What is natural capital and why should investors like you care?

Assets are often rated based on their financial value. But when it comes to finite natural resources - which are crucial to our economic activity and prosperity overall - why don’t we do the value them as financial assets too?

What exactly is natural capital?

Nature has elements that provide important benefits to humans, known as ecosystem services. A few of these ecosystem services are CO2 sequestration and removal, protection against soil erosion and flood risk, habitats for wildlife, pollination as well as recreation and wellbeing spaces. Every community and individual around the world benefits from nature. Natural capital is a way of looking at nature, recognising its true value as an asset.

As well as natural capital there is also human capital and produced capital. All three sources of capital work together and form the basis of economic activity.

How is natural capital categorised?

There are two types of natural capital: renewable and non-renewable. Non-renewable natural capital can only be used once - like minerals, oil and gas. The problem is not necessarily that the assets are being used but that they will be used up by one generation without taking future generations into consideration.

Renewable natural capital is more...well sustainable. It’s capital that keeps on giving. However there is always a tipping point and once the capital is depleted it is no longer renewable. For future generations to be able to use these resources, they need to be maintained, enhanced, and protected.

Is natural capital valuable in financial terms?

Life as we know it is dependent on natural capital - we rely completely on it to survive and to develop. Though in the past it has largely been left out of consideration as an economic asset and is not accounted for in terms of economic growth and human wellbeing.

Though some international organisations are now pushing the agenda for it to be, including:

• The UN’s framework called the System of Environmental-Economic Accounting;

• The Economics of Ecosystems and Biodiversity; and

• Capitals Coalition

Kathy Willis, a professor of biodiversity at Oxford University, said that viewing nature as an asset and putting it on the same balance sheet as a company’s other resources is no longer seen as an oddity.

“Governments, corporations, and individuals across the world are starting to understand the critical importance and value of the ecosystem services provided by their natural capital assets, not least in carbon storage and sequestration,” said Professor Willis.

“There is huge potential of investing in natural capital assets; potential not only for offsetting of carbon and ESG but also for halting global biodiversity loss and restoring some of the most important ecosystems in the world.”

What more needs to be done by investors regarding natural capital?

Allocating capital towards natural capital investments and understanding how the companies in your portfolio rely on these assets can play an important part in preserving our environment.

The importance of investors working together means more action where natural capital is concerned. Ways you can be an active investor include -

• Be an active owner - by asking companies to value, protect and restore nature;

• Determine and support industry leaders that are driving change to improve practices;

• Researching widely and using reliable sources for real data, we like RIAA and EAC Leaf Ratings for information about investment products.

For more reading about natural capital, check out this piece from Schroders.

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