Improving nature’s visibility in financial accounting

As a growing number of organizations identify and assess their impacts and dependencies on natural capital,
they also seek ways to use and report the results. Given that financial accounting is a key decision-making
tool, linking natural capital data with financial accounts is an obvious route to examine. This report presents
methods to address the questions of how can financial accounts be adjusted to make natural capital more
visible to decision makers and/or in disclosures?

The report is based on the contributions of many experts from across disciplines who came together in a
collaborative process hosted by the Capitals Coalition (formerly the Natural Capital Coalition). The goal of the
project was to illustrate innovative approaches that organizations use to integrate the value of nature into their
financial accounts. This report seeks to begin a process by identifying solutions, exploring their synergies, and
highlighting how they fit into the current landscape of financial accounting.

This report provides an overview of four innovative approaches and identifies potential future routes and
collaborations to mainstream solutions. The four methods explored all show how parts of financial accounts,
such as an income or balance sheet, can be altered to include figures that reflect natural capital impacts
and/or dependencies. The methods presented are neither comprehensive nor complete, but they are all
illustrated through real-world examples, showing that action can be taken. They help companies to
understand and visualize how they can integrate natural capital within their income statement and/or balance
sheet, and what impact this could have. The specific methods differ in their approaches, providing different
routes to make natural capital visible within different aspects of financial accounts:

- Method 1 – Integrating Natural Capital Accounting practices into Financial Accounting of
Intangible Assets: Treating some investments to enhance natural and human capital as an “intangible
asset” under existing accounting standards (International Accounting Standard 38).
- Method 2 –Value Added Statement for Nature: Reshaping the income statement to show how much
of the value generated by companies is “given back” to nature.
- Method 3 – Comprehensive Accounting with Respect to Ecology (CARE) Model: Including new
types of liabilities and assets that reflect debts to (as a result of inputs from) natural and social capital.
- Method 4 – Integrating Natural Capital into Financial Accounting: Illustrating integration of financial
and natural capital into a single income statement and balance sheet.

Like all financial accounting approaches, each of these methods has advantages and disadvantages, but all
result in an adjustment to a financial account, illustrated with real data in this report. The discussion of
methods and adjustments used is focused on natural capital. However, the methods are considered to be
largely applicable to other forms of capital, such as human or social capital, which suffer from the same
invisibility as natural capital.

Going forward, there is much more work to do to integrate natural capital into financial accounting.
Further guidance and standards are needed if methods are to be used at a larger scale across business. While
related guidance on how companies can measure and value their impacts and dependencies is growing (such
as ISO standards ISO 14008: monetary valuation and ISO 14007: using monetary valuation evidence), further
guidance is needed on how companies can integrate separate natural capital and financial reporting systems,
illustrated by specific examples showing the practicality of methods and the materiality of the data for decision
making.

The integration of natural capital in financial reporting will require continued collaboration between leading
initiatives to ensure a common approach and understanding for natural capital accounting, and further inputs
from businesses to ensure pragmatic uptake and implementation. A common approach does not require
harmonization to a single method but does require common principles and rules to ensure the advantages of
accounting: the comparability of results across space and time combined with the insights from measuring and
valuing natural capital.

We hope that practitioners from across the economy who use differing tools and approaches will benefit from
this document by having a comparator for their work, and an input to their thinking.