A look at the Natural Capital Protocol

A framework for understanding a company's dependency and impact on nature offers finance departments new strategic insight into risk and opportunity.
A look at the Natural Capital Protocol

The impact of climate is becoming an urgent business concern. Extreme weather events, biodiversity loss and the collapse of ecosystems, natural disasters, and policy failures to confront climate change dominated the World Economic Forum's recent Global Risks 2019 report. The WEF estimates the value of "ecosystem services" — the water, air, soil, and pollination on which human activity depends — at $125 trillion a year, nearly two-thirds higher than global GDP, and says that many of those systems are becoming "increasingly fragile". Some impacts are already showing up for businesses.

Supply chain disruptions due to environmental disasters are up 29% since 2012, according to the WEF. As environmental risks grow, the "impact on global value chains is likely to intensify", and "it will become increasingly difficult to treat those risks as externalities that can be ignored or shipped out", according to the WEF.

The increasing complexity and interdependence of the global system is adding opacity to risk management, and unseen risks ripple throughout the global supply chain. Natural capital is a significant part of that risk landscape, and, increasingly, it is up to finance to assess that risk.

Some organisations are starting to assess their dependencies and impacts on natural capital to make financial decisions.

In 2015, Dow Chemical announced that the company had developed an assessment tool to "identify and incorporate the value of nature into business decision making". Unilever has developed a set of natural capital assessment tools as part of its Sustainable Living Plan. French asset management company BNP Paribas Asset Management has started evaluating natural capital dependencies and risks in its investment decisions.

But the bigger benefit of natural capital assessments may not necessarily show up on the balance sheet but in a deeper discovery — and understanding — of hidden risks and opportunities lurking in a business's operating environment. That knowledge may also offer companies a competitive advantage while protecting the bottom line. When finance professionals see their company's dependencies, they can better invest to protect the business foundations of a company.

But if management accountants are to start taking on natural capital accounting practices, whether it is out of a concern for the environment or motivated by financial results, they'll need to answer two questions: Why should they consider nature in the business decision process, and how does that work?

A tool for decision-making

Natural capital is a significant part of many business models, and management accountants need to start considering it as part of their strategic mandate, according to Jeremy Osborn, FCMA, CGMA, D.Phil., director of business and stakeholder engagement at the International Integrated Reporting Council.

"Natural capital is arguably the most significant capital because if we diminish our stocks of natural capital, there is nothing on which to base economic value at the most fundamental level," he said.

However, accounting for natural capital has not generally been part of a company's long-term management strategy or a management accountant's job. To start including nature into the business process, companies and accountants will need new means to do so.

One of those means is an open source accounting framework called the Natural Capital Protocol (available at, developed in 2015 by the Natural Capital Coalition, a collaboration of businesses, academics, professionals, and organisations, including CIMA.

The Natural Capital Protocol is the world's first set of common standards for supporting strategic decision-making around a sustainable relationship with natural capital. The protocol lays out the foundations of a natural capital accounting system that has the potential to expand the role of management accountants beyond traditional balance sheets.

"It is part of the evolutionary change in the role of chartered management accountants in the business community to take on concepts like natural capital accounting," Osborn said. "I firmly believe that accountants, particularly management accountants, have got the right skillset to play a significant role because they are the ones helping to manage their business from the inside."

Risk and opportunity

Because it is nearly impossible to put a consistent price tag on nature — the value of a tree is very different for a lumberjack than it is for a fisherman — the Natural Capital Protocol doesn't focus on valuation.

Rather, the Natural Capital Protocol is a decision-making framework that offers finance professionals a more nuanced, holistic understanding of the risks and opportunities hidden in an increasingly complex world.

"It's still very experimental, and it is primarily for decision-making," said Eva Zabey, executive director of Business for Nature, a global coalition aiming to unify the business voice to call for action to reverse nature loss. Zabey led the development of the Natural Capital Protocol for the Natural Capital Coalition, when she was at the World Business Council for Sustainable Development (WBCSD), an organisation of CEOs advocating for sustainability.

"It's not a reporting standard. This is a new additional framework that can be used to help make better decisions with more information about potential risks and opportunities, or how big those risks and opportunities are," she said.

Impacts and dependencies

For finance professionals who want to start looking at the role that natural capital plays in their businesses, and the risks and opportunities it presents, the first step is to frame their objectives by considering a "wide range of impacts and dependencies that your business has perhaps not considered before but which may be relevant to your business and stakeholders", according to the Natural Capital Protocol.

