Scottish Forum Chair presents to Government Directors

29th September 2016

Jonny Hughes, Chair of the Scottish Forum on Natural Capital and Chief Executive of the Scottish Wildlife Trust was invited to speak to the Scottish Governments Directors’ Network on 29 September 2016 about the potential benefits of natural capital to Scotland. Read the transcript of his presentation below:

Exactly one year ago Mark Carney, Governor of the Bank of England, made an important speech at Lloyd’s of London.

It was important in the context of natural capital as he used it to warn of the increasing financial instability arising from environmental degradation around the world - including carbon pollution leading to climate change.

But he also talked about opportunity, saying: “Financing the de-carbonisation of our economy is a major opportunity for insurers as long-term investors.  It implies a sweeping reallocation of resources. For this to happen, ‘green’ finance cannot conceivably remain a niche interest over the medium term.”

A few days after Carney’s speech, the Obama Administration released a Directive instructing all federal departments and agencies to factor the value of natural capital and ecosystem services into their decision-making

This all follows from a growing number of people and organisations engaging with natural capital and recognising a need to move beyond our over reliance on traditional measures of Gross Domestic Product.

For example, here’s what Ban Ki-Moon had to say on the subject: “It is time to recognise that human capital and natural capital are every bit as important as financial capital.”

In this presentation, I will explain how such natural capital thinking might help us increase resilience in the Scottish economy and improve the prosperity and well-being of the Scottish people.

So what do we actually mean by terms such as ‘natural capital’ and ‘ecosystem services’?

Natural capital is another term for the stock of renewable and non-renewable natural assets (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.

The benefits provided by natural capital include clean air, food, water, energy, shelter, medicine, and the raw materials we use in the creation of products. But it also encompasses less obvious, often invisible, uncosted benefits such as natural flood defences, climate regulation, water purification, pollination and recreation.

For example:

  • Insect pollination is worth €153 billion to agriculture globally.
  • Forests are a massive ally in the fight against climate change – locking up the equivalent emissions from 278 billion vehicles.
  • Mismanagement of ocean assets could cost us all $428 billion in lost profits by 2050 unless things change.

So who is engaging with the new natural capital agenda and why?

Many governments have made significant strides forward in recent years - for example by helping in the development (and one would hope eventually adoption) of the United Nations System of Environmental-Economic Accounting. But it is really the business sector, particularly large global corporates who are blazing a trail on environmental profit and loss accounting.

A recent major milestone came in London this July with the launch of a global standard for natural capital accounting, the Natural Capital Protocol developed by the Natural Capital Coalition.

The value of natural capital had until recently, been largely excluded from business decisions and, when included had been inconsistent, open to interpretation, or limited to moral arguments. The Protocol responds by offering a standardised framework to identify, measure, and value impacts and dependencies on natural capital.

One of these companies using the Protocol is Kering, owners of Puma, Gucci, Yves Saint Laurent and 18 other luxury brands. Here is a snapshot of their Environmental Profit and Loss Account – beautifully designed like their clothes - but slightly tricky to read!

©Kering

The circles represent the size of the - essentially free - natural capital draw-down that the company has – arranged by supply chain tier and environmental impact types. So, Kering’s water consumption for example is generating environmental dis-benefits to the tune of €80.1 million every year. The biggest impact is land use in Tier 4 – Raw Material Production. In total, land use impacts amount to 28% of Kering’s environmental footprint, or €223.7 million .

Yet these figures do not show up in the company’s financial profit and loss accounts. They are so called ‘externalities’, i.e. the costs borne by society, and often the poorest in society. You might say it’s brave of Kering to disclose these figures. You might also ask why have they done so?

The answer is it makes good business sense. Knowing where in the world their impacts and dependencies on the natural environment are, helps the company make smarter decisions.

Natural capital accounting gives businesses several advantages ranging from reduced volatility in supply chains, de-risking of regulatory compliance and easier access to finance. Several major lenders including National Australia Bank now require borrowers to understand natural capital risks before providing finance.

Perhaps the most important business benefit – returning to Mark Carney’s point about de-carbonisation being an opportunity – is the ‘spur to innovation’. For example, Kering have realised that certain ecosystems (from which they derive rare leathers and furs) are unsustainably managed due to problems such as overgrazing – they have also linked this natural capital asset depreciation with poorer quality raw materials.

