Natural Capital Exploring nature's investment case By Esme van Herwijnen, Responsible Investment Analyst
Natural capital can be defined as both non-renewable and renewable stocks of natural resources and the services they provide, including land, water and air, as well as habitats, minerals, forests, raw materials and the contributions of ecosystems. Natural capital is everything nature offers for "free".
Bees do not send an invoice for pollinating crops, and forests are mostly valued for the price of timber, rather than taking into account the economic value of all the different ecosystem services they provide such as carbon storage and water filtering. It is certainly a complex exercise to put a value on natural capital, although that value becomes clearer once it becomes scarce.
The financial system, as we have learnt, can implode with too much debt. While the financial system is recovering and still learning its lessons from the crisis, those lessons are unfortunately not being transferred to other areas of the economy. Complex risk management systems are used to protect financial capital and highly regulated capital requirements are in place.
So why don't we do the same for natural capital? Our planet is our most important asset, however the products and services provided by nature are not properly valued. Therefore it is time to include biodiversity and the wider environment into economic modelling so as to value natural capital in business.
Natural capital is rapidly declining, while ecosystem services are being degraded. This is worrying given the key role natural capital plays in terms of its contribution to economic development as a whole. Though embryonic, corporate initiatives are now developing in order to value natural capital; hence the need for investors to understan this novel, but increasingly material topic.
In this Insight, we aim to look at some different aspects of natural capital, covering both non-renewable natural capital such as fossil fuels and minerals as well as renewable natural capital, including products and ecosystem services. We will examine the crucial contribution natural capital makes to economic development, and the business risks related to a degrading of natural capital.
