Accounting for nature

Sep 30, 2020

Dr Aideen O’Dochartaigh provides an accountant’s introduction to natural capital.

Concepts such as carbon budgets, natural capital, and carbon taxes illustrate the increasing interaction between accounting and environmental issues. While nature and the biodiversity crisis are often overshadowed in public discourse by the climate crisis, awareness of the economic and intrinsic value of natural ecosystems is growing, highlighted by issues such as pollinator loss and the spread of zoonotic diseases like COVID-19. One of the most useful tools to account for the human impact and our dependency on nature is natural capital accounting.

This article offers an introduction to the emerging thinking and methodologies in this area, exploring its applications and benefits for organisations and considering how accountants can engage with natural capital accounting.

What is natural capital accounting?

Natural capital has its origins in the concept of capital as a stock that can give rise to goods and/or services. In the case of natural capital, the stock is natural resources or ecosystems such as forests, water, grassland or air, while the goods and services (known as ‘ecosystem services’) that flow from the stock include raw materials for production and consumption (fuel or food, for example), the absorption of wastes from production and consumption, and the fundamental life-supporting services provided by nature.

Historically, goods and services flowing from ecosystems have been accounted for, or rather not accounted for, as ‘free gifts’ from nature. The depletion of natural capital has, in turn, been accounted for as income (the sale of forestry products recorded as income, for example) with no recording of the loss of the services provided by the forest, such as the absorption of carbon dioxide.

Mounting evidence indicates that human activity is increasingly threatening the stability of natural systems and the ability of the earth to provide a safe space for humanity, and economic activity, to flourish. Four of the nine planetary boundaries identified by scientists have now been transgressed due to human activity, including two core boundaries, climate change and biosphere integrity, with significant impact on the stability of earth systems. We must, therefore, rapidly develop tools to account for our interactions with natural capital and incorporate the calculations into decision-making at management and policy levels.

Natural capital accounting frameworks have largely been developed at country and company level. At country level, the most widely used framework is the UN System of Environmental-Economic Accounting (SEEA). The SEEA methodology measures the scale of the asset, the condition of the asset, the services flowing from the asset, and the benefits to humans. Four thematic accounts are commonly developed: carbon, biodiversity, water, and land, with the valuation of stocks and flows accounted for in both physical and monetary terms. Multiple research institutions are applying this approach in Ireland through the Irish Natural Capital Accounting for Sustainable Ecosystems (INCASE) project, which is funded by the Environmental Protection Agency.

Corporate natural capital accounting

The SEEA methodology translates at organisation level to the corporate natural capital accounting (CNCA) approach. The Natural Capital Coalition has developed the Natural Capital Protocol to offer companies a roadmap for implementing natural capital accounting, which is a useful initial resource for accountants interested in applying CNCA in their organisations. Natural capital accounting interacts with several other reporting frameworks, such as the Global Reporting Initiative (GRI) Guidelines and integrated reporting, and is also directly related to several UN Sustainable Development Goals (SDGs).

In practice, corporate natural capital accounting requires the entity to set up accounts for assets, maintenance costs, and physical and monetary flow. A simple illustration of the process and the accounts required is shown by the assessment approach adopted by Northern Ireland Environment Link (see Figure 1). Two reporting statements are generated:

  1. The natural capital balance sheet, which presents the asset values and the related liabilities (i.e. the costs of maintaining the natural capital). The asset value must include both the value accruing to the organisation and the value for the rest of society in terms of ecosystem services.

  2. The statement of changes in natural assets, which reports the gain or loss in asset values in the reporting period.


An example of the reporting statements is shown in Figure 2 and a comprehensive guide to CNCA, which includes these statements and examples of all the supporting accounts, is provided by the 2015 EFTEC et al. report cited in the figure. In Ireland, Bord na Móna, Coillte and Bord Iascaigh Mhara already apply this approach to accounting for their peatland, forest and marine assets.



Who should use natural capital accounting?

The Natural Capital Coalition stress that their Protocol can be applied to any organisation in any industry, and it is recommended that all entities consider their impacts and dependencies on nature and integrate a nature-centred approach into decision-making. Adopting comprehensive natural capital accounting is typically most relevant in the categories summarised in Figure 3:

  1. Sectors that are directly dependent on and/or own large natural capital assets and have a direct impact on these assets (e.g. fossil fuels, forestry, farming, and fisheries).
  2. Sectors where raw materials in the supply chain are directly dependent on, and have a direct impact on, natural capital. For retailers in the food and beverage sector, for example, their supply chains are dependent on natural capital such as fresh water or healthy soil.
  3. Sectors that rely directly on infrastructure that requires significant land use and/or with significant impacts on natural capital (e.g. energy, transport, and communications).
  4. Sectors that are indirectly dependent on large infrastructure through their supply chains (e.g. the technology sector, which relies on energy-intensive data centres). 

Why use natural capital accounting?

There is an increasing focus on accountability for environmental and social interactions in the supply chain, and natural capital accounting can help organisations understand where their impacts and dependencies lie. For example, luxury goods group Kering has used natural capital accounting to develop its environmental profit and loss (EP&L) account, which illustrates that 90% of the group’s environmental impact relates to its supply chain, largely through raw material production and processing.

More nuanced cost-benefit analyses can also be supported by natural capital accounting. In the Netherlands, for example, analysis of peatlands converted for dairy farming revealed that due to the cost of maintaining the land, plus the cost of controlling carbon emissions and water levels, it was not cost-effective to continue to farm the lands. They will instead be converted back to natural ecosystems.

Natural capital accounting completed thoroughly and transparently can support reputation management. However, it is important to ensure that information is communicated transparently and consistently to avoid the risk of ‘greenwashing’.

Finally, natural capital accounting can help organisations manage nature-based risks such as supply chain disruption, scarcity of raw materials, and new regulatory requirements. The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework to support organisations in accounting and reporting on climate-related risks and plans to establish a similar task force on biodiversity-related risks.

Table 1 illustrates how accountants can engage with natural capital accounting.

Future directions

As natural capital accounting develops, it is important to be cognisant of risks and critiques, and for researchers and practitioners to work to address them. As Kering’s EP&L reveals, many organisations will find that their nature-based impacts and risks are largely associated with the supply chain. To date, however, the potential for accounting and reporting on social and environmental issues at supply chain or sectoral level has not yet been fully explored. Inherent in natural capital accounting is a recognition of interconnectedness between ecosystems, species, and human (and business) activity. In this way, the natural capital approach of looking at impacts and dependencies can help us to link organisation-level activity to sectoral and supply chain activity and, ultimately, to global indicators such as planetary boundaries, including vital climate change and biodiversity targets.

It is also crucial to be aware of the risks of instrumentalising nature by reconceptualising it solely as natural capital, rather than seeing it as intrinsically valuable. Financialising nature in this way can encourage the use of ‘trade-off’ arguments to justify environmentally and socially destructive activities, which also privilege some actors over others. For example, corporate natural capital accounting could be used to support a decision to harvest forestry in the Amazon, or kelp on the Irish coast, which privileges the company’s valuation of the natural capital asset over both the intrinsic value of the related ecosystem and the value it holds for local or indigenous communities. Natural capital accounting must be accompanied by a holistic approach to performance measurement and decision-making, characterised by community engagement, accountability and transparency. Accountants are encouraged to work with multiple actors in a participatory way as we develop new means of accounting to support a sustainable future.

Dr Aideen O’Dochartaigh ACA is Assistant Professor in Accounting in  DCU Business School.