Introducing the Natural Capital Practice
Article written by the Natural Capital team at ThirdWay Partners.
Our Natural Capital Practice plays an important role in financing the transition to a low-carbon economy and helps our clients navigate the risks and opportunities associated with climate change and biodiversity. At ThirdWay Partners, we provide a range of advisory solutions aimed at helping clients achieve their impact objectives while also generating financial returns. These solutions are designed to help clients integrate impact considerations into their investment decision-making processes, measure and manage impact performance, and report on impact outcomes to stakeholders.
Natural Capital
We realise that the world of natural capital can be unclear and so it can be defined, ‘as the world’s stock of renewable and non-renewable natural resources which include soil, air, water, plants, animals, and minerals’[1]. The natural capital field was born out of the realisation that all other forms of capital (human, social and produced capital) need and directly impact the natural world.
The stocks of natural capital provide ecosystem services across the below four main classifications:
Provisioning services: These are the direct benefits provided by natural capital, such as food, water, and fiber. For example, forests provide timber for construction, and crops provide food for humans and animals.
Regulating services: These services involve the ways in which natural systems regulate environmental conditions. For example, wetlands filter pollutants from water and reduce the impacts of floods, or pollination by bees is necessary for crop production.
Supporting services: These services are necessary for the production of all other ecosystem services. For example, photosynthesis, nutrient cycling, and soil formation.
Cultural services: These services are non-material benefits provided by nature, such as spiritual, recreational, and aesthetic values. For example, natural landscapes and wildlife can provide opportunities for outdoor recreation and inspiration.
Clearly, the combined ecosystem services form the basis of life and provides the resources and services which are critical to our continued existence. Over utilisation of natural capital stocks, adverse climatic conditions all have negative consequences which is unstainable.
“What is not defined cannot be measured. What is not measured, cannot be improved. What is not improved, is always degraded” - William Thomson Kelvin.
The lack of ascribed value to natural capital has resulted in the mismanagement of these critical resources, leading to significant environmental degradation and economic losses. For decades, natural resources have been viewed as limitless, and the true value of ecosystem services has been neglected in economic decision-making. A good example is the value of bee pollination, the contributions of bees to our ecosystem are not typically monetarily compensated, yet US$ 235 billion – US$ 577 billion – annual value of global crops are directly affected by pollinators[2]. Unfortunately, global bee populations are dwindling due to habitat loss, pesticide use, and various diseases. This decline will have negative consequences for human beings, such as lower crop yields and increased food prices. We have already witnessed this around the world.
Furthermore, human activities such as deforestation, overfishing, pollution, and habitat loss, are jeopardising the delivery of ecosystem services, and threatening the sustainability ecosystems as per figure 1 below.
Figure 1: Source: WEF New Nature Economy Series 2020
The loss of the above critical ecosystem services can lead to significant economic losses of up to US$ 10 trillion in global GDP by 2050[3] from the nature market and further effect US$ 44 trillion of economic value generation – close to half of the world’s total GDP – moderately or highly dependent on nature and its services[4].
Over the last decade, natural capital has gained tremendous traction. IUCN founded the natural capital coalition which later rebranded to coalition of capitals. The collaborative forum is made up of public, private, academia and civil society bodies have provided a definition, scope, and measurements tools to help in systemic measurement and reporting of natural capital.
Data can play a role in helping to communicate the value created and the risk of in action. By ascribing value to natural capital, economic decision-making can start taking into account the true cost of resource depletion and environmental degradation. This can be achieved through the use of tools such as ecosystem services assessments, natural capital accounting, and carbon and biodiversity market mechanisms.
The drivers behind Natural Capital include consumer awareness, increased availability of finance, and supportive regulatory and governance frameworks.
With a growing consumer consciousness on the importance of protecting our environment, companies that prioritise natural capital are likely to reap the benefits, as consumers increasingly seek out environmentally conscious offerings. These first movers could even receive a "green premium" or "greenium" for their products or services.
A recent survey has shown that a significant majority of global consumers, 67 percent[5], consider environmental health and their impact on the planet to be important factors when making purchasing decisions. As consumer consciousness continues to grow, companies that prioritise natural capital and sustainable practices are well-positioned to capture a larger market share and secure long-term success.
Increased access to finance as more investors realise the importance of nature outcomes. The increasing volume of performance-linked financing, including debt-for-nature swaps, is now being used to fund nature outcomes. According to recent reports, these swaps restructure an average of US$250 million in debt annually, generating approximately US$160 million in conservation payments. Additionally, in 2021, nearly US$150 billion in bonds and loans were issued in nature-related sectors, which yielded an estimated US$430 million in foregone yields[6]. Moreover, 126 financial institutions managing more than USD 20.5 trillion[7] in assets have committed to setting targets on their impacts on nature. The intention is to finance projects that align with their commitments, encouraging the implementation of projects that promote natural capital conservation. The extent to which these commitments will translate into concrete action remains to be seen. If successful, such efforts have the potential to increase financing and stimulate greater investment in natural capital.
Supportive regulation and governance frameworks such as the agreements made in CoP 22 and the Paris Agreement that aim to reduce global warming to 1.5°C. More recently, the Kunming Montreal Biodiversity Framework of 2022 and the High Seas Treaty of 2023 have also been signed. These frameworks and commitments aim to reduce greenhouse gas emissions and protect and increase biodiversity. To encourage the required behavior changes, various incentives and disincentives have been put in place to promote avoided emissions, increased sequestration, and the protection of biodiversity loss on land and in water. Resourcing, capacity building and commitment will be required to bridge the gap between policy and implementation and the gap between policy and implementation.
As the global community seeks to navigate the complexities of sustainable development, it is becoming increasingly evident that the health of our ecosystems and the vitality of our economies are definitively linked. At the core of this intrinsic relationship is the concept of natural capital. Yet, for many, this area of investment is new, and yet for the future of the planet is required to be nurtured and embraced. We are looking to demystify the concept of natural capital, defining its importance, and outlining the existing market mechanisms that enhance the development of natural capital and the abatement of further losses.
[1] Capital coalition website
[2] FAO: Pollinators vital to our food supply under threat
[3]UNEP: Ecosystem and species restoration to benefit people and the planet 2022
[4] Nature risk rising: Why the crisis engulfing nature matters for business and the economy
[5] Neilsen IQ 2021
[6]Nature Finance: Global Nature Markets Landscaping Study
[7]Finance for biodiversity 2023