7 Oct 14

Putting a value on Natural Capital: the why and how

value_on_natural_capitalThe scale of valuing Natural Capital as part of a sustainability reporting process could range from thinking about the suppliers selected to a structured accounting approach that seeks to quantify non-financial impacts with the same rigour as financial impacts. Using either approach, these assessments should feed into a high-level strategy of engraining sustainability in the operations, products and geographies of the business. Puma’s Environmental Profit & Loss (E P&L) Report is a high profile example of the financial accountancy approach to valuing Natural Capital[1].

Techniques for monetising Natural Capital

The Puma E P&L project has led the way in setting out a practical approach for organisations to integrate Natural Capital into financial accounting and tackles the challenge of the economic invisibility of the natural environment[2].  

The Natural Capital Coalition outlines various techniques for calculating the monetary value of environmental impacts, dependant on the availability of information and the relationship of the impact with a business[3].  A robust monetary valuation is possible when market prices are obtainable from existing market structures and can be used to determine the economic value of an environmental benefit.

Where the impact sits outside of existing markets, three methods of producing a non-market valuation are possible.  The first is cost based calculations which estimate the cost of avoided damage or ecosystem replacement.  Avoided damage costs could occur from protecting a coastal region for example. As a result, people and property are prevented from being lost and degraded which has an associated economic value. Similarly, in the instance of replacement costs, an economic value can be attributed to replacing specific ecosystem services if they are lost. For example, natural biodiversity may need to be replaced by man-made sea-walls to maintain coastal protection which in turn incurs an economic cost.

The other two non-market valuation techniques require information on stakeholder preferences, whether they be realised in actual costs or in stated preferences to hypothetical scenarios. In realised costs a stakeholder might state how much they have spent on coastal preservation whereas in stated preferences, a stakeholder might hypothetically state how much they would be willing to pay towards the protection of a coastline or endangered habitat.

The final technique relies on secondary data to apply value estimates to similar scenarios. This can be useful when other market techniques are not available to apply comparable costs to areas of similar land types, such as the value of a hectare of wetlands.

Inevitably Natural Capital accounting will involve a combination of these techniques based on the availability of data and the type of environmental dependency that is being monetised. 

Method

Description

Example Output

Market Valuation

 

Market-based direct valuations based on market prices

 

E.g. Net Present Value of harvested timber (£/ha)

Non-Market Valuation

 

Cost Based - Avoided damage or replacement costs

E.g. Value of avoided water treatment costs (£)

 

 

Revealed or Stated Preference – Travel cost or hypothetical survey

 

E.g. Recreation travel costs or willingness to pay (£)

 

Secondary Data Valuation

 

Applying existing value estimates to similar cases

 

E.g. A value transfer of wetland value per hectare (£/ha)

 

 

Measuring value: Monetisation Vs Qualitative Metrics

When clear financial values cannot be calculated or sourced, qualitative non-financial metrics can be used to value Natural Capital impacts.  Estimating the value of natural resources and services using qualitative indicators requires an understanding of both the biophysical processes that underpin the provision of the product or service and the associated stakeholder groups.  Measuring the value of Natural Capital dependencies in the accounting sphere can be challenging and in many cases measuring value through non-financial indicators will be a more suitable approach.  For example, a company that depends on the sourcing and use of natural minerals may monitor its Natural Capital value by the location of its natural mineral providers and the long term sustainability of the local communities on which the providers depend for its staff. 

To find out more about putting a value on Natural Capital, download our free eBook:

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[1] http://about.puma.com/wp-content/themes/aboutPUMA_theme/financial-report/pdf/EPL080212final.pdf

[2] http://about.puma.com/wp-content/themes/aboutPUMA_theme/financial-report/pdf/EPL080212final.pdf

[3] http://www.naturalcapitalcoalition.org/js/plugins/filemanager/files/Valuing_Nature_in_Business_Part_2_Taking_Stock_WEB.pdf

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