By Stephanie Huff, Huff Communications
Natural capital is defined as the stock of natural ecosystems, including air, land, soil, biodiversity, and geological resources. This stock underpins our economy and society by producing value for people, both directly and indirectly. In few places is the significance of this non-monetary capital more apparent than in agriculture. However, the challenge with natural capital accounting, and the ensuing investment in these businesses, is to determine how to measure its value and create a systematic and consistent tool for tracking these assets and their depletion or growth.
Historically, we measure by economic performance. But when a farm, company, or entire country is valued only by its profit, while still exploiting all its minerals, polluting and degrading its water resources, overfishing its oceans, or eroding its soil, it may be gaining short-term profits but losing long-term wealth.
Nobel Laureate Joseph Stiglitz noted that a private company is judged by both its income statement and its balance sheet, but GDP of a country is in essence just an income statement. Countries are not measuring the other side of the ledger – the losses. Therefore, traditional GDP measurement gives misleading signals about economic growth and well-being of a country. The same is true of nature. As ecosystems deteriorate, so does the ability to support human and animal health as well as future sustainable economic growth. If you cannot measure it, you cannot improve it. When ecosystems are well understood and managed, they provide long-term benefits to people, such as clean air and water, flood control, crop pollination, and recreational benefits. Well-defined ecosystem accounts can highlight otherwise hidden environmental degradation, natural resource depletion, or unsustainable use patterns.
According to the Food and Agriculture Organization of the U.N. (FAO), “Natural capital is the foundation of economies. Businesses, and agriculture in particular, depend upon natural capital to be viable.” However, in traditional business models, natural capital was largely neglected and was considered ‘economically invisible’.
A study for FAO in 2015, Final_Natural_Capital_Impacts_in_Agriculture_-_Supporting_Better_Business_Descision-Making_v5.0.pdf (fao.org), states that this invisibility resulted in the “over-exploitation of our finite natural capital through climate change, soil erosion, water pollution, and loss of biodiversity and wild habitats, such as forests and wetlands. The increasing scarcity of both renewable and non-renewable natural resources impacts the sustainable development of farmers, businesses, and nations. The degradation of natural capital imposes external costs on society and future generations. These costs can be better understood and addressed by accounting for natural capital.”
As farmers and ag investors know, global food production faces an ever-growing challenge due to rising input costs, climate change, resource competition, and ecosystem degradation. We have all heard that the global population is predicted to reach nearly 10 billion by 2050. But do we fully understand the true costs and benefits associated with crop and livestock production, their different management practices, or the options for increasing productivity? While the understandable goal is to expand and intensify farming operations to keep up with demand, stakeholders and investors need information on the relationship between these activities, the subsequent natural capital impacts, and the dependencies on natural capital to make informed decisions.
Numerous international and national bodies are working on placing monetary values on natural capital to factor in the effect caused by businesses, and to better support their strategic decision-making. There is the Natural Capital Coalition (NCC) in the private sector, the Wealth Accounting and the Valuation of Ecosystem Services (WAVES) partnership in the public sector, and the Natural Capital Declaration (NCD) in the finance sector. All have been formed specifically to address the increased risk posed by the deteriorating supply-demand balance for natural capital flows.
One such initiative gaining traction within the private sector and being developed by the NCC with support from the International Finance Corporation (IFC), the International Union for the Conservation of Nature (IUCN), and The World Bank, is the Natural Capital Protocol. This is a framework designed to help generate trusted, credible, and actionable information that business managers need to inform decisions. Until now, natural capital has for the most part been excluded from decisions, and when it is included it has been largely inconsistent, open to interpretation, or limited to moral arguments. The Protocol responds by offering a standardized framework to identify, measure, and value impacts and dependencies on natural capital.
Another potential solution is The Natural Capital Exchange (NCAPX), established by the company SilviaTerra in 2019. A pilot program was launched in Pennsylvania in which 21 landowners representing about 68,000 acres were enrolled and contracted to deliver about 300,000 ton-years of carbon via harvest deferral. The expansion of the market to 11 states in the U.S. South will begin in 2021. According to the company’s website, NCAPX currently provides a marketplace for forest carbon payments using advanced precision mapping technology. NCAPX is starting with carbon, but plans to include markets for biodiversity, fire risk, and other forest benefits.
In the agriculture sector, the 2015 FOA report found that agroecological production has been identified as one of the ways to regenerate agroecosystems and reverse the damage caused by extractive production activities. Specific focus should be on the farm’s operational impacts. In particular, the effect of water pollution from fertilizer application, and the loss of ecosystem services from land use change should be addressed. For instance, it was found that maize production in Germany has a particularly high operational impact due to the leaching and subsequent eutrophication of fertilizers in water bodies. Businesses and other stakeholders can begin to look at the application rates of fertilizers, the method of application, and the drivers for this. This can include analyzing the effects of subsidies provided by the Common Agricultural Policy (CAP) on fertilizer application, or the cost and sourcing of fertilizers.
The key to solving these environmental challenges is to measure not just the total value of natural assets, but also how these benefits are distributed, how much goes to each stakeholder group, and the extent to which each group depends on them. When it is proven that both the ecological and human benefits are beneficial to the majority, it will succeed.
ABOUT THE AUTHOR:
Stephanie Huff is a 4th-generation farm owner with more than 20 years of professional experience as a marketing and communications executive. She has worked in an array of industries, but particularly enjoys combining her experience in agriculture, finance, and consumer packaged goods to help identify and communicate growing trends in the ag research and sustainability sectors. She earned a Bachelor of Journalism from the University of Missouri-Columbia and a Master of International Business at Saint Louis University. She is currently pursuing coursework in Sustainability at Washington University and previously received a certificate in Applied Ethanol Process Systems and Alternative Fuels from the National Corn-to-Ethanol Research Center at Southern Illinois University in Edwardsville.
* All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, or parent company HighQuest Group.