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Natural Capital

Esme van Herwijnen
By Esme van Herwijnen SRI Analyst July 2016
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Natural Capital

Summary

Summary

Natural capital can be defined as both finite and renewable stocks of natural resources and the services they provide, including land, water and air, as well as habitats, minerals, forests, raw materials and the contributions of ecosystems. Natural capital is everything nature offers for “free”. Bees do not send an invoice for pollinating crops, and forests are mostly valued for the price of timber, rather than taking into account the economic value of all the different ecosystem services they provide such as carbon storage and water filtering. It is certainly a complex exercise to put a value on natural capital, although that value becomes clearer once it becomes scarce.

The Invisible Cost of Natural Capital Degradation

The Invisible Cost of Natural Capital Degradation

The world is currently using natural capital at an unsustainable rate, as if we had more than one planet at our disposal. The number of countries whose footprint exceeds their biocapacity is rapidly increasing. We currently need 1.5 planets to meet our needs globally. Some developed countries, including the U.S., would even require 4 planets to meet today’s rate of usage[1]. Current business models and consumer demand exercise pressure on our local ecosystems, which are unable to regenerate themselves; this in turn presents various risks for businesses dependent on the availability of natural capital.

[1] WWF Living Planet Report 2014

The Business Case for Protecting Natural Capital

The Business Case for Protecting Natural Capital

The ability of more than seven billion people to live on this planet will partly rely on our ability to manage natural capital in a sustainable manner. This includes protecting biodiversity, ensuring the future availability of our resources and decoupling economic growth from natural capital depletion.

Many countries have based their economic development on the use of their natural resources, South Africa being a good example. Natural capital is a critical asset, especially for developing countries where it makes up a significant share (36%) of total wealth.[1] Hitherto, economic development has caused global natural capital depletion and loss of biodiversity. Economic growth must be sustainable in order to preserve the benefits of natural capital for the future and this will be a real challenge for emerging markets. Examples show this is possible: Costa Rica has made environmental protection an integral part of its development, whilst Bhutan has included in its constitution the promise to maintain 60% of Bhutan's total land as forest for all time.

[1] World Bank

Water

Water

Water is essential to all life on earth and indispensable for many businesses; yet little financial value is placed on it, compared to, say, diamonds or gold. Water is omnipresent, covering 71% of the planet’s surface. Yet only 2.5% of it is freshwater, of which less than 1% is easily accessible. The World Economic Forum has defined water supply scarcity as one of the top global risks in 2016, thus being increasingly material for business, given water is a key input for many sectors including agriculture, energy, electronics and industrials[1]. 27% of corporate respondents to the CDP water questionnaire have already seen water risk manifest itself as having a detrimental impact on their business in 2014[2].

More than a billion people currently live in water-scarce regions, about 2.7 billion people experience severe water scarcity for at least one month per year and as many as 3.5 billion could experience water scarcity by 2025[3]. Water risks have already started to materialise, with the availability and quality of water being impacted locally.

[1] World Economic Forum 2016 global risks report

[2] CDP 2015 global water report – water scarcity between 1996 and 2005

[3] World Resources Institute and World Bank

View From the Top

View From the Top

According to a ground-breaking report published by the Royal Botanic Gardens, Kew, one in five (20%) of the world’s plant species are threatened with extinction. Of the estimated 390,000 known species, over 30,000 are used in support of human activity from medicines to food to poisons to fuel. What the report makes abundantly clear is the dependence humankind has on natural capital, and the risks it faces if species are allowed to degrade and become extinct. The reasons for this decline are complex but a unifying factor is the failure to understand how natural capital can be properly valued. The conversion of natural habitat to farming (10% of the world’s vegetable land cover has changed perhaps irreversibly in just a decade) means the consequences for plant and animal extinction are not being properly evaluated. In excess of 17,000 plants are used as vital components in the march of global medicine. At another extreme there are just three Northern White Rhinos left on the planet none of which have the ability to breed. The species, like so many, have been brought to the edge of extinction because of the black-market economic value of their horn, and because there is no conventional method for valuing and pricing the contribution such iconic species make to wider ecology, conservation and tourism.



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