Transcript provided by Kensho.

Lindsey Hall: I'm Lindsey Hall, Head of thought leadership at S&P Global Sustainable1.   

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 Thought Leadership Team   

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Next week, S&P Global Sustainable1 is hosting its annual summit in Paris. This event will bring together members of the public and private sector to talk about some of the biggest topics in the sustainability world. And in the run-up to that event, we're talking today about a topic we've been covering quite a bit on this podcast nature. More specifically, how to put a value on it. That means understanding how companies impact nature and also how they depend on the ecosystem services nature provides. 

Now protecting nature is a nascent priority for many companies despite the fact that it underpins much of the global economy. To put a dollar figure behind that idea, 55% of global GDP is moderately or highly dependent on nature, according to a new analysis PwC released in April 2023, and that's equivalent to an estimated $58 trillion. 

Esther Whieldon: So the global economy is dependent on nature, but it's also driving nature loss. Pollution, deforestation and other unsustainable land use paired with climate change and the spread of invasive species, all of this is having a serious impact on the world's biodiversity. 

In 2021, the U.K. Treasury published the Daskgupta Review, a landmark study at the economics of biodiversity. And here's one of the reports headline findings, which I think is important for setting the scene, "Nature's worth to society, the true value of the various goods and services it provides is not reflected in market prices because much of it is open to all at no monetary charge. These pricing distortions have led us to invest relatively more in other assets such as produced capital and underinvest in our natural assets." 

The Dasgupta Review said that introducing natural capital into national accounting systems would be a critical step towards a more sustainable and inclusive measure of wealth. 

Lindsey Hall: In today’s episode, we’re going to be talking to two people well-placed to explain how the world values nature, and how that is changing. For the global perspective, we’ll hear from Martin Lok, executive director of the Capitals Coalition. This is a global collaboration that advocates for companies to identify, measure and value their impacts and dependencies on natural capital, social capital and human capital.  

We'll also explore how the US is moving to put nature on the nation's balance sheet for the first time. The Biden administration announced the strategy in January 2023 with the goal of better understanding how nature contributes to the US economy, which will ultimately help guide policy and business decisions. 

To help us understand what this strategy entails, we'll talk with Aniket Shah. He is Managing Director and Global Head of Environmental, Social and Governance and Sustainability Research at the financial services company Jefferies Group.

Before we dive in, I think it’s worth providing a couple definitions of some of these terms we’re throwing around. In simple terms, biodiversity is the part of nature that is alive. Nature is all of Earth’s existing systems, features, forces and processes — so think weather, oceans, mountains, including all life on earth, of biodiversity. To hear more about what we mean when we talk about that other term, natural capital, let’s turn to my interview with Martin Lok at Capitals Coalition.  

So Martin, thank you for joining me, and I'll be seeing you actually in just a few days in Paris at the S&P Global Sustainable1 Summit. Can you first start please, introduce yourself to our listeners and tell them a little bit about what Capitals Coalition is and does for those who aren't familiar.

Martin Lok: Thank you very much, Lindsay. It's great to be here on your show. My name is Martin Lok. I'm the Executive Director at the Capitals Coalition. We are a collaboration, a community around the globe of business, finance, governments, accountancy body standard setters that all come together to change the way how decisions are made. And we want to change them by embedding the value of nature, people, society into business decision-making into economic decision make.

Lindsey Hall: Okay. Great. Can I dig in a little bit? What goes into that change that you're trying to bring about? How do people currently value nature?

Martin Lok: So I just came from a long weekend with quite some holidays in the Netherlands. And what do people do when they have free time, they go into nature. We all value it. We all love it. At the same time, when you're taking a consumer decision or a business decision, you don't think about nature. You're not including the value of nature and your decision-making. 

So most of the business and the financial decisions that we are taking, even the personal decisions as a consumer, they are based on financial capital, only one form of capital instead of the much wider forms of capitals that also bring value to companies to organizations that are indispensable like nature is indispensable to companies. 

And when we started around 2012 to work on natural capital, what we wanted was to make it doable for companies, for organizations to assess their impacts and dependencies on natural capital and take that into account when they were taking decisions. So with that aim in mind, we developed the natural capital protocol, which is a standardized way of doing exactly that, taking the impacts and dependencies on nature natural capital into account when taking your decisions. 

