As highlighted in the Sustainability and business — the call to action; build back better report, AICPA® and CIMA® started a programme of thought leadership to explore accountancy and sustainability. This is part of a series of briefs exploring the topic of sustainability, business, and the finance professional’s key role. These briefs will help organisations consider the sustainability issues, how to integrate them into their long-term decision-making, and how to incorporate these issues into internal and external reporting.
Although this report focuses on accounting for nature, we recognise that a three-fold crises of, a climate emergency, dramatic nature loss and rising social inequality affect the planet. Addressing this will require systems thinking across the three crises as companies reallocate resources, reorientate production and reimagine their business models. It is the poorest in the world that are disproportionately affected by and impacted by climate change and nature loss. Our goal must be to make it possible for low-income people to climb a ladder without making climate change and nature loss worse.
Nature is everyone’s business. Every business relies on nature for resources and ecosystem services such as water, food, fiber, minerals, pollination of crops, water filtration and climate regulation in their operations, supply chains and for their employees and customers. Protecting nature within these ecosystems is foundational and critical to long-term human well-being, healthy societies and resilient economies.1
GAA — A call to action in response to the nature crisis
This accounting for nature report is designed to help finance professionals build their nature literacy so they can lead and support their organisations’, firms’ and clients’ journeys to adapt business models and reduced their impact on biodiversity in the global race to be nature positive. Finance professionals are ideally placed with the skill sets and knowledge to make a difference. These include insights in organisational governance, strategy, risk management and performance (through metrics and targets), to support nature-positive decision-making, built upon the skills of business analysis, and assurance of both financial and non-financial data. However, a wider understanding of the natural capital will require a rethinking and a critical awareness of impacts on global economic systems and organisational business models.
Upfront, a health warning. This is going to be messy. Accounting for nature is not a quick tick-box exercise in a global goal to reverse nature loss. Given the complexity of the task ahead for society, governments, organisations, and individuals, quick-fix solutions that fail to acknowledge the interconnectedness across the three crises could worsen things. Nature loss exhibits the characteristics of what the authors Rittel and Webber called ‘wicked problems’.2
The characteristics of ‘wicked problems’ include,
Difficult to formulate.
It is never clear when a solution has been reached.
They don’t have true-or-false solutions, only good or bad, according to the perspective taken.
A solution will have long drawn out consequences that need to be considered in evaluating it.
An attempted solution will change a wicked problem so it is difficult to learn from trial and error.
There will always be untried solutions that might have been better.
All wicked problems are essentially unique; there are no classes of wicked problems to which similar solutions can be applied.
They have multiple, interdependent causes.
There are lots of explanations for any wicked problems, depending on the point of view.
Solutions have consequences for which the decision-makers have responsibility.3
In March 2022, AICPA & CIMA signed the Global Accounting Alliance’s (GAA) call to action on nature for the accountancy profession. The call highlights the vital role professional accountants play and should commit, to helping reverse the process of nature loss by,
Understanding how their organisations and clients impact and rely on nature.
Providing sound advice and services that contribute to an organisation’s positive effect on nature.
Providing relevant and meaningful decision-making information supporting investment that protects and restores nature.
Actively supporting the alignment of investment and expenditure flows to nature-positive outcomes.
Contributing to disclosure on biodiversity-related risks and impacts.
Contributing to the efforts of an organisation to innovate and scale up products and technologies with a lower impact on nature.4
In December 2022, 195 countries came together in Montreal, Canada, for COP15 and agreed a new set of global goals to protect and restore nature by 2050: the Kunming-Montreal Global Biodiversity Framework (GBF). These goals will need to be at the heart of and driving an organisation’s accounting for nature journey.
Why is accounting
for nature needed?
The science exploring the impact of nature and biodiversity loss
Founded in 2012, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) was established to provide the bridge between science and policy on issues of biodiversity and ecosystem services.
