Is natural capital a material issue?

Natural capital – the stock of capital derived from biological diversity and ecosystems as well as natural resources such as fossil fuels – has huge importance for business and society.

Biodiversity and ecosystems give rise to ‘ecosystem services’, defined as the benefits, closely dependent on biodiversity, which human beings obtain from ecosystems. These benefits include access to food and water, protection from threats such as floods and disease, recreational opportunities, and services like photosynthesis that maintain conditions for life on Earth.

This report, by ACCA, KPMG and Fauna & Flora International, highlights how the benefits deriving from biodiversity and ecosystems (and the risk of their loss) are rarely considered to be material by companies.

The report demonstrates the lack of a standardised business case for considering biodiversity and ecosystem issues is a barrier impeding companies from effectively determining risk and opportunity exposures. So too is a basic lack of awareness among accounting and business communities of natural capital issues.

Given the importance of biodiversity and ecosystems to business and society, CFOs and accountancy professionals have an important role to play in developing new valuation, accounting and reporting approaches.

CFOs, for example, need to engage with experts to understand the extent to which their organisations depend on natural capital – including the degree to which company revenues, costs and going concern status rely on natural capital, directly and indirectly.

CFOs should also:

• ensure that risk and materiality assessments consider natural capital
• work with finance teams to develop the skills and capacity for accurate assessment of corporate impact or dependence on natural capital
• disclose material natural capital impacts and dependencies, guiding the development of robust disclosure and assurance systems to ensure data quality
• educate other board members on the importance of BES within key management and strategic decisions
• consider whether natural capital can be incorporated into financial accounts, and engage with standard setters on how current accounting standards can be improved to address the topic more fully
• engage with other organisations, such as the International Integrated Reporting Council,  that want to develop tools to account for natural capital, and
• consider how tools used by other companies could be applied to their own operations.