Fixing this by reducing grazing pressure will help recover tree cover and have beneficial effects for local climate regulation as well as helping re-charge depleted aquifers. Crucially it will also improve product quality. It’s a win for society, a win for the environment and a win for the bottom line of the business.

Kering are one of many companies that have realised running up a large natural capital debt on their accounts is simply not good for business. They are now going one step further and disclosing these impacts directly to the customer.

What then, could the application of such natural capital approaches potentially do for Scotland? As I see it there are four areas where this might have significant benefit to our country.

First, is business competiveness and innovation, which I’ve already covered.

Second is the use of natural capital analysis to help us understand how to extract better net present value from our land and seas. A sustainably managed hectare of farmland may produce a slightly lower yield of beef or wheat but the carbon gains, amelioration of flooding and water quality benefits alone will more than outweigh the difference in reduced yield.

Flooding alone, exacerbated by issues such overgrazing and peatland erosion has been estimated to cost the Scottish economy between £50 million and £700 million every year.

Research by Oxfam has shown it is people in lower income groups who are more negatively affected by flooding than those in higher socio-economic groups. It is almost always the poor, whether here in Scotland or elsewhere in the world, that suffer disproportionately from natural capital degradation.

This bring me onto the third area, which is perhaps of greatest interest to you as a group of senior directors. Investing in natural capital, particularly in and around towns and cities is a proven and extremely cost effective way to improve health and well-being, particularly in vulnerable groups.

The UK Government’s Natural Capital Committee have estimated investment in quality greenspace in England and Wales would reduce health treatment costs alone by £2.1 billion. We could expect similar or even higher returns in Scotland.

In the UK as a whole, poor urban air quality causes an estimated 40,000 premature deaths a year and reduces productivity, which together cost the UK economy at least £20 billion each year.

Air quality also has a significant negative impact on life prospects for children, for example by increasing childhood asthma and by lowering educational attainment. Real world learning in local greenspaces – something which is widespread in Scandinavia – also has very tangible benefits which can be clearly costed.

Fourth relates to ‘Brand Scotland’ and the threat to our brand reputation. Our brand is vital to the food and drink industry and nature-based tourism is worth £1.4 billion per annum to the Scottish economy.

So a quick reminder of those four again:

  • More competitive businesses with a culture of innovation – just look the Scottish success story Vegware– a circular economy company that increased its growth by 919% in just 5 years.
  • Better Net Present Value from every hectare of Scotland’s land and seas
  • Improved social and health outcomes from healthier local environments
  • An enhanced brand reputation for Scotland

As a country, if we showed genuine leadership on this agenda – we could carve ourselves out a high-value, competitive niche. To be fair we have shown some leadership – albeit so far in showcasing best practice from around the world rather than, for example, ending perverse subsidies and correcting clear market failures.

But the will is there. The First Minister said at the second World Forum on Natural Capital held here in Edinburgh last year, that “In Scotland we are determined to play a leading role in developing the thinking about the concept and application of natural capital.”

The First Minister also reminded us how important natural capital is to the implementation of the Sustainable Development Goals adding that many of the goals are “directly relevant to natural capital”.

Scotland’s Economic Strategy states: “enhancing our stock of natural capital…is fundamental to a healthy and resilient economy” and the 2016-17 Programme for Government recognises that “Scotland’s natural environment is worth more than £20 billion per annum and supports more than 60,000 jobs.” This recognition is a good start.

We are also leading on the non-monetary valuation of natural capital and we were the first country in the world to launch a natural capital asset index designed to monitor annual changes in natural capital stock. This is now included in the national indicator suite.

So why am I here if we are making good progress? I’m here to appeal to you as a group of leaders to consider how, in all your different portfolio areas, you might use natural capital analyses and accounting techniques to make better, evidence-based decisions for the people of Scotland.

Natural capital tools and methods could help us transform blighted urban areas, create green collar jobs, give Scotland a competitive niche in an increasingly tough international commercial climate and help bring improved health, equity and prosperity to vulnerable and unequal communities.

Investment in the restoration of our natural environment is exactly that – investment. Nature is not a ‘nice to have’, it is an essential solution to many of the challenges we face as a country. Restoring it will make us more resilient to both economic and climate shocks in the future.