In 2019, IPBES published, ‘The Global Assessment Report on Biodiversity and Ecosystem Services’6 It is a stark read with a key message,’ multiple human drivers have significantly altered nature across most of the globe, with the great majority of indicators of ecosystem and biodiversity showing rapid decline’.7
The rise in monoculture production is also addressed as local varieties disappear. ‘This loss of diversity, including genetic diversity, poses a serious risk to global food security by undermining the resilience of many agricultural systems to threats such as pests, pathogens and climate change.’8
In September 2020, the Convention on Biological Diversity (CBD) published the fifth edition of the UN’s Global Biodiversity Outlook Report. The report, providing an authoritative overview of the state of nature worldwide, noted depressingly that none of the 20 Aicihi biodiversity targets set in 2010 had been achieved.9 Six of the objectives were deemed to have been ‘partially achieved’.
Growing thinking around the interconnectedness of climate change and biodiversity led to IPBES and the International Panel on Climate Change (IPPC) to collaborate through a co-sponsored workshop approach, in December 2020. Together, they acknowledge,
Climate change exacerbates risks to biodiversity and natural and managed habitats; at the same time, natural and managed ecosystems and their biodiversity play a key role in the fluxes of greenhouse gases, as well as in supporting climate adaptation.10
For organisations, a systems thinking approach to both accounting for carbon and nature is likely to become the norm.
Growth or health? — The Economics of Biodiversity: the Dasgupta Review
Accounting for nature, allows organisations to stop and reflect. In this reflection, it asks us to broaden our thinking on measurement and modifying our focus beyond growth.
Traditionally, organisations have been focused on growth and maximising profit. These lead to business models based on wealth extraction, where nature capital has been exploited. In turn, countries then narrowly focus their success through Gross Domestic Product (GDP). Kate Raworth, economist and author, said it drives the wrong behaviour, ‘Growth is the wrong thing to get focused on. It’s the wrong tug of war. When economies go for growth as the goal, the health of communities and the living planet become the collateral damage’.11
An independent review, which the UK HM Treasury commissioned, the Dasgupta Review challenged the global obsession with GDP.12 Led by Professor Sir Partha Dasgupta, The Economics of Biodiversity, published in 2021, called for changes in the way we think, act and measure economic success. By doing this and measuring economic success differently, the report concludes, it will enhance and protect the natural world. In an interview, Dasgupta explained,
The accounting methods that we now have in place are completely out of kilter with what we are discussing, because natural capital doesn't even enter into the national accounts of national economies.
We estimate GDP. But GDP doesn't measure the depreciation of nature, that goes hand in hand with the growth of national income. The accounting system needs to recognise that nature is an asset.13
Accounting for nature forces us to move our attention from wealth extraction to wealth creation. It moves measurement from a pure focus on growth measures to consider and measure the health of the natural ecosystems organisations, and countries that deal with the impacts.
Finance function and finance professionals have a crucial role to play in helping organisations and global financial systems shift their course to a nature-positive mindset.
World Economic Forum (WEF) — global risks and nature
The impacts of nature loss should be top of mind when thinking about global risks. In the World Economic Forum’s (WEF) Global Risk Report 2022, four of the top long-term global risks over the next five to 10 years are environmental, directly linked to nature.
3rd Natural disasters and extreme weather events
4th Biodiversity loss and ecosystem collapse
6th Nature resource crises
10th Large-scale environmental damage incidents14
It is also worth noting that the societal risks at 5th — 'involuntary migration', and, 7th — ‘social cohesion erosion’ will increase in their severity if risks linked to nature are not mitigated.
With all these global risks having the highest potential to severely damage societies, economies, and planet, they must certainly be integrated into an organisation’s Enterprise Risk Management (ERM) system and processes as part of an organisation’s accounting for nature activities.
The unintended consequences of our actions on nature
If organisations don’t have sight of their impact on nature, or fail to build accounting for nature in their decision-making processes, the resulting operational activity can have unintended consequences for the entity and the ecosystem within it sits. The following are three examples demonstrate that a narrow focus on product or service efficiency without understanding nature and biodiversity impacts can lead to a much-wider unintended consequence. These consequences not only impact the organisation, but also the wider stakeholder community and biodiversity.
