How Natural Capital Is Redefining Success

As far as we've come in redefining corporate governance and success toward the triple bottom line, we still have a distance to go before there is real specificity and widespread agreement among companies and consumers about what terms like "natural capital" or even "sustainability" mean.

This can be seen as a shortcoming or a vacuum, but it's also a huge opportunity for smart businesses to take up. The moment is ripe for disruption; potentially revolutionary understandings of businesses' goals and metrics are increasingly coming into focus. More than ever, consumers want to live meaningfully and to engage with brands that have a purpose. That's galvanizing companies to drill down on defining their social and environmental purpose today, and anticipating how it will evolve in the future.

One key case in point is how companies and other economic stakeholders are coming to understand and account for "natural capital." It's the idea that natural resources and healthy ecosystems are not "externalities" separate from capital, but should be considered and valued as capital assets in their own right -- as renewable stocks of resources for production, and reservoirs of valuable services like controlling erosion, filtering water, sequestering carbon, etc. Valuing them appropriately is the way to make sure we don't squander them.

This has been recognized for a long time, at least conceptually. In a 1937 speech FDR said, "...the natural resources of our land -- our permanent capital -- are being converted into nominal evidences of wealth at a faster rate than our real wealth is being replaced.... That is the unbalanced budget that is most serious." The term "natural capital" itself goes back at least to E. F Schumacher's 1973 classic Small Is Beautiful. As the term entered the lexicon, the damage to natural capital was just beginning. For example since 1970, the human population has doubled, while the population of other vertebrate species declined by half.

But in practice, accounting for the impact of natural capital on a company's balance sheet is a recent and still controversial development. Many contemporary economists, including Thomas Piketty in his big book Capital in the Twenty-First Century, hardly deal with natural capital at all, and those who do disagree mightily on how to value it.

Many corporate boards are seeking to control or optimize their environmental impacts. But they are largely taking a linear, risk-based, individual approach. They've recognized that working to prevent or cushion environmental disruptions by making their particular supply chains more sustainable is a legitimate, if not a primary, way to insulate their company and its shareholders from shocks.

But there's also evidence of an emerging mentality that sees natural capital as central to the value that business creates. Instead of just amassing what FDR called "nominal" wealth for shareholders, a growing number of companies see themselves as responsible not just to shareholders, but to a global "ecosystem" of which they are a part, along with staff, suppliers (like farmers or foresters), stakeholders in the land they're working, and consumers who buy what they produce. Success in this emergent view means creating social benefits and net positive impacts across the whole ecosystem.

Natural capital accounting is therefore a hot topic among forward-thinking companies, because it could be a key way to pursue and measure this kind of success. I recently attended a summit on natural capital at London's RSA, where the Rainforest Alliance convened corporate leaders for a dialog on natural capital as a guiding principle for business. We asked such questions as: Is there a reliable, scalable method for natural capital accounting, and will it help companies become more sustainable? Is there a risk that putting a price on a forest or a river or a viewshed could make them more vulnerable to exploitation as they're reduced to figures on a balance sheet and as scarcity drives prices up? Will natural capital accounting help farmers and other producers improve their livelihoods and gain better returns for the value they create? Will it lead to fairer, higher prices and a more secure supply?

The answers aren't obvious or universally agreed upon, but the discussion is in full swing, and fascinating. In my next blog, I'll summarize some of the high points of where this discourse is now, where it's headed, and the light it sheds on the fast-emerging future of the global economy.

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