Natural capital, or the unnatural preoccupations of IFRS

In this space I’ve sometimes commented on initiatives and issues which don’t directly have anything to do with IFRS, the headline topic of this blog, and I suppose the link back to that (because I always feel obliged to make some sort of link) is always pretty much the same: shouldn’t this topic have more to do with IFRS than it actually does? The same will apply in here in briefly addressing the subject of “natural capital,” defined (in one place anyway) as “The stock of renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.” I only recently came across the “Natural Capital Protocol,” a somewhat stunning, if daunting, 136-page publication from a few months ago that sets out “a framework designed to help generate trusted, credible, and actionable information that business managers need to inform decisions.”

As it specifies near the outset: “To value something means to understand what it is worth to us. In the Protocol, valuation refers to the process of estimating the relative importance, worth, or usefulness of natural capital to people, in a particular context. In financial accounting terms, valuation is understood to mean monetization, but in environmental economics and this Protocol, valuation means more than just monetization. It includes qualitative, quantitative, and monetary approaches, or a combination of these.” Still, it’s a little disappointing perhaps to reflect that even with this limitation, the document seems to find little value to draw from the financial accounting field. I mean, shouldn’t we have something to contribute?

We now have a Canadian initiative which seeks to draw on and extend this work – the Natural Capital Lab, convened by CPA Canada and others. Here’s an extract from how it explains what it’s setting out to do:

  • “Natural capital is not a new idea, but the field is fragmented. Important work is being done across the country on better measurement and management, but initiatives are largely disconnected from each other. As a result, the public is largely unaware of the concept, and even interested stakeholders in business and government are faced with a confusing variety of metrics, definitions, and methodologies for valuing natural capital.
  • No single person or organization has the knowledge or capacity to create and promote the accounting system that the future requires of us. Doing so will require a mix of perspectives (e.g. government, First Nations, industry, non-profit, community group interests, etc.) and the ability to learn and experiment together on innovative practices that can act as stepping-stones towards this future.”

The Lab is currently asking “economists, accountants, statisticians, ecologists, NGOs, government and business leaders to join us as we collaboratively design, pilot and test innovative approaches to improve natural capital stewardship.” Participants should have been chosen by the time this article appears, with an “Innovation Forum workshop” to take place before the end of the year.

The concept of learning and experimenting seems key. A blog post on the site acknowledges that while “efforts to value nature won’t get it exactly right…. (if) we apply values to natural capital, as imperfect and simplified as they may be, we’ll at least have in our hands a new piece of information: our best approximation, with current knowledge, of some aspects of natural capital’s value.”

By comparison, many of the IASB’s ongoing preoccupations seem petty and tired and irrelevant, an example of the old cliché about how issues that only carry 10% of the ultimate importance consume 90% of the time and effort. I suppose it depends whether you monitor companies and their financial condition and performance primarily as an abstraction – that is, to make money in the short or the medium term by making good calls on where the stock prices are going, without having any great interest in them from any broader perspective – or on whether you understand the company as a complex multi-faceted entity, intertwined with society and the environment in multiple ways both for good and for bad, and you want a way of engaging more than merely conceptually with all those points of contact. Another blog post on the website indicates interest in the latter:

  • “A 2016 Canadian Investor Survey, conducted by RR Donnelley and SimpleLogic, found that Canadian investors look at environmental, social and governance (ESG) issues when they make investment decisions – and they want to know how these issues are related to the company’s strategy, risk management and operations. The survey concluded there is a gap between the ESG information companies are providing in their mandatory securities filings and voluntary reports, and what Canadian investors want to know. Further, 85% of investors said that the quality of a company’s ESG disclosure impacts their perception of management and/or the board of directors.”

But the reporting landscape evolves awfully slowly in response to such concerns, evidenced by the comments above about fragmentation and low public profile…

Perhaps there’s nothing wrong with the first approach I mentioned, of viewing companies mainly as abstract investment opportunities, but there’s an element of denial (or else fatalism) attached to it – an implicit assumption that the game can go on forever, or that if it can’t, there’s no point seriously worrying about it anyway until the music stops. IFRS, looked at that way, is the provider of the sheet music, doing enough to keep the piano player pounding away at the keys, but oblivious to what earth-changing events might be going on outside the games room…

The opinions expressed are solely those of the author

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