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Working with natural capital

Natural capital is a term that is becoming increasingly prevalent, in part due to the existence of the government’s Natural Capital Committee. But what does it really mean, and what is its significance for landscape professionals?

The Natural Capital Committee has defined natural capital as: ‘The elements of nature that directly and indirectly produce value or benefits to people, including ecosystems, species, freshwater, land, minerals, the air and oceans, as well as natural processes and functions’ (NCC, 2014a).

In other words, natural capital includes ecosystems, biodiversity and all sub-soil, abiotic resources such as fuels and minerals. This definition represents the natural environment as a capital asset, i.e. something that has the productive capacity to generate value, in terms of the benefits that we derive from it.

Some of these benefits are already traded in markets and accounted for in financial accounts (for example, the value of timber from a forest) and some are not (for example, the informal recreational opportunities, amenity benefits, and flood-prevention functions of a woodland). Some natural capital benefits are produced with input from other types of capital, such as: human-made capital, like grey infrastructure; human capital, in the form of an educated work force; and social capital that maintains the rules, rights and limits. For example, the water-filtration benefits of upland bog can only be realised if there is a substantial human-made infrastructure for water collection and distribution. Figure 1 shows some types of natural capital assets and their benefits.

The importance of natural resources is often overlooked in decision-making, typically because the full range of their benefits and value, or the costs of their decline, are not as visible as their financial (accounted for) costs and benefits. Understanding, valuing and accounting for natural capital in terms that are comparable to other capital assets is a vital step to addressing this imbalance.

In England, around two-thirds of the total land area is privately owned (NCC, 2014a). If land-owning organisations alone can be encouraged to take more formal account of their natural capital, then there is an opportunity that the full value of natural resources will be considered more explicitly in important business decisions. Landscape architects already influence such decisions. Adapting a natural-capital way of thinking could better enable them to incorporate considerations about quality, quantity and benefits of natural capital into their design work and communicate them to different stakeholders.

Understanding the benefits of natural capital
There is a disconnect between our appreciation and understanding of the overall importance of nature in the absolute (e.g. we all like a good view), and our understanding of the marginal (i.e. additional / unit) impacts of our actions on nature. For example, we are not very good at balancing the time-saving benefits of a new road with its impact on the landscape.

A natural capital asset check (or register) is one way of making natural assets and their benefits explicit. This is a catalogue of the significant assets owned by the organisation, which includes data on the asset extent, condition, services and benefits delivered.


Example – Natural Capital Asset Check

Understanding the natural capital in Surrey

A Natural Capital Asset Check asks three basic questions about natural resources:
  • What forms of natural capital do we have?
  • What benefits do they produce?
  • Are they being used sustainably?

By asking these questions in a structured way it is possible to reveal how much we depend on natural capital and whether it is being managed sustainably. Applied to Surrey, this approach highlighted the role that green space plays in providing the high quality of life enjoyed in the county and its importance to the local economy. Evidence included:
  • Its role in making the county attractive to businesses and employees; and
  • An evaluation of the considerable health and welfare benefits derived by local residents.

The results included three key examples:

1. Although Surrey is one of the best endowed counties in England for quality green space, its distribution is uneven. A case was made to improve green space provision for the more deprived areas, based on reduced health costs and improved workforce participation. This insight was seen as an important theme for future development and investment in the county.

2. There were severe floods in the Wey Valley in 2013. The Wey Valley asset check exposed the potential increase in flood risk if urban development occurred without proper consideration for the maintenance of the flood risk benefits of natural capital. The study suggested that the increased flood risks from urban development could be countered by the maintenance and creation of appropriate land cover in targeted areas.

3. Surrey is the most wooded county in England (22% land cover). However, an evaluation of Surrey’s woodland revealed that the non-market benefits were an order of magnitude greater than the market value of timber production. These non-market benefits included: recreation for visitors and local residents, air quality regulation (especially removal of particulate pollution) and carbon sequestration.

These three examples illustrated the degree to which a thriving economy depends upon a healthy and well-functioning natural environment. They were used to help make the case for improved management of natural capital and to demonstrate the importance of linking economic development to careful planning for the natural environment. They were also a powerful device for communicating the benefits of natural capital to a diverse range of stakeholders.

This work was conducted for Surrey Nature Partnership, in support of its Valuing Surrey project. www.surreynaturepartnership.org.uk/projects/


Valuing natural capital
‘Value’ has different meanings in different contexts and disciplines. In economics, what individuals prefer is what they value. In turn, individuals value what they benefit from (or believe they do).

There are many reasons why individuals may prefer to protect a natural capital asset – some are related to individuals’ own self-interest while others relate to the implications on other individuals (now or in the future). These motivations are organised into the Total Economic Value typology: • Use values – direct and indirect uses people make of a natural capital asset now and may do in the future; and • Non-use value – preferences to protect a natural capital asset for the benefit of others who are using it now (altruistic value), for future generations (bequest value) and for its own sake (existence value). Economic analysis does not make a judgement about which motivation is more ‘valuable’. Relative values are measured by looking at what individuals are willing to give up for the thing they value – the more they are willing to give up, the more valuable the thing is. Where what’s given up is money (or expressed in monetary terms), economic value has the advantage of comparing like with like: financial and other costs and benefits of maintaining natural capital assets.



