Natural Capital — Why We Should Value the Invaluable

By : Moray McLeish | on 8:53 AM March 20, 2014
Category : Business, Environment, Sustainability

APRIL Indonesia Firefighting Efforts As Haze Amid Drought Stokes Fears of Repeat Choking A trug loaded with logs near burned land in Riau province. (JG Photo/Dimas Ardian)

Jakarta. Tomorrow, March 21, is the International Day of Forests — declared by the United Nations in an effort to raise awareness of the importance of all types of forest and to promote their wise use.

Like any other causes granted their own special day of the year, the world’s forests are cherished in principle but unappreciated in practice. In the case of forests, though, the lack of appreciation is quite literal. Despite the sophistication of financial and economic systems and models, there is as yet no universally accepted framework to recognize and value forests beyond their function as remote warehouses where logs are stored vertically. This unfortunate status is also shared by other useful elements or services of nature — known as ‘natural capital.’

However, things may be set to change. The Economics of Ecosystems and Biodiversity (TEEB) is a global study backed by the United Nations Environment Program (UNEP) which focuses on “the global economic benefit of biological diversity, the costs of the loss of biodiversity... and the failure to take protective measures versus the costs of effective conservation.”

TEEB makes the case for integrating the economics of biodiversity and ecosystem services into decision-making — by governments and the private sector. Why is this important? Because every day huge, invisible flows of natural capital assist global and local economies to turn, but remain unrecognized, unmonitored and unregulated. This results in mismanagement, abuse, and misappropriation by both the public and private sectors, which in turn leads to the degradation of ecosystems and the loss of biodiversity.

So what? — you may ask. What have ecosystems ever done for me?

Among many other services, they store and purify water. This deceptively simple service is becoming less accessible to people in Jakarta and other urban areas in Indonesia, where water supply is so contaminated that people now feel compelled to purchase bottled water for drinking and cooking. On average, Indonesians consumed 49 liters of bottled water in 2011, up from 29 liters in 2006 and estimated to reach 86 liters in 2016.

Through the market economy, the problem of supplying clean, drinkable water is transferred to the producers of bottled water, which are basically paid to worry about where they can obtain a year-round water supply in sufficient amounts and quality. They rely on healthy functioning ecosystems to bring you the purity promised on the label.

Under business as usual, our natural assets are being liquidated fast. If natural capital is the sum of natures ‘goods,’ it is also clear that nature provides a wide range of ‘services,’ known as ecosystem services. These range from clean air and water to erosion control to carbon sinks. Forward-thinking companies are starting to think about putting a value on these services. They are asking themselves what would happen if the same quantity or quality of these goods and services was suddenly not available.

Note that valuing a natural asset is not the same thing as pricing it: it does not have to be in monetary terms. Acknowledging the value of nature is the first step to conserve it, and various companies have come to that realization. For example, Danone AQUA designed and implemented a Water Conservation Master Plan in four watersheds around its operations, focusing on sustainable forest management with local stakeholders, in response to local complaints about declining water quality and supply. This demonstrates the company’s acknowledgment that preservation of natural capital and positive perception by stakeholders also bring value to their business.

Companies are slowly becoming aware of the diminishing stock of the natural resources they need, the declining natural services upon which they rely and how this decline will hurt their business. The global economic cost of biodiversity loss and ecosystem degradation for the year 2008 was estimated to be $2 trillion to $4.5 trillion, or 3.3 percent to 7.5 percent of global GDP, as mentioned in the TEEB Cost of Policy Inaction Report of 2008. Companies are among the perpetrators, and they are also among the victims. Making efforts to conserve natural capital is a sensible strategy to minimize liabilities and damages, and understanding the whole range of impacts of their business is critical to their performance and growth in the short and long term.

The total impact measurement and management (TIMM) framework developed by PwC is specifically designed to assist companies to understand the overall sources of value for — and impact of — their activities, and to incorporate this integrated thinking into their strategic business decisions (see image above). In PwC’s 17th Annual Global CEO survey in 2013, 74 percent of CEOs told us that measuring and reporting their total (non-financial) impact contributes to their long term success. “The TIMM framework provides a holistic view of social, environmental and economic dimensions of a project or business. This helps organizations evaluate options and optimize trade-offs to make better decisions,” said Fumi Harahap, a sustainability and climate change manager at PwC Indonesia, who is currently leading work in this area.

Governments, too, are waking up to the critical reliance that their rural and urban citizens, their national economic measures and the global community have upon ecosystem services. To this end the Indonesian government placed a moratorium on the awarding of new licenses in primary natural forests and peat lands in May 2011, which was extended in May 2013 for a further two years. Indonesia has also been at the forefront of the UN’s Reducing Emission from Deforestation and Forest Degradation (REDD+) program.

Natural capital and ecosystem services are invaluable. That means we cannot do without them. To truly capture the contribution they make to our daily lives we must continue to attempt to value the invaluable. Both the government and private actors have a responsibility to contribute. Only then can we take solid steps towards a truly green economy — one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.

Moray McLeish is technical adviser for sustainability and climate change at PwC Indonesia.

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