Golden eagles and organochlorine
In the Lake District, United Kingdom, farmers traditionally used organochlorine chemicals. These were primarily used in sheep dipping to protect their flocks against insect pests, between the 1940s to the 1960s. It was only when golden eagles were reintroduced to the area in the 1960s, after they had been eradicated in England by the Victorians, that the unintended consequences of the chemicals in the ecosystem were observed. The author, Lee Schofield, and site manager at the Royal Society for the Protection of Birds (RSPB) Haweswater site, explains,
Sheep would often die whilst grazing out in the fells, and their carcasses made up the bulk of the Haweswater eagles’ diet. And so the noxious organochlorine chemicals in the dips made their way into the eagles’ bodies, weakening would-be mothers and thinning the shells of their eggs.16
The organochlorine chemicals in sheep dips were preventing the Haweswater eagles from reproducing. Once organochlorine dips were banned, the bird recovered and began laying eggs again. Unfortunately, even with this discovery, the last sighting of a wild golden eagle was in the 1990s. Schofield concludes, ‘That the whole of England is incapable of supporting a single pair of golden eagles, where historically there had been hundreds, should be a source of national shame.17
Chicken farming and microscopic algae
So many nutrients are imported into the catchment in the chickens’ feed, then excreted in their droppings, that the soil cannot absorb them … Rain washes the surplus phosphates and nitrates into the river, fertilizing the microscopic algae.18
In the Wye valley, on the Welsh/English borders, the river Wye’s biodiversity is in rapid decline due to an annual explosion of algae. This has been linked to the building of massive chicken barns in the area, that house six million birds. The author, George Monbiot, explores the chain of events,
This algae explosion, through photosynthesizing, then sucks the oxygen out of the River Wye, leading to the asphyxiation of local fish populations. Its density also reduces the amount of light reaching the river bed, killing much of the river plant biodiversity. The unintended consequence of chicken excrement on the River Wye now extends to 110 kilometres of its course.19 Monbiot, notes
No application for a chicken farm had been refused. Worse still, the country councils in England and Wales and the government regulators treated every application as if it existed in isolation, making no attempt to determine what the extra increment of excrement would do to an overloaded river.20
Forestry and the wood wide web
The Canadian Professor of forest ecology, Suzanne Simard, in her research, discovered that trees and plants form a wood wide web of communication using mycorrhiza fungi as an underground network. This wood wide web allows forests of trees and plants to pass information to optimize shared resources and protect themselves against predators. This was at odds with how the foresters of British Columbia managed their woodlands. Simard explained that the prevailing wisdom of the logging companies focused upon, trees competing for resources, and the Darwinian notions around survival of the fittest.
In Western Canada, there was a war, a war on trees. That war was trying to get rid of the native plants. I saw the native plants is necessary in these ecosystems, whereas the foresters were trying to get rid of them because they thought they were competing with the coveted and valuable conifer trees like the Pines and the firs. I went about learning and discovering these [native] trees, that the foresters called weeds, were actually connected to the firs and pines, and that they formed this enormous web below ground, like an Internet. Through that Internet they exchange information and resources like water and nutrients in carbon, and they actually help each other out. The complete opposite of how these foresters were thinking …
Simard’s discovery, of underground mycorrhiza networks, turned forestry efficiency methods of woodland management on their heads. She went on to explain,
Foresters simplified the whole ecosystem into light, water, and nutrients. Everything needs those three things. In this dog, eat, dog world, if shading another tree competing for light. It's that simple. Or if the roots can grow wide, big, and deep they're going to get all the nutrients and water for themselves and grow into big trees. The thinking was that the ecosystem is like a pie, and you want to get the biggest piece of the pie for yourself. That's how foresters viewed ecosystems. Whereas, my view of an ecosystem was, there's all these plants that make the pie bigger, and bigger, and bigger. When they worked together, they actually create more, than just each one as an individual. That completely changes how we see ecosystems, instead of competing for a piece of pie, that's only going to be so big, let's actually create something that's a bigger pie. That's what they [trees and funga] do when they cooperate.21
A greater understanding of the woodland ecosystem replaced efficiency with forest wisdom.
Of course, many times, unintended consequences can also have positive impacts. In India, Pakistan and Bangladesh, the annual activity to irrigate fields is also impacting the farming habits in East Africa. Monbiot explains the impact and highlights global complexity,
The water inadvertently dispatched by farmers in South Asia increases the rainfall in East Africa by up to a millimetre a day. This might not sound like much, but in the arid parts of the region it appears to be crucial to the survival of farmers and herders, and the people they feed. The growing local population may have become dependent on this extra rainfall. The water vapour also reduces temperatures by about half a degree, through evaporation and cloud cover, which could be vital in a place where both people and livestock face severe heat stress. If irrigation in South Asia failed, the consequences could be grave not only locally but also far across the ocean.22
The fragility of this positive consequence for the farmers of East Africa will need to be monitored.
