Natural Capital Committee Developing Corporate Natural Capital Accounts Colin Mayer 1

Independent advisory committee to the Government, reporting to the Economic Affairs Committee chaired by the Chancellor. Provides advice in annual State of Natural Capital reports. Key aim is to incorporate natural capital into decision making at both the public and private sector levels, hence our work on corporate natural capital accounting. 2 The Natural Capital Committee Natural Capital Committee

Conventional approach is to value natural capital services, e.g., carbon captured by trees. Starting point is physical assessment of natural capital assets (trees, rivers, soils). Value these services using market prices, revealed preferences such as hedonic prices and stated preferences. Then discount the values to the present at an appropriate rate – social discount rate, market rate, time preference rate. 3 Conventional, e.g. SEEA, Approach Natural Capital Committee

High margins of error on imputed values. Sensitivity to discount rates. Open ended nature of assets – mountains, sunshine. Double counting – much is included in land values. 4 Issues with the Conventional Approach Natural Capital Committee

Scale of natural capital. Comparisons with material, human, social capital. Most valuable forms of natural capital. Where they are located. => These are all important issues but none of these establish whether natural capital is being preserved or protected. 5 What Questions Does Conventional Approach Answer? Natural Capital Committee

An alternative approach involves determining the cost of maintaining natural capital. What is the cost of maintaining the existing services derived from natural capital. The maintenance charge is the cost of being able to sustain a profile of natural capital services. Equivalent to a landowner having to account for the deterioration of the properties from which they derive rents in arriving at an income net of maintenance costs. Going forward an obligation to maintain the asset will require a stream of maintenance charges that create a liability associated with the asset. 6 The Cost Approach Natural Capital Committee

7 The NCC’s CNCA Framework Natural Capital Committee Documents both assets and liabilities in a balance sheet format that extends traditional financial reporting to include natural capital. Forward looking – recognises long term costs and benefits of maintenance. Asset register – includes data on the quantity and condition of natural capital, and then tracks benefit flows and their values. Reports changes in natural capital assets relative to a baseline. Reports both the private value and external benefits from natural capital.

Over the course of 2014: 8 What We Have Done Natural Capital Committee Developed a generic corporate natural capital accounting (CNCA) framework. Engaged with a wider group of organisations to assess the framework: Piloted it with: Lafarge Tarmac; National Trust The Crown Estate; United Utilities. Learned lessons to improve the framework and produce generic guidelines for other organisations to follow. GovernmentNGOs AcademicsAccounting bodies PLCsLandowners

CNCA assists with determining the following with relation to an organisation’s natural capital: Their value to an organisation; The cost of maintaining them; Changes in their condition over time; Risks from depleting them; Opportunities from utilising them; Returns from investing in them; Their value to society - stakeholders and communities. 9 Benefits of CNCA Natural Capital Committee

Organisations that: Own, are responsible for, or rely on significant stocks of natural capital; Have an explicit or implied responsibility to maintain their natural assets intact; See potential benefits from enhancing or better utilising their natural assets; Seek to reduce operational risks through improved management of their natural assets. 10 Who is the Audience for CNCA? Natural Capital Committee

Promote piloting of CNCA by corporates, landowners and public authorities; Encourage exchange of ideas and experience; Identify tools that facilitate its adoption; Amend framework in light of experience; Relate CNCA to national accounting for natural capital. 11 Next Steps Natural Capital Committee