Natural Capital: What’s the Story?

By Shrishti Shah

Can we place a value on rivers, land and oceans? In recent years, the momentum behind ‘pricing nature’ has quietly gained popularity. Teams are working on ways to value natural assets and the intrinsic benefits that nature provides. This will unlock funding that supports initiatives that protect and restore ecosystems and the continuous flow of benefits that they offer to people, our ecosystem and the economy.

In this article, we have collaborated with Michael Molitor, Senior Advisor at Cecil, an Australian company building software to support teams restoring nature. Read on and introduce yourself to new ways of thinking as Michael shares his knowledge on the natural capital market and the opportunities that lie ahead.

Natural Capital is not a new concept. What exactly is it though?

To capture your imagination on natural capital and why so many people are talking about it, think of it this way — natural capital is everything that is provided by our planet which lies at the foundation of not only all human life, but also all other life on Earth. It is the foundation of our existence and without it, modern civilization would collapse. Natural capital supports a growing human population of almost 8 billion people and includes, for example, all plants, land, rivers, minerals, animals, sunlight, lakes, and oceans. It includes stocks of key resources, including iron ore and healthy soils, as well as valuable ecosystem services provided by those key resources — such as pollination, fresh water, soil fertility and the cycling of energy and nutrients for example.

We will go into three recent events which have lifted global attention on natural capital and the critical challenge of preserving and expanding it.

1. TNFD

The first event was the launch of the Task Force on Nature-Related Financial Disclosures (TNFD) in July 2020. The TNFD, modelled closely on the Task Force of Climate Related Financial Disclosures (TCFD), aims to create global reporting standards for how companies disclose their nature-related risks. Here is the challenge as described by the TNFD:

For companies, natural capital is a source of economic value. Businesses benefit from ecosystem services provided by the healthy functioning of the natural world. Given the growing pressures on natural ecosystems, businesses will need to be increasingly aware of their own dependencies and impact on natural capital.

2. The Power of Influencers

The second event was an article published in the Financial Times by former US Treasury Secretary and Global Managing Partner of Goldman Sachs, Hank Paulson in September 2020. Paulson made a powerful argument for why we need a global market for natural capital including a focus on improving soils and protecting pollinators. The fact that such a major influencer in global capital markets has used his voice to attract attention to the natural capital challenge indicates that expanding natural capital and ecosystem services is also one of the biggest investment opportunities in history.

3. Importance of Research and Understanding

Finally, the third event was the publication of the Dasgupta Review by the UK Government in February of 2021. Titled ‘The Economics of Biodiversity’ the report was commissioned by the UK Treasury to explore the value of nature to the UK economy as well as the global economy. In the words of the report…

These three events demonstrate the shifting sentiments towards natural capital and the centering of this topic in sustainability discussions.

Carbon Credits/Tax and Other Developments

There are a range of mechanisms to achieve nature and climate goals. For example, the introduction of carbon credits and carbon tax are examples of market mechanisms to increase carbon storage and/or avoid greenhouse gas emissions.

Carbon credits: Carbon credits are the unit of carbon emissions or CO2e which can be traded on carbon trading markets. These markets first appeared after the 1997 Kyoto Protocols but have developed into two main systems — the mandatory market and the voluntary market.

Under the mandatory market, regulators issue a limited amount of carbon credits based on set emissions targets which limits the amount of CO2e which may be emitted by a company in a year. Any leftover credits can be traded. The voluntary market describes the marketplace where businesses/ individuals can buy carbon offsets issued for activities that avoid or sequester carbon from the atmosphere.

The carbon credits framework has allowed organisations like the Katinga Mentaya Project to protect and restore 157,875 hectares of peatland forest in Indonesia and generate 7.5 million carbon credits annually which is equivalent to removing 2 million cars from the road each year. In addition to the avoided emissions, the project reduces threats to biodiversity, maintains ecological integrity and supports sustainable development opportunities for local communities. (World Economic Forum)

Carbon taxes: Broadly speaking, a carbon tax is a levy applied to emitters of greenhouse gases to account for the external cost of greenhouse gases being released into the atmosphere.

The combination of regulatory and market approaches and growing consumer trends have incentivised companies to find ways to minimise their carbon footprint and reach a carbon-neutral status.

On the other hand, technology is also playing an increasingly important role in restoring nature. An example of this is Cecil, a platform that simplifies natural asset management. Cecil helps teams manage and invest in natural capital by streamlining natural asset operations, collecting and aggregating data on key health indicators and sharing transparent and robust risk and performance reports with stakeholders.

Another example of technological innovation is Soilify by Earth Analytics India. Soilify enables regenerative agriculture and monitoring of soil carbon to be achieved through high-resolution satellite data and machine learning. Soilify’s innovation extends beyond technology — their source of funding is through an impact bond and investing through small size venture debt which de-risks the shift to regenerative agriculture for farmers until their carbon credits are realised. (World Economic Forum)

What about the value and restoration of our current natural resources?

Ecosystems, the rich biodiversity they support and the ecosystem services they provide are the most valuable assets on Earth — protecting and expanding them sits at the apex of our interconnected natural capital and climate stability challenges.

Restoring natural capital requires centering it into strategic and operational decisions making for governments and businesses as well as recognising natural capital investment risks and opportunities in the financial markets. Momentum is building — we must leverage technology providers, the private sector, policy makers and local communities across the world to accelerate the global carbon and ecosystem markets at a pace and magnitude proportionate to the challenge.

If you liked this article, listen to our podcast ‘The Mission to Restore Nature’s Capital’ with the co-founders of Cecil, Alex and Rory.

Feel free to contact Alex at [email protected] to learn more.