Once again natural capital is in the news – this time with the announcement last week by the National Australia Bank (NAB) that it’s changing its policies to start accounting for the sustainability of farming business practices. NAB is Australia’s largest agribusiness lender, so this is big news for farmers and big news for natural capital.
The NAB’s move comes amid warnings about the economic risks incurred by businesses ignoring natural value. Australia is running down its natural capital assets (forests, water, soil, energy) and this poses a material risk to the economy. According to the advocates of natural capital accounting, this means businesses should treat natural capital as they do other financial risks and assets.
NAB’s plan to include natural capital in its lending policies means that farmers who manage the environment better should eventually receive higher credit ratings. Why? Because these farmers generally have a more resilient business model. According to the NAB’s manager of agribusiness, Khan Horne, there’s a clear correlation between farmers’ environmental performance and their profitability: better environmental practices tend to produce more reliable yields and lower input costs.
For the moment, it seems NAB’s move to natural capital is focused on having conversations about it with the aim of translating natural capital into its financial practices, such as its credit assessments, within three to five years.
Here’s what the NAB says about incorporating natural capital into its practices: ‘We recognise that if we fail to consider natural value as part of our decision making, we may be blind to the significant risks and threats to our future business sustainability.’
‘Eventually, as business decisions become more informed by natural value considerations, it will be easier to place an actual financial value on natural capital (bringing it explicitly into the balance sheet) and to start to adjust the way we think about growth strategies, future value of businesses and the real impacts of sustainability.
‘For example, over 65% of agricultural production in Australia is dependent on pollinators such as honey bees. Pollination services are estimated to contribute directly to AUD$1.7 billion in agricultural production.
‘And, in Melbourne, the water supply is dependent on protected forests for purification. Without these forests, Melbourne would need to build a new water treatment plant at a cost of USD$500 million to USD$1 billion with additional operating costs running into hundreds of millions of dollars each year.’
NAB is one of the pilot companies in the new ‘six capitals’ global accounting framework initiative launched in December 2013 by the International Integrated Reporting Council. In December 2011 it was also one of the two inaugural signatories to the Natural Capital Declaration (NCD). Launched by the United Nations and the Global Canopy Programme (which protects forests as natural capital), the NCD acknowledges the risks and opportunities natural capital poses for the finance sector. It aims to integrate natural capital reporting into private-sector accounting and to make natural capital part of business decision making by 2020.
The 40 signatories to the declaration – including China Merchants Bank, Standard Chartered Bank, First Green Bank and Earth Capital Partners – acknowledge the importance of natural capital to a sustainable global economy and the fact that the ‘ecosystem goods and services‘ natural capital yields provide trillions of dollars worth of food, fibre, water, health, energy, climate security and other essential services to the global economy.
As I’ve already written here several times, most recently in December 2014, natural capital is a contentious concept. It’s also an idea we’re going to be hearing a lot more about this year, this decade, this century. Stay tuned.