Data for measuring the value of natural capital could come from observing consumer behaviour, for natural capital goods and services that are bought and sold in markets. Alternatively, we could observe consumer behaviour in related markets.

For example, we could look at how much people spend to travel to recreational sites and use this spending as a proxy for the value of the site; based on the assumption that people must benefit at least as much as they spend, otherwise they would not visit. Finally, where there are no known or related markets, we could ask individuals to state their preferences. There is a large and growing international literature that presents economic value estimates for many natural capital assets using these different types of data.

Finally, the economic value of a natural capital asset is about the value of marginal changes (increase or decrease) in the quality and/or quantity of the asset. It is not about the absolute value of the asset. The values are also context and location specific, influenced by: environmental factors (which capital asset, of what quantity and quality); benefits (e.g. what kind of ecosystem goods and services) and characteristics of the beneficiaries (e.g. socio-economic characteristics of the affected population).


Example – using economic valuation

Natural Capital Committee – investment priorities


The third State of Natural Capital report by the NCC highlighted the case for investing in natural capital. Based on the ‘value chains’ approach (understanding, measurement and valuation of multiple benefits, beneficiaries and [opportunity] costs of investments), the following areas of priority investments are recommended (NCC, 2015):

  • Woodland planting of up to 250,000 additional hectares. Located near towns and cities, such areas can generate net societal benefits in excess of £500 million per annum;
  • Peatland restoration on around 140,000 hectares in upland areas. This would deliver net benefits of £570 million over 40 years in carbon values alone. Further work is needed to determine water quality, recreation and wildlife values. Including these will significantly increase the net benefits of such investments;
  • Wetland creation on around 100,000 hectares, particularly in areas of suitable hydrology, upstream of major towns and cities, and avoiding areas of high grade agricultural land. Benefits cost ratios of 3:1 would be typical, but up to 9:1 are possible in some cases;
  • Restoring commercial fish stocks, particularly white fish (like cod) and shellfish, which remain considerably below optimal levels. We recognise that reducing the level of fishing effort to allow these stocks to recover will have short-term impacts on the fishing industry, but the long-term gains are potentially large, securing jobs in the industry for generations to come. Investing in measures to restore certain stocks of shellfish could deliver benefit cost ratios in excess of 6:1; and
  • Intertidal habitat creation to meet objectives set out in Shoreline Management Plans. These areas provide a wide range of benefits including: coastal flood protection, and can reduce costs of maintaining concrete defences; carbon storage; areas for wildlife; and the provision of nursery grounds for important commercial fish stocks.

Finally, the NCC reported the potential for high return investment opportunities in:
  • Urban greenspaces which can provide enormous recreation values, benefiting millions of people in our towns and cities. They also offer significant potential for improvements in physical and mental health which in turn will reduce health expenditures and improve labour productivity. Reduced health treatment costs alone of £2.1 billion have been estimated;
  • Urban air quality is the top environmental risk factor for premature deaths in Europe. It causes an estimated 40,000 premature deaths a year and reduces productivity, which together costs the economy at least £20 billion per annum. It also has a significant negative impact on life prospects for children (e.g. by lowering educational achievement); and
  • Improving the environmental performance of farming. Farming is an important sector of the economy but its impacts on natural capital are also substantial. Addressing these impacts would deliver significant benefits for society. Channelling subsidies towards environmental schemes that demonstrate good economic returns would be very worthwhile. Also, investing in measures to connect wildlife areas across farming landscapes, as set out in the Lawton Review, will significantly increase net benefits to wildlife from these areas.

Accounting for natural capital
Organisations assess the value of their assets through conventional financial accounting processes. These include balance sheets that summarise the assets and liabilities that the company holds, and profit and loss accounts that record flows of values in an accounting period. This basic information underpins multiple decisions in an organisation, such as knowing when funds will be required for maintenance and improvement, and how to capitalise on increasing the value of their assets.

Most of the natural capital benefits do not appear in financial accounts. Shortcomings of financial accounting are demonstrated quite clearly in the way that parks are treated in local authority accounts. The park is the physical asset. It gives rise to a liability via the cost of maintaining the park or public use year on year. This is shown in the financial accounts of the local authority as a cost. The park also generates recreational value, but this is not recorded financially, as entry to the park is free. Financial accounts therefore register nothing for this element of asset value of the park, or a notional value of £1. The actual value to the users and wider society is of course much higher than this, but is not visible in the financial accounts and would be hard to articulate in decision-making.

