Natural capital: avoiding the next financial crisis

Ivo Mulder and George Scott in Chinadialogue: Nature underpins global wealth creation. The renewable flow of goods and services provided by the earth’s ecosystems buttress our economy and yield benefits for business. But this stock of ecosystems – also known as “natural capital” – is largely invisible in financial decision-making. As a result, natural capital does not appear on the balance sheets of businesses and is largely unaccounted for in financial products.

...Most finance institutions still do not believe that natural capital is material to their bottom line. As a result, for many types of financial products there are at present no metrics available to incorporate it (quantitatively) in credit risk. But loss of forests affects water supplies vital to agriculture and hydropower. Greenhouse gas emissions from forest clearance account for about 12-15% of emissions globally. Species loss is immense, while deforestation can trigger community conflicts. Economists estimate forest loss alone is eroding natural capital and ecosystem services valued at US$1.2 to US$4.7 trillion per year.

...For industries dependent on natural capital, the continued erosion of global resources presents additional operational challenges. Exponential population growth is putting ever increasing pressure on the limited global natural capital base. The resulting surging demand in the past decade alone has reversed a 100-year decline in resource prices. Growing pressure on agricultural production, as well as associated water and energy requirements, from feeding an additional billion people by 2030 will trigger considerable increases in the price of global commodities.

...The Natural Capital Declaration, launched in June 2012, is an attempt to do something about this web of risks. The industry-led initiative aims to encourage widespread integration of natural capital considerations into financial products and services, and work towards their inclusion in financial accounting and reporting....

Jean-Francois Millet, "Forest workers sawing wood," early 1850s