BSI readies natural capital accounting standard as investors seek impact 'baseline'

Channels: ESG, ESG Data, IMPACT, Natural Capital

Companies: NatureVest, EcoEnterprises, HSBC Pollination Climate Asset Management, Eftec

People: Ece Özdemiroğlu, Tammy Newmark, Charlotte Kaiser, Martin Berg, Wijnand Broer

A forthcoming accounting standard for natural capital could help investors grappling with the problem of assigning a financial value to preservation and improvement of nature, according to speakers at Environmental Finance's conference on the theme.

The British Standards Institution (BSI) is expected to publish in May a standard on natural capital accounting, the Environmental Finance Natural Capital Investment conference heard.

Draft standard BS8632 aims to "mimic traditional financial accounting structures," said Ece Özdemiroğlu, founding director of London-based consultancy eftec.Ece Özdemiroğlu

"We already have environmental Profit and Loss accounts ... but in this standard we're also trying to create natural capital balance sheets for corporations or investments. We're trying to see what state those assets are in – what benefits they provide to the business, to the investors, but also to the rest of the society. [We aim to] map beneficiaries ... and to show that we are aware of the multiple benefits and we can quantify them, and we can value them."

A consultation on the standard closed in January, ahead of publication this year. Özdemiroğlu is among a group of experts that have advised BSI on developing the standard.

The standard will "enable organisations to understand their impacts and dependencies [on] natural capital assets while facilitating comparison of natural capital accounting processes between organisations," according to a blog post by Stephanie Hime and Marta Santamaria, who are members of the BSI committee.

It links to many of the frameworks that are already available and under development, and is aligned with the Natural Capital Protocol, Hime and Santamaria write.

The standard will add to a quickly growing number of private sector efforts to account for business and investment impacts on natural capital – a fact that reflects accelerating interest in the area as organisations look to broaden their understanding of impact, beyond climate. 

These efforts include the Partnership on Biodiversity Accounting Financials (PBAF), which was launched in 2019 by ASN Bank and fellow Dutch financial institutions Actiam, Triple Jump, Triodos, Robeco and FMO.

Wijnand BroerWijnand Broer, a partner at CREM consultancy and a member of the PBAF, told the conference the assessment is a work in progress: "We know that we're probably not [entirely] accurate in our calculations, but we are happy as long as we're sure that we're accurate enough that we're going in the right direction. Don't let perfect be the enemy of the good! We can improve further over the next few years."

The PBAF has already devised a biodiversity footprinting model for sovereign bonds, listed equity, project financing and mortgages. It is working on aligning the footprinting model with the European Commission's sustainability taxonomy and the proposals from the nascent Task Force on Nature-related Financial Disclosures (TNFD).

"The next step [for the PBAF] will be to also look at dependencies on ecosystem services but also impacts on ecosystem services," he said.

Broer said it is important to ensure assessments of biodiversity impact deliver comparable results, and that it will be crucial to arrive at "benchmark" against which impact can be judged.

Martin Berg, a partner at Pollination Group and head of the Natural Capital Impact Strategy at HSBC Pollination Climate Asset Management, agreed: "We at HSBC Pollination Climate Asset Management are doing a lot of thinking on how you prove that impact has been achieved. It requires a baseline, and this is something that needs to be established. So far, no initiative has developed this baseline [for natural capital]."

HSBC Pollination is part of a coalition aiming to invest $10 billion in natural capital by next year.

"We know there's economic value in a lot of [natural capital] projects, but it's often very difficult to translate this into financial return. That is really the crux of the issue when we're talking about natural capital; we could do so much more, if we had been a measure to translate that."

Charlotte Kaiser, managing director at NatureVest, the investing division of the Nature Conservancy, said a good example of how impact investors can identify the financial value of natural capital investments is the firm's $130 million Cumberland Forest Fund, which acquired 253,000 acres (102,000 hectares) of working forestland across the US Central Appalachians.

The fund seeks to generate "competitive" risk-adjusted financial returns for its investors with revenues from sustainable timber harvesting and carbon capture, monetised through carbon credits.

"It's not always so straightforward to capture the financial value of natural capital ... There's a demand for precision, which I don't think we can meet at this time. At the [individual] deal level you can see that precise impact but it's a little more challenging to roll that up to portfolio level."

NatureVest manages about $1.3 billion in assets. It invests in areas including sustainable fisheries, forestry and regenerative agriculture.

Tammy Newmark, managing partner and CEO of EcoEnterprises Fund, which has about $150 million in assets under management and invests across Latin America, said because the firm has been investing for about 20 years, it has needed to be a "finance first rather than impact first, investor".

This means EcoEnterprises has always had to show it can deliver financial returns that are similar to those generally achieved by conventional private equity investors in the region, she said.

"You need to identify companies that could make money, and that could prove the concept [to attract more investment into the space]. What we try to do is build businesses and then bundle [investments] to really show the ability to scale. The small to medium size companies we have invested in over the years have achieved $2 billion in sales, conserved 10 million acres [of forest], and involved 50,000 suppliers."

The EcoEnterprises Fund invests in areas including alternative proteins, investments associated with promoting a circular economy, and "intellectual property associated with biodiversity", Newmark said.

To watch this session on demand register for the Natural Capital Investment Conference here.

Michael Hurley