Finance & Investment

Why Natural Capital Accounting and the SDGs Are Critical Components of Each Other’s Success

A report launched at the World Forum on Natural Capital (WFNC) in Edinburgh, Scotland last week examines the vanishing wealth of the world’s nature, and the growing systemic risk that represents to global economies and societies.

By Maxine Perella | Published 7 years ago | About a 5 minute read

A report launched at the World Forum on Natural Capital (WFNC) in Edinburgh, Scotland last week examines the vanishing wealth of the world’s nature, and the growing systemic risk that represents to global economies and societies.

The study, published by a team of economists at the University of Oxford, highlights that extreme weather, mass extinctions, falling agricultural yields, and toxic air and water are already damaging the global economy, with pollution alone costing $4.6 trillion every year. It points out that natural capital is not being accurately measured or valued in the context of these ecological tipping points — and that current economic models are ill-equipped for dealing with the threat this presents.

The report makes a series of recommendations on how to accurately reflect natural capital in national wealth accounts — but emphasises that better valuation alone will not ensure future prosperity. Governance to protect critical natural capital such as a stable climate and well-functioning ecosystems is also required, and here the Sustainable Development Goals (SDGs) can provide the foundation for such a governance framework.

Speaking at the WFNC, one of the authors of the report, Cameron Hepburn — professor of environmental economics at the Smith School, University of Oxford — said critical natural capital was “vital to our continued existence.” He added: “It’s irreversible if depleted; we have to think hard about how we govern and manage it. We shouldn’t leave it to the economists — it’s too important … it requires a democratic, political process.”

The SDGs offers a way forward in this regard, given that the management of natural capital features prominently in the SDGs. One emerging ‘green economy’ idea is to adopt a capitals approach to the SDGs. This could help standardise current SDG efforts, given the diversity of approaches taken by governments and businesses in order to meet the 17 Goals and 169 associated targets.

It was a point raised by Oliver Greenfield, convenor for the Green Economy Coalition: “The wealth of SDG targets and indicators is way too complex, so people start to cherry-pick goals. Business just looks at the goals most relevant to them,” he told delegates.

For example, one of the report’s recommendations is to develop an explicit register of critical capitals — including critical natural capital — on a country-by-country basis, which could be informed by the SDGs. This may include establishing metrics and precautionary thresholds, below which such capital assets are not permitted to decline.

SDGs could also help improve and harmonize data collection for natural capital accounting. For example, a few indicators used by the SDGs are close to those used to evaluate natural capital in the Wealth of Nations data.

However, questions remain over just how complementary SDG and natural-capital strategies are, and what the trade-offs might be. Ultimately, will the SDGs create greater coherence — or more confusion — in relation to capitals? Neil Stevenson, managing director for global implementation at the International Integrated Reporting Council, said that consideration around the substitutability of capitals can unlock new ways of thinking, and that might prove helpful in also meeting SDG ambitions.

But, he stressed, this could take time: “If we do expect businesses to employ new capitals in new ways, it won’t happen overnight — it requires new business models and innovation. We need to start getting boards to articulate the importance of capitals.”

He added that there was still a discussion to be had about how sustainability professionals can make the SDGs land in the boardroom so they are part of business strategy. It was a view echoed by Carol Adams, professor of accounting at Durham University’s business school, who said there was an ongoing challenge to make the SDGs accessible, especially for companies looking at them for the first time.

Adams has authored a report examining how the SDGs can be linked to integrated reporting, and hence natural capital. It centres on the concept of the six capitals — a fundamental feature of integrated reporting — and demonstrates how efforts to transform the capitals to create value can also help organisations make a material contribution to the SDGs.

Greenfield believes such an approach could bring about real change. Commenting on Adams’ study, he said: “The future we want, and the SDGs that define it, needs business. We also think the SDGs need capitals. So, helping business to think through the SDGs and the capitals might just be transformative.”

Meanwhile, Farooq Ullah, co-founder and co-chair of the UK Stakeholders for Sustainable Development, said more mobilisation on the SDGs was required to drive wider dialogue and called on delegates to start engaging outside of their specialist community. He added that in the UK, there was no national action plan for the SDGs, but his organisation is currently creating one, which will be presented to the UN’s High Level Political Forum on Sustainable Development next summer.