her enthusiasm for the scheme and that the government sees much potential in this space.

“I was fortunate enough to see Ken Henry’s address earlier this week – on accounting for nature and biodiversity credits. I think it’s a really exciting area of policy.  There is growing international effort to measure and account for nature – and Australia is a leader in this field.  If we can measure and describe improvements in biodiversity.  If we can formally credit a landholder’s efforts to enhance an area’s biodiversity. Markets can put a price on that work. Businesses can invest in it their credits. And landholders can then profit from their services to nature, creating a clear financial incentive for high-quality restoration work  [… ] similar to what we’ve done with carbon credits.

Minister for the Environment and Water, Tanya Pliberseck

Interested in measuring your natural capital or the Accounting for Nature standard? 

We support companies in measuring their natural capital, reporting under the Accounting for Nature framework and developing Environmental Accounts for the Accounting for Nature Standard. With Accredited Experts on the AfN Register we’re here to support your project.