In focus

Q&A: how is the UK taking stock of "natural capital"?

The UK has the lowest levels of biodiversity among the world's richer nations, according to a new report published this week.

Biodiversity in the UK: boom or bust?, from a committee of MPs, has warned against spending more on exploiting the natural environment than preserving it and called for legally binding targets for nature. These would be similar to climate laws.

It comes after the UK government formally responded to a major proposal for halting and reversing damage to global ecosystems earlier this month: through taking stock of the world’s natural resources, or “natural capital”.

It backed the landmark Dasgupta Review’s central argument that nature and biodiversity sustain our economies and wellbeing, and that financial decisions must start accounting for the Earth’s assets.

The government's commitment to a “nature-positive future” aligns with the UN’s calls for economies to adopt a new accounting framework so that natural capital figures in calculations of wealth, i.e. for accounting to look beyond GDP.

We explain the concept and why the adoption of natural capital could be a paradigm shift for the world of investment.

What was the Dasgupta Review?

The UK government decided to take an in-depth look at the economics of biodiversity through the independent assessment The Economics of Biodiversity: The Dasgupta Review, which was revealed in February. 

Sir Partha Dasgupta, the emeritus professor of economics at The University of Cambridge, called for biodiversity to be regarded as indispensable to economic prosperity.

He said: "We are all asset managers. Whether as farmers or fishermen, hunters or gatherers, foresters or miners, households or companies, governments or communities".

The review warned that declines in biodiversity and the environment’s ability to provide food, clean water and air, regulate the climate and absorb pollution were “fuelling extreme risk and uncertainty for our economies and wellbeing”.

Over the past 150-200 years, approximately 60% of the earth’s land surface has been altered, primarily by agriculture.

The Dasgupta Review cited estimates that suggest we would require 1.6 Earths to maintain current living standards.

What is natural capital?

The term is used to describe elements of nature that provide important benefits called "ecosystem services".

These include CO2 sequestration or removal, protection from soil erosion and flood risk, habitats for wildlife, pollination and spaces for recreation and wellbeing.

Nature provides critical societal benefits to individuals and communities around the world.

The combination of soils, species, communities, habitats and landscapes which provide these ecosystems services are often called "assets".

The idea of viewing nature as natural capital, recognising the true value of nature's assets, is rapidly increasing in popularity.

While the term first came into use in the 1970s, there are now growing calls for natural capital to be viewed as an economic asset, with the UN urging governments to look beyond GDP. 

Is natural capital the same as biodiversity?

Biodiversity is part of natural capital. Sometimes the terms are used in ways that suggest they are interchangeable. But “biodiversity” applies to the variety of living organisms only. Natural capital includes living organisms but also includes the flow of ecosystem services from this biodiversity.

More than 32,000 species are threatened with extinction including 26% of mammals, 41% of amphibians, 33% of corals and 14% of birds.

Why is natural capital coming into focus?

The UN is adopting a landmark economic framework designed to ensure natural assets are included in economic reporting.

The snappily-titled System of Environmental-Economic Accounting will attempt to put a price on natural assets that are used and degraded by economic development and commerce.

In a talk for BBC radio’s The Reith Lectures, Mark Carney, the UN Special Envoy on Climate Action and Finance and former Governor of the Bank of England, asked why financial markets rate Amazon as one of the world’s most valuable companies, when “the value of the vast region of the Amazon appears on no ledger until it’s stripped of its foliage and converted into farmland?”.

The UN’s Convention on Biological Diversity will host its COP15 summit from 11 October in Kunming, China.

The World Economic Forum warns that around half of the global economy – the equivalent of $22trillion –  is dependent on nature, but investment in nature-based solutions represents only 0.1% of global GDP.

Finance ministers from the G7 of the largest economies have endorsed the launch of the new Taskforce on Nature-related Financial Disclosures, an initiative which aims to provide financial institutions and corporates with a complete picture of their environmental risks and opportunities.

What was the UK government’s pledge?

It committed to a “nature-positive future” on 14 June. The government will table an amendment to the Environment Bill requiring big infrastructure projects to provide a net benefit for nature.

For instance, the second leg of the high-speed railway project HS2 must be completed with the target of improving biodiversity around the line between Crewe and Manchester.

The government also committed to making sure bilateral aid spending does not harm nature.

Kemi Badenoch, Exchequer Secretary to the Treasury, said the commitment "sets out the ways in which the Government will go further to ensure our economy supports nature and wildlife – from infrastructure at home to bilateral aid spending overseas".

Separately, the British Standard Institution has just launched a new standard to help organisations measure the extent and value of their impacts on nature.

What next?

With biodiversity declining globally at unprecedented rates, and showing no signs of slowing, there is widespread support and momentum behind recognising the importance of natural capital in the run-up to COP15. 

The benefits of nature in mitigating against some of the worst effects of climate change are also in focus. Carbon offsetting provided by trees, soils and peatlands is one important benefit, but so too is the role of vegetation in reducing flood risk and soil erosion. 

Lifelong champion of the natural world Sir David Attenborough has backed the concept of natural capital and said the Dasgupta Review provided “the compass that we urgently need".

He said it "shows us how, by bringing economics and ecology together, we can help save the natural world at what may be the last minute – and in doing so, save ourselves".

It is expected a new EU biodiversity strategy will be agreed this year after 2020 targets signed in 2010 were missed. The World Wildlife Fund has called on global leaders to commit to “nature-positive by 2030”.

Today's report has called for legally-binding interim targets between now and 2030, measurement of natural capital, a ban on peat products and the removal of subsidies that harm nature. 

Attention is also turning to the idea of “planetary boundaries” or the “safe operating space for humanity”, the limits of which were explored in an Attenborough film for Netflix earlier this year.

Our view

Schroders' chief executive has said that the adoption of natural capital in financial models would be “a paradigm shift”.

Peter Harrison told a TV news programme: "It's a fundamental change in the way we think about corporate profits. When we invest in a company it's really important that we look at the full impact of their profits, so profits after their impact on the environment, and only then will we understand the true impact on the natural world.”

He has observed more recently that soaring global GDP has been “very positive in terms of improving lives and reducing poverty but it has come at a cost – a cost that has been too easy to ignore”.

“There’s now a realisation that we can’t go on like this,” he added. “The UN is developing standards that will help set economic value for natural capital. So for our industry, there is an urgent need to accurately measure the benefits of natural capital.”

Peter looks forward to a future where it will be as important to value the Amazon as it is to value Amazon stock.

“Capital markets can be force for immense good in this regard, driving money towards industries that can solve the environmental challenges we’re facing,” he said.

Hannah Simons, Head of Sustainability Strategy, said: “It is our responsibility as investors to encourage third parties to collect and disseminate consistent and comparable nature-related data, and urge companies to get involved in the Taskforce for Nature-related Financial Disclosures pilots”.

Irene Lauro, Economist at Schroders, said: "With the new accounting framework, we will finally give value to the stock of natural capital, acknowledging that nature plays an important role in enhancing human prosperity. 

"To achieve a more sustainable future we need to make sure that economic growth increases without harming the environment. Incorporating the value of natural capital will be an important step in that direction."

Kate Rogers, Head of Sustainability, Wealth, at Schroders, said: "While accounting is perhaps not the first activity people associate with saving the planet, the UN’s new system for evaluating the world’s assets could be a crucial step towards achieving sustainable development. We must account for the value of seas and rivers, of flora and fauna, to allow us to conserve and support our most important assets.”