Embracing natural capital accounting
To paraphrase Oscar Wilde, only a cynic knows the price of everything but the value of nothing. Were he alive today, Mr. Wilde might have made this comment regarding the world’s shortcomings in valuing nature.
Nature is the foundation of today’s economic and social system, with 50 percent of the world’s economy depending upon it. Additionally, the economic benefits derived from nature – including its provisioning, regulating and cultural services – are estimated to be valued at 1.5 times global GDP.
Yet today, our natural resources are degrading faster than they can regenerate. The way we grow and deliver food and natural fiber used to produce goods – called ‘the value chain” – is a significant driver of biodiversity loss and greenhouse gas emissions. The World Bank estimates that the loss of “ecosystem services” provided by nature could result in a decline in annual global GDP of $2.7 trillion by 2030. Because nature’s contributions are often silent, unseen, and hard to quantify, they are undervalued.
So what can we do about it?
Sustainable land management will play a major role in meeting global biodiversity, greenhouse gas, and sustainability targets. Long-term projections show that demographic growth and changes in consumption patterns through 2050 will require a 60 percent increase in food production, with a simultaneous 45 percent decrease in emissions across the food economy.
We will have to produce more, on less land and with less impact on nature to reverse an estimated 30 percent decline in world species. The United Nations Environment Programme (UNEP) estimates that investment in nature-based solutions has to increase to $384 billion by 2050 if we want to meet those goals. Such investments currently stand at around $154 billion, with the majority from public financing and only about 14 percent from the private sector.
The World Bank estimates that the loss of “ecosystem services” provided by nature could result in a decline in annual global GDP of $2.7 trillion by 2030.
Investors who recognize the broader value of, and dependency on, nature will see compelling reasons to invest in sustainable land management. For example, making investments in farmland practices that optimize yields through efficient farm practices and also restore or maintain native vegetation builds long-term resiliency and, hence, value.
Putting a monetary value on nature
But there is a problem. It’s difficult to invest in nature-based solutions if there is not a compatible accounting system. Unlike traditional financial markets, we don’t have centuries of financial checks and balances to provide precedents for investments in nature. Until recently, there has been a lack of pricing, transparency, and methodologies regarding how to value natural ecosystem services and risks.
It’s time to embrace a new form of accounting known as “natural capital accounting.”
Natural capital accounting is a financial tool to measure changes in the stock and condition of natural capital ecosystems and incorporate these values into standard accounting practices. Natural capital accounting also helps policymakers understand the dependence of economic development on natural resources.
The adoption of a natural capital accounting system that mirrors the sophistication of the financial system will help create a holistic view of the value of sustainable land management. Such adoption will normalize a fuller, values-driven mindset toward natural capital investments.
Collaboration is needed
Getting the accounting right is just one step. Collaboration will also be needed to accelerate investment in sustainable land management. The Global Biodiversity Framework (GBF), announced at COP 15 in Montreal in December 2022, is the most critical global agreement for protecting and restoring nature by 2050. Of particular importance is the Framework’s Target 15, which encourages and enables all businesses to regularly assess and disclose their impacts and dependencies on biodiversity by 2030. Adoption of the Taskforce for Nature-related Financial Disclosures (TNFD) and Greenhouse Gas (GHG) Protocol will be instrumental in the practical implementation of measuring and disclosing nature-related impacts.
The adoption of a natural capital accounting system that mirrors the sophistication of the financial system will help create a holistic view of the value of sustainable land management.
Another way to accelerate private sector investment in sustainable land management is through collaboration across all elements of the financial sector. One example of this is the Good Food Finance Network (GFFN), a multi-stakeholder initiative composed of public and private financial institutions, including global environmental funds, banks, asset managers, fin-techs, and agri-businesses. GFFN members and partners work together to identify impacts, measure performance and set ambitious, science-based targets.
Cross-sectorial groups like these play an important role in the evolution of investments in sustainable land management. All are aimed at improving the measurement of ecosystems, mainstreaming biodiversity and ecosystems policy planning and implementation, and developing an internationally agreed methodology for partner countries.
Embracing natural capital accounting can help us achieve our multifaceted goals of producing sustenance, reducing emissions, and protecting nature, but the approach needs to be widely adopted to make a real impact. It will allow investors to have a more holistic view of the value of sustainable land management.
Mr. Wilde would have approved.
Nuveen Natural Capital is a land-focused investment manager, with $12.3 billion of assets under management across diverse geographies, crop and tree species, and operating strategies.