What is accounting
In simple terms, accounting for nature is the process used to measure the impact an organisation has on biodiversity and understand the dependencies for the entity of the natural ecosystem they sit within. This must be considered in the wider context of the planet experiencing dramatic nature loss. Natural capital has traditionally been viewed as a free and unlimited resource, often not reflected in the cost of production, or its impact to the wider stakeholder community rarely accounted for. In many capital allocations and organisational investment decisions investors have ignored nature, and the wider biodiversity issues absent from boardroom decision-making.
Accounting for nature can facilitate the inclusion of environmental resources that are the earth’s natural capital to reflect the true costs of products and services. Directly understanding the material impact of nature on an organisation and the impact of an organisation on nature, not only builds future business resilience, but can also help reverse dramatic nature loss.
The accounting for nature lexicon
In our Environmental Protection Introduction: Putting the E in ESG we summarized some of the aspects of accounting for nature. Included in the summary were concerns about rainforest deforestation and also keystone species such as bees, beavers and hummingbirds, which are critical to the survival of other species in an ecosystem, and especially important to agriculture. We also introduced the concept of ‘movement ecology’, which is the migration of species in response to environmental change.
Upfront, it is important to have a common understanding and definitions of what we mean when using the terms, such as, ‘nature’, ‘biodiversity’ and ‘ecosystem’. The language and terms used are important so that organisations can scope what accounting for nature means for their operations and their wider stakeholder community.
Nature and natural capital
The Oxford English dictionary defines the word ‘nature’ as, ‘all the plants, animals and things that exist in the universe that are not made by people.24 A more common term, in the accounting profession, when thinking about nature, is ‘natural capital’. The IFRS Foundation’s Integrated Reporting <IR> framework defines ‘natural capital’ as,
All renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization. It includes:
- Air, water, land, minerals and forests
- Biodiversity and ecosystem health.25
This is broadly in line with the Capitals Coalition definition of ‘natural capital’ and the combined natural resources of ‘plants, animals air, water, soils and minerals.26
With these definitions, at a basic level, accounting for nature, focuses on an organisation’s impact in the four realms of, land, water, freshwater and atmosphere.27 But also the reverse; the impact of nature, or the lack of natural resources, on an organisation.
The Natural Capital Protocol defines an ecosystem as, ‘A dynamic complex of plants, animals, and microorganisms, and their non-living environment, interacting as a functional unit. Examples include deserts, coral reefs, wetlands, and rainforests.’28 The Canadian Professor of forest ecology, Suzanne Simard, expands on their importance,
Ecosystems are so similar to human societies — they're built on relationships. The stronger those are, the more resilient the system. And since our world's systems are composed of individual organisms, they have the capacity to change. We creatures adapt, our genes evolve, and we can learn from experience. A system is ever-changing because its parts - the trees and fungi and people are constantly responding to one another and to the environment. Our success in coevolution — our success as a productive society — is only as good as the strength of these bonds with other individuals and species. Out of the resulting adaptation and evolution emerge behaviors that help us survive, grow and thrive.29
A simplified definition of biodiversity, from The Economics of Biodiversity: The Dasgupta Review is, ‘The variety of life in all its forms, and at all levels, including genes, species and ecosystems.' 30 This builds on the United Nations’ Convention on Biological Diversity (CBD) definition of:
The variability among living organisms from all sources, including inter alia, terrestrial, marine and other aquatic ecosystems, and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.31
Biodiversity is critical because it represents the foundation of ecosystems that, through the services they provide, affect human well-being. These services that ecosystems provide include:
provisioning services such as food, water, timber and fiber;
regulating services such as the regulation of climate, floods, disease, wastes and water quality;
cultural services such as recreation, aesthetic enjoyment, and spiritual fulfilment; and
supporting services such as soil formation, photosynthesis and nutrient cycling.
Ecosystems that provide these services include unmanaged ecosystems, such as wildlands and nature preserves, or other ‘protected’ areas; they also include managed systems, ranging from farms, croplands, rangelands to aquaculture sites, as well as urban parks and ecosystems.