What You Need To Know About Techniques for Monetizing Natural Capital

• Katherine Prove

• Last Updated: July 24, 2014

Natural Capital has become an important part of a business’ sustainability reporting. However, there is also a practical approach for organizations to integrate Natural Capital into financial accounting. Using a robust monetary valuable can be used to determine the economic value of an environmental benefit. Especially when market prices are obtained from exiting market structures. The idea of monetizing Natural Capital is to take on the challenge of economic invisibility of the natural environment and, in turn, develop a new economic model that works with nature. This naturally becomes an increasingly important factor when constraints on resources could become a significant risk to some businesses as the resources they need become scarce.

In terms of approaches, there are a few different ways of monetizing Natural Capital:

• Market Valuation
• Non-Market Valuation
• Secondary Data Valuation

Market Valuation

This is Market-based direct valuation based on market prices, for example the Net Present Value of harvested timber (£/ha).

The idea here is that when the market is functioning well, the market prices depict the marginal benefit of a good/service and the Net benefit can then be calculated by combining the price with quantity and cost estimates.

Non-Market Valuation

The Non-Market valuation techniques are slightly different. These might take into account cost based calculations, such as working on the estimate of avoided damage or ecosystem replacement.

Avoided damage costs might come from thinking ahead and protecting a coastal region, and in turn, people and property are prevented from being lost and degraded and this has an associated economic value.

Secondary Data Valuation

This technique differs from the previous ones and relies on secondary data to apply value estimations to similar scenarios. It can be a useful technique when other market techniques are not available.

It works by applying existing value estimates to similar cases such as a value transfer of wetland value per hectare (£/ha).

In many cases, Natural Capital accounting will most likely involve a mix of these techniques, depending on the data available at the time of valuation and the type of environmental dependency that is being monetised. By integrating Natural Capital into Financial Accounting as well as Sustainability Reporting, it is possible to value and monetize it. This will in turn provide some significant long-term environmental and economic benefits.

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