What is natural capital and why is it so important?

Putting a value on nature’s services

A study published in the journal Global Environmental Change suggests that the total value of the World’s ecosystem services amounts to twice as much as global aggregate GDP – as much as $124.8 trillion per year. 

But how do you put a monetary value on the priceless services provided by nature? Again, it’s a question of economics, with the value of the services provided – or in many cases, the cost of the absence of the services provided – aligned with the financial barometers we’re already familiar with.

Typically, the value of natural capital falls under four categories:

• Direct use value the economic value of a resource taken from the ecosystem, such as food or timber, of the value of a resource ‘used’ without being consumed, such as enjoyment of a landscape.

• Indirect use value where people passively benefit from natural services, such as flood regulation and pollution filtering, or by watching nature programmes on TV.

• Option value the value that people place on having the option to use a natural resource or asset in the future even if they are not currently. An example would be a National Park, where people who have no intention to visit it may still be willing to pay something to keep that option open in the future.

• Non-use value which comes from the knowledge that the natural environment is maintained, and is based on motives such as giving value to assets being passed on to future generations, care for wildlife, or the value of assets available to others (such as beaches in other parts of the country). Many people who may hold non-use values in the economic sense understand that nature is objectively valuable.

A significant volume of research has been undertaken to determine the value of these services, even if they are, ostensibly, priceless. For example, street trees in California provide $1 billion per year in ecosystem services, through atmospheric regulation and flood prevention, while Mexico’s mangrove forests provide an annual $70 billion to the economy through storm protection, fisheries support, and ecotourism. In the UK, the assets of natural capital services that are currently able to be valued were estimated to be worth £1.8 trillion.

We can also use a natural capital approach to infer socioeconomic findings and therefore make informed decisions on policy and spending. According to the Office of National Statistics (ONS) in the UK, the total annual value of cooling from green and blue space in 2017 in Great Britain was valued at £243.6 million in labour productivity savings and avoided air conditioning energy costs. Meanwhile, in 2020 air pollution removal services provided by nature led to an estimated 2,001 deaths being avoided and prevented 49,126 life years being lost.

Encouraging the approach

The clear value of nature and its services means there are growing calls for it to be officially recognised as an economic asset. The UN’s landmark economic framework, the System of Environmental-Economic Accounting (SEEA) was adopted in March 2021 and is designed to help people and businesses more accurately value natural resources. The UK government launched Enabling a Natural Capital Approach, an online tool to encourage better environmental decision-making within business, and the Natural Capital Protocol offers a standardised framework for business to identify, measure and value its direct and indirect impacts and dependencies – much like the Taskforce on Nature-related Financial Disclosure, which launched its reporting guidance in September this year (read more on the TNFD framework here).   

Meanwhile the Capitals Coalition, which is made up of more than 450 global initiatives and businesses, is campaigning for the world’s businesses, financial institutions and governments to account for natural capital in their decision-making by 2030.

Taking a natural capital approach

As environmental regulations tighten and consumers and stakeholders increasingly expect businesses and governments to take responsibility for their climate impacts, we’re seeing an uptick in action in this area, with a natural capital approach swiftly gaining traction.

The natural capital approach is still relatively new to many organisations, who are starting to ramp up understanding of the role they play within nature’s accounting books. Brazil’s government, for example, has undertaken a study into the role monetary incentives can play in encouraging the sustainable use of forests. In India, textiles giant Arvind has conducted natural capital accounting on the water impacts of its cotton, while the Australian government is leveraging natural capital accounting to improve farm profits.

For others, a natural accounting approach is spurring innovation and practice change. Food tech company Liv Up has now shortened its supply chains with smallholder farmers, while WWF Myanmar is supporting local businesses to identify sustainable aquaculture practices within the Ayeyarwady Delta. Food company Olam, meanwhile, is now moving towards more organic soil processes after a natural capital assessment of its coffee production in Sumatra.

For major corporations, finance and investment is often where they’re able to have the biggest impacts. Coca-Cola is investing in wetlands as a means of water stewardship, in line with its water restoration ambition, while BMW UK has created the ‘Recharge in Nature Project’, which focuses on locally-delivered restoration, biodiversity and wellbeing projects at National Parks throughout the UK.

Further reading

• UK Government’s ‘Enabling a Natural Capital Approach’ guidance

• The Natural Capital Committee

• World Economic Forum’s findings on nature dependency  

• Data in Global Environment Change on ecosystem value

• The value of California’s street trees

• The economic contribution of Mexico’s mangroves

• ONS data on the value of UK’s natural capital assets

• The UN’s System of Environmental Economic Accounting (SEEA)

• Enabling a Natural Capital Approach from the UK government

• The Natural Capital Protocol

• The Capitals Coalition  

• Capitals Coalition business and government case studies

• The Green Finance Institute’s report on the nature finance gap

• Revere partnership