While other areas of sustainability have captured the attention of businesses, capital accounting measures that show the cost of production on the natural environment is slow to catch up, which could be impacting industries financially, according to a new report.
The S&P Global Ratings report says much like how carbon pricing can internalize for investors and policymakers the cost and impact of carbon dioxide emissions, the same can be done with through natural capital valuation. This can be done by assessing the services that natural areas can provide and calculating the cost of replicating them and incorporating that into financial assessments.
The report specifically used a case study of beef production in Brazil. It says beef production is a key driver of deforestation in the country and that resulted in a hypothetical loss of $4 billion in 2020, or about 12% of Brazilian beef revenue that year.
While there is much progress to be made in natural capital valuation, the report says, there are tools that are being implemented to work on the problem. These include the Natural Capital Protocol and the Natural Capital Finance Alliance’s ENCORE tool. Also, the UN System of Environmental Economic Accounting provides framework for incorporating natural capital into government accounting systems.
Brazil is also one of the first countries to pass legislation requiring an annual valuation of its natural capital, the report says.
According to the report, the Ecosystems Services Valuation Database says approximately 100 acres of Amazon Rainforest creates nearly $5,000 of ecosystem services per year. By eliminating that area is what results in the cost to beef production.
Ecosystem services are goods provided by nature, such as wild pollination, clean water and carbon dioxide sequestration that companies rely on, the report says.
One way that businesses can be encouraged to make changes is to be charged for ecosystem services, the report says. Without a value addressed to it impacting companies, change will be limited.
The report shows that while cattle production is 15-times higher than it was in the 1950s, the resources to support such production are being depleted. Brazil is the world’s second largest producer of beef behind the United States, but that has led to rainforest deforestation that has created a carbon source.
Without addressing those costs, that type of production cannot be sustained, according to the S&P Global Ratings report. Currently those costs are not factored into the price of products and those producers have no incentive to be more sustainable.
While sustainable programs such as regenerative agriculture have become more common additional work can be done in natural accounting of production. If those incentives existed, there may be more reason to establish additional eco-friendly farming practices.
The report says that while costs may also be passed down to consumers, which could influence demand and thus impact companies, more direct financial rules would speed implementation of natural capital procedures.