The Five Steps to Corporate Natural Capital Accounting
Forest Enterprise England developed the first Corporate Natural Capital Account to inform decision-making and demonstrate the social and environmental returns on public investment. At an IFNC workshop earlier this year, representatives from the UK’s Forestry Commission and environmental economists eftec walked us through the process. By Hannah Hamilton (Executive Coordinator, IFNC)
In the 21st Century, organisations need accounts that give them information about social and environmental impact, as well as financial. Forest Enterprise England (FEE), which manages 254,000 hectares of England’s forest estate, was the first organisation to use the Corporate Natural Capital Accounting (CNCA) methodology to account for the stocks of their forest estate (soils, trees, etc.), in order to give them information about the flow of benefits (e.g. carbon sequestration and recreation).
FEE undertook its ‘natural capital journey’ in order to:Demonstrate the social return on investmentQuantify the value of England’s forest estateInform strategic business decision-making about future forest management The accounts showed that the value of England’s forests was £11.9 bn in 2015, with 95% of that value accruing as benefits to society.
Developing a Corporate Natural Capital Account
Step 1: What do we have? Assessing stocks in a Natural Capital Asset Register
The first step is to answer the question: what do we have? Environmental economist at eftec Phil Cryle, who led the study, explained that they started by compiling quantitative data on the extent, condition (e.g. SSSI status), spatial configuration and location of the forests, relative to the people who benefit from them. Data on how the forests are used for recreation was also counted, along with other forms of capital (such as car parks, which though not related directly to the ecological functioning of the stock are nonetheless an important component of the social value). These data formed a Natural Capital Asset Register.
Step 2: What does it produce? Quantifying flows of Ecosystem Services in a Physical Flow Account
The Asset Register informed a ‘physical account’ that captured the annual flow of ecosystem services produced by the natural capital assets. Units of kg/year, number of recreational visits, m3/year of timber and tCO2e/year were used to reflect provisioning services like food, minerals, plants/seeds and timber, regulating services like climate regulation, and cultural services like recreation.
Step 3: What is that worth? Valuing the Natural Capital Benefits in a Monetary Account
The next step was to develop a monetary account that put financial values on the physical account to answer the third question: what is what worth? For FEE, market values like the cost of energy use and the price of timber were already captured in financial accounts. To create their first natural capital account, they focussed on monetising non-market values for climate regulation and recreational benefit.
Climate regulation was monetised using the 2015 UK Department of Energy and Climate Change’s non-traded carbon values, which were £62/tCO2e in 2015. The increase in carbon values over time were applied to subsequent years.
The value of recreation was quantified using a conservative average willingness-to-pay value of £2 per visit from a 2003 study ‘The Social and Environmental Benefits of Forests in Great Britain’ (Willis et al, 2003). The UK Forestry Commission’s Pat Snowdon acknowledged that this was a somewhat crude assessment, and that more and better data is needed to come up with a figure that reflects the diversity of recreational uses (e.g. walking with your family, taking the dog for a walk, riding a horse, etc.).
There are other important natural capital assets that aren’t currently included in the accounts, such as clean air, aesthetic benefit and, of course, wildlife. As Pat Snowdon put it, “Valuing biodiversity is fraught with complexity!” They took a conservative approach and decided not to include it at this stage.
Q4: What does it cost to maintain these benefits? Determining a Natural Capital Maintenance Cost
The accounts were then used to estimate the ‘capital maintenance’ – or the amount of money that is spent every year in order to maintain the forest as it currently stands and the benefits it provides. This was estimated at c. £515 million as a capital value.
Q5: What are the costs and benefits over time, and what do they tell us about asset value? Building a Balance Sheet
A balance sheet was then developed to reflect the flow of costs and benefits over time. It was assumed that the amount and value of each benefit (such as recreation) would stay the same (i.e. the number of people visiting the estate would remain the same into the future and the value they place on each visit would remain the same). The recreational asset value was calculated on that basis, totaling £4.3bn. Climate regulation was different though: because climate targets will be harder and harder to meet in the future, the value of carbon sequestration is expected to rise. On that basis the asset value for carbon sequestration was calculated at £7.3bn. Adding the above recreational and climamte values together with FEE’s private values (e.g. timber) and subtracting the capital maintenance gave a total net natural capital asset value of £11.9bn.
Practical Benefits According to Pat Snowdon, these accounts have had a number of practical benefits, including:A structured and transparent way to show the full value of the public forest estate and the costs of maintaining its natural assetsEnabling FEE to consider the effects of management decisions on the natural capital value of the estateAiding strategic decision making and long term planningEnabling better connection between financial & natural capital performanceInforming individual investment & business decisions Advice from the experts about developing a Corporate Natural Capital Account: Try to monetise, but don’t be obsessive about it. Use values to relay a story and describe things getting better or worse. We can get into the detail around which figures we agree with, but the intention of these accounts is to give order of magnitude assessments.Valuation requires underlying science to be robust. We should be clear about uncertainty associated with science and valuation. The figures in accounts are only ever as good as the underlying data.It’s important to understand private versus public value in order to understand who benefits from the estate.Accounts should ultimately include non-renewable natural capital as well as renewable. This includes minerals, atmosphere, and potentially wind.