Corporate Natural Capital Accounting (CNCA) is designed to address this missing information. CNCA is a framework that collates natural capital information in a similar way to other capital assets2. It records the benefit to both the organisation that owns the natural capital asset and to society, by answering four key questions:
  • What natural capital assets does the organisation, own, manage, or is responsible for?
  • What flows of benefits do those assets produce, for the organisation and wider society?
  • What is the value of those benefits?
  • What does it cost to maintain the natural assets and flows of benefits?

Natural Capital Committee (NCC)
The NCC was established in 2012 with the remit to provide independent advice to the Government on the sustainable use of England’s natural capital. The committee’s first State of Natural Capital report, published in April 2013, presented evidence that significant economic and wellbeing benefits can be secured through improved management of natural capital (NCC, 2013). In March 2014, the second report highlighted that natural capital is not being used sustainably and that the benefits that are derived from it are at risk. The committee proposed that a long-term restoration plan is necessary to maintain and improve natural capital in order to secure its benefits for the long-term (NCC, 2014b). The third report (NCC, 2015) recommended that the government encourage the use of Corporate Natural Capital Accounting (CNCA) as a means of managing natural capital sustainably.


Example – Corporate Natural Capital Accounts

The National Trust – Wimpole Estate

Wimpole is a 1,200 ha historic estate and important visitor attraction in Cambridgeshire, consisting of parkland, farmland and semi-ancient SSSI (Site of Special Scientific Interest) woodland. Due to poor soil quality, the lowland arable farm had recently been taken in-hand by the National Trust and undergone changes in farming practices, moving from conventional arable farming to organic cropping and Higher Level Stewardship (HLS). The CNCA framework was used to measure and report the overall change in natural capital value arising from this change.

The National Trust piloted CNCA to investigate a new way of recording what natural assets are owned by the trust and the relative costs and benefits that flow from their management. This exploration provided three benefits:

1. A new way of communicating with trustees, staff and supporters about what the National Trust is doing to conserve assets;

2. Reviewing whether financial budgets are being invested in the right place; and

3. Exploring whether there are sustainable ways of capitalising on the costs of some of that investment.

The range of benefits included farm income, visitor revenue, recreation, wildlife and carbon sequestration.

Comparing the current organic regime to the previous intensive arable practice demonstrated that despite the reduction in crop yields, the overall income was about the same. More importantly, there were significant (non-market) benefits through increases in soil carbon sequestration, higher recreational benefits and improvements to biodiversity.

Taking these additional benefits into account meant that the overall return on investment was much greater than recognised in conventional financial accounts.

This was also a simple way of communicating the multiple benefits of the estate to conservation staff, business managers and to external stakeholders.

Below is a simplified balance sheet from the CNCA pilot account for the estate.

Assets are valued as the expected flow of future benefits based on the existing condition of the natural capital. Liabilities are evaluated as the expected flow of future costs of maintaining the condition and benefits of the natural capital in perpetuity. All values are discounted to bring the expected costs and benefits into present value terms. In this way the overall asset values and their associated maintenance costs can be presented to highlight the net natural capital of the organisation.

The format separately discloses private value (to the organisation) and external value (to all external beneficiaries). This reveals the pattern of flow of natural capital benefits, which provides useful insights into important stakeholders and opportunities for greater benefits realisation.

This example provides further asset detail in terms of an original baseline value (in 2008), plus increases in asset value due to improved natural capital condition and some additions (due to the acquisition of more farmland into the in-hand estate).

NT Wimpole Estate Balance Sheet – year end 2013
 
RENEWABLES
  TOTAL
  Private £m External £m Value £m
ASSETS
Baseline value (2008)
Cumulative gains / (losses)
Additions / (disposals)
Gross asset value 

14
2
2
18

12
4
2
18

26
6
4
36
LIABILITIES
Maintenance provisions
(4) (2) (6)
TOTAL NET NATURAL CAPITAL     30















References
eftec (2015) The Economic Case for Investment in Natural Capital in England, available at: http://www.naturalcapitalcommittee.org/investing-in-natural-capital.html

eftec, RSPB and PwC (2015) Developing Corporate Natural Capital Accounts, available at: http://www.naturalcapitalcommittee.org/corporate-natural-capital-accounting.html

NCC (2013) The State of Natural Capital: Towards a framework for measurement and valuation, available at: http://www.naturalcapitalcommittee.org/state-of-natural-capital-reports.html

NCC (2014a) Towards a Framework for Defining and Measuring Changes in Natural Capital, available at: http://www.naturalcapitalcommittee.org/working-papers.html

NCC (2014b) The State of Natural Capital: Restoring our Natural Assets, DEFRA, available at: http://www.naturalcapitalcommittee.org/state-of-natural-capital-reports.html

NCC (2015) The State of Natural Capital: Protecting and Improving Natural Capital for Prosperity and Wellbeing, available at: http://www.naturalcapitalcommittee.org/state-of-natural-capital-reports.html

Ece Ozdemiroglu is the founding director of eftec (Economics for the Environment Consultancy) 

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