"What the protocol does is, fundamentally, make you take a long look at your business model," said Mark Gough, executive director of the Natural Capital Coalition. "It asks questions about where your resources come from. One of the things that often happens is that people pick up the protocol and realise they really don't understand their business model as well as they thought they did." (See the sidebar, "Lessons From a Natural Capital Case Study".)

Through this initial phase of framing, by thinking deeply about how the company interacts with nature, finance departments can start to better understand where a company's natural dependencies and risks lie, both internally and in the supply chain.

Once a finance department has considered the widest range of dependencies and impacts, the protocol then moves to a scope stage in which companies can start deciding on the most relevant of those. Finance professionals have to define the specific audience for the assessment, articulate the objective, determine the limits and focus of the scope, and start technical and planning issues, according to the protocol.

After the assessment has been scoped and the objectives determined, it's on to perhaps the trickiest part of the process: measuring and valuing the dependencies and impacts. The protocol suggests paying particularly close attention to "changes in the state and trends of the natural capital related to your business impacts and dependencies". There's no one right way to do that, as there are no standardised measurements or quantifications within the protocol.

"It can be very confusing, especially for finance people, because we're borrowing financial terms without using them in the exact same way," Zabey said. But, she added, "They can help in saying, relatively speaking, this impact outweighs this impact."

But it's not just about finding a financial value, according to Osborn, who also helped draft and test the protocol. Rather, it's about gaining insight that increases the value that management accountants can bring to the organisation.

"It creates an opportunity for the management accountants and the finance team within an organisation to work with those with whom they may not have worked before, like the sustainability team, around business analysis and to work out how to integrate the natural capital assessment into financial assessment," he said.

The future of natural capital accounting

Natural capital accounting is a way for companies to shift their thinking about value — how they create value, what's valuable to them, and where they get their value from — and the finance department is best equipped to assess these questions.

"It has to sit in finance because finance are the people within businesses that hold that information," said the Natural Capital Coalition's Gough. "The CFO is the obvious champion for this within a business."

No matter how a company or a finance department decides to investigate the relationship with natural capital, the exercise will prove valuable, according to Zabey. Natural capital accounting may be more valuable in the learning than in the final spreadsheet.

"Somehow we've been using overcomplicated and technical terms to basically say it's just going to be better business to have the right information, to understand your risks, and to think about these opportunities of what is the best investment strategy," she said.

Lessons from a natural capital case study

By Stephen Jollands, Ph.D.; John Burns; and Markus Milne, D.Com.

In April 2019, CIMA, with the University of Exeter and the University of Canterbury, released a study called Natural Capital Accounting: Revisiting the Elephant in the Boardroom. The following is an excerpt of a case study of Forest Enterprise England, one of the first practical adopters of natural capital accounting (NCA), featured in the CIMA study. The agency is now known as Forestry England.

The natural world is extremely complex and highly interconnected, which demands that those undertaking NCA have expertise and in-depth knowledge that is not readily available in most organisations, our research indicates.

In the case of [Forestry England] the organisation employs ecologists in the normal course of its operations. Moreover, these ecologists provided fundamental expertise and knowledge. It was also evident that the management accountants involved in producing [Forestry England’s] NCA significantly expanded their own knowledge and expertise through their interactions with the ecologists during the NCA process. This allowed them to better understand the stewardship issues that related to [Forestry England’s] management of the natural resources under its control. This in turn allowed them to better engage with the process of demonstrating to the government, and other stakeholders, the wider value that the organisation produced for society.

This highlights, particularly given the threat of privatisation in the past, how NCA has the potential to be utilised in societal and political debates and discussions over what values we want our organisations to be focusing on.

The above leads to the following three main points that any management accountant needs to be aware of before implementing NCA:

1. NCA requires in-depth knowledge and skills of the natural world, which are not always readily available within an organisation. These may need to be drawn in from external scientists and experts.

2. NCA may produce major benefits, not from the outcome of the NCA calculations or values generated, but as a result of the learning that is required to be able to undertake the process of making the NCA calculation.

3. While NCA may be beneficial in opening up debate as to the wider value an organisation provides, it also may require a focus on issues and challenges that are beyond the organisation’s traditional remit and comfort zone. NCA clearly has the potential to stretch the conventional accounting entity boundary, something that may no longer be based on legal, ownership, and transaction rules but rather scientific understandings of ecology.

Stephen Jollands, Ph.D., is a senior lecturer in accounting, and John Burns is a professor of management and accountancy at the University of Exeter in the UK. Markus Milne, D.Com., is a professor of accounting at the University of Canterbury in New Zealand.

Drew Adamek is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact him at