May 26th, 2017

Will ‘natural capital’ ever yield returns?

7 minute read

by David Baxter

 

Natural capital is pushed as a new way of looking at environmental impacts and the value of nature to society. Promoters of the concept, and the associated approaches of valuing natural assets in financial terms, promise that it will put the protection of nature on to boardroom agendas. It is even at the heart of the UK government’s proposal for a 25-year plan for the environment.

Using the language of business to highlight the importance of nature and natural processes is a seductive idea, but has it made a difference? And if language is so important, is ‘capital’, the best word to focus on?

 

A capital idea

It seems we have the economist E.F. Schumacher to thank for the term ‘natural capital’, which he brought to prominence in his famous 1973 collection of essays, Small is Beautiful: A Study of Economics as if People Mattered.

When Schumacher talked about natural capital, he did it to raise awareness that we were using up irreplaceable resources faster than at any other time in human civilisation, and the limits of nature were being exceeded. He did it to raise awareness that the natural world is intricately linked to the substance of being human.  And he did it to point out that humans were thinking about nature in the wrong way.

“[W]e are recklessly squandering [natural capital] because we treat it as if it were income: as if it were something we had made ourselves and could easily replace out of our much-vaunted and rapidly rising productivity.”

The idea has triggered action on an international scale: across the world, governments, institutions and businesses have set up committees, prepared reports and developed valuation techniques  so that society can integrate nature into the world of financial decision making. In March 2015, The UK’s Office of National Statistics (ONS) reported that the UK’s natural assets could be valued at £1.6 trillion, broadly equivalent to its GDP.

Such efforts have undoubtedly raised the profile of nature in decision making. But worries are beginning to emerge about the effectiveness of the natural capital concept as a rallying cry for those who would protect nature and the environment.

 

Capital erosion

Some argue that by single-mindedly pursuing the natural capital concept we’re paying only lip service to Schumacher’s concept of nature as a special asset. Turning nature into money encourages society to treat it like exchangeable income – something we can expend without being any worse off.

Others, such as George Lakoff in his article Why it matters how we frame the environment, argue that, if we use language and thinking of the world view we want to change (in this case, capitalism), we are doomed to fail.

Great thinkers are not the only ones to have concerns. I wrote this article because my recent work gave me opportunities to see the “behind closed doors” reactions of business leaders, utility customers, economic regulators, community groups and local government executives to the term ‘natural capital’.

 

Kemeri Swamp Bridge

Can the concept of natural capital help us get across the importance of protecting the natural environment? Photo: Rulexip (CC BY-SA 3.0), via Wikimedia Commons.

 

If I had to use one word to connect all their different reactions, including my own, it would be “discomfort”. Whilst acknowledging the importance of thinking about natural capital, the audiences I interacted with:

  • mistrusted how others would use it;
  • were unconvinced that a valid valuation could ever be made;
  • questioned why it should be more prominent than other intangible capitals– human and social – in the five capital model ;
  • worried that biodiversity would be undervalued;
  • could not see how it differed from the concept of sustainability;
  • were unconvinced that valuation exercises created sufficient insight to justify the expense; and
  • worried whether it could motivate practical action.

 

On top of these concerns, in November 2016, the ONS released its latest natural asset valuation for the UK. This stated that the NPV of the services provided by the UK’s natural assets had reduced by 25% between 2007 and 2014, from £664bn to £497bn. Nobody appeared to care. It seems that the value of natural capital is decreasing, both literally and metaphorically.

 

Trust fund

The natural capital movement has significant momentum and a high recognition factor. These are positive assets but, as the recent experience of Volkswagen teaches us, to really motivate buy-in you also need trust – something I think the natural capital movement lacks. To build it, all of us involved in using these ideas need to:

  • stop obsessing over finding the perfect monetary valuation, and focus instead on the amount, quality and resilience of nature’s assets; and
  • talk about natural capital in the context of nature and a natural economy.

 

There are many approaches to valuation but no tool will overcome the methodological difficulties of monetising intangible benefits. Take the ONS valuation approach, for example: it attempts to do this by using a resource rents approach. But when applied to freshwater assets it has rather contrary implications: the value of fresh water decreases when we use less of it.

In physical volumes terms, the 8% decline in ecosystem service values from 2007 to 2014 was accompanied by a reduction in the water abstracted from the environment for public supply.

If our aim is to encourage the conservation of freshwater environments, this is unhelpful. Surely, we don’t want to increase natural capital by making water scarcer!

A host of other water resource management indicators could better reflect the state of freshwater natural capital assets: water available for use, water consumption per capita or per unit GDP, reliability of yield.  Importantly, these measures better identify the actions that can make a difference.  If a farmer can be encouraged to change land use to make more water available for use in the summer, then this is a major boost to the resilience of nature and the economy.  These outcomes can be measured and could ultimately form part of a financial reward system.

Measuring environmental resilience in these ways seems much more intelligible and accessible than trying to boil down a complex system into a single number with a pound sign in front of it.

 

Economising on discussion?

While reactions to the words ‘natural capital’ have, in my experience, been pretty mixed, several of the people with whom I’ve discussed this had a more positive view of the term ‘circular economy’. The reason? Discussion suggested that ‘economy’ brought out associations with concepts like ‘efficiency’ and ‘making the whole system work’. ‘Capital’, by contrast, was more associated with exploitation. So – now you know why I am Eunomia’s Head of Natural Economy and not its head of natural capital!

The idea of a ‘natural economy’ also encourages debate about what we currently spend on managing nature, and whether this could be better co-ordinated. Work I did with Indepen, on behalf of Wessex Water, South West Water and Southern Water, showed that over £13 billion is spent annually in England managing catchments to conserve aquatic life, water quality and supply, and to respond to the consequences of flooding. We found many opportunities to better allocate investment in catchments, often away from manmade capital infrastructure. This helped water companies solve their problems more efficiently, delivered wider benefits to customers (more resilient water supplies, reduced flood risk, support for farmers) and enhanced trust.

Thinking about a natural economy also encourages us to think of solutions on a larger scale, offering opportunities to capture and co-ordinate piecemeal spending. Eunomia is working with the West of England Nature Partnership on a trust mechanism that will help conserve natural resources, encourage pooling of resources and streamline regulatory processes: the aim is to show that acting on environmental concerns can be good for growth.

There are many ways in which we can reflect the importance of nature in the decisions we make. Natural capital accounting is one of these – but it has inherent limits, and some negative associations. If we are smart, we will use a range of measures that connect nature to the economy and show that taking nature into account can create jobs, save money and be good for the environment.

 

David Baxter

 

 

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