So we launched this natural capital protocol in 2016. And many organizations around the globe started to implement that at that time, while at the same time, in parallel, this ignited also a parallel development for a human and social capital protocol that was published in 2018. And then our community came together and what they said to us was what we really need is decision-making that is based on the value of nature of people, of society as well as, of course, of financial capital. We need to bring it together. So that's why we linked all efforts, and we created the Capitals Coalition that is now looking to the 4 capitals.

Lindsey Hall: Okay. So 4 different kinds of capitals that you're really encouraging people to look at and to think about?

Martin Lok: Yes, that's true. By the way, we are not the only ones who are doing this. You might have seen the OECD's well-being framework or the World Bank Group on their wealth accounting, they all look to 4 different capitals. Sometimes you see organizations adding it up to 6 capitals or 5 capitals, but nature, people, society and financial capital are the key capitals that you see popping up most of the time.

Lindsey Hall: On this podcast on this episode today, we're zeroing in on the natural capital in particular. So just to reiterate for our listeners, when we're talking about natural capital in plain English, what does that mean? How do you think about that?

Martin Lok: We see it as the stock of renewables and nonrenewable natural resources such as plants, animals, water and minerals that together provide a flow of benefits to people. 

Let me give you a specific example. No, let me give you 2. One form of natural capital is clean water. And we all use clean water. Some businesses, without water, they wouldn't exist. So if you are, for example, a beer brewer, and I don't know about you, many people like beer, but the majority of what you're taking in if you drink beer is water. So if there is no water available in some geographies, there are moments in time when there is no water available, then brewers really are having difficult times because they depend on a natural resource, clean water, that if it's not available, they cannot produce their beer. So that's a very practical example of natural capital and the importance for our business. 

But now look at a totally different business, for example, the almond industry in California. Of course, they need water to to grow their elements. But they also need something else, and that is best -- with bees, there's no pollination. Without pollination, there's no growth in the elements organs. Probably all your listeners also know that bees, many insects are having very difficult times at the moment. And so their numbers go down again and again. And the other day, it was here on the news in the Netherlands for the so many time that the -- most of the insects and the polynaters are going down so rapidly that it's becoming more and more threat. So in California, there are even agricultural growers that produce those elements, they higher Bs. So can you imagine that? They hire bees.

Well, to be honest, they hire an organization that brings the bees to their farms. So they bring in the bees in trucks to -- at the right time for the elements to take care of the pollination that is necessary to grow the elements. So suddenly, in nature in a very strange way pops up into the figures of a company because they have to pay the other company that's bringing in the best to pollinate their elements. And I think this is an example where you see that nature has a value that you have to pay for. So 2 examples of natural capital. I hope this helps to understand how important natural capital can be, but also how practical it is?

Lindsey Hall: Yeah, absolutely. It's very helpful to have those kind of concrete examples. You've outlined this problem that the world is facing. Are you seeing companies and investors acknowledging responding to this problem? Is the paradigm actually shifting?

Martin Lok: Yes and no, I would say, although the yes is becoming more and more strong. So we see many front-running companies as well as front-running financial organizations, by the way, who are acknowledging that, without nature, without biodiversity, business would be in a dead-end alley. 

So they are looking into ways how to assess their impacts and dependencies on biodiversity to value the importance of biodiversity into their business decision-making and more and more companies and financial organizations are doing that. At the same time, the majority of business is not doing this. And also, the front runners that are doing it, not always are finding that they get the reward for that. A lot of the incentives in the market as well as in government systems, still point at another direction. So that's one of the problems next to the fact that the relevance, the importance of biodiversity for many companies is still unknown because if you don't look at it, you won't notice it. And then it's unknown, and you keep on going, taking decisions based on finance only. So I apologize a little bit about the yes and no answer -- makes me sound like a politician, but I think it is really currently the case.

Lindsey Hall: Okay. So if I'm hearing you correctly, you're saying that for the most part, the world's current approach to tracking or accounting for nature and the value of nature is not sufficient or leaves something to be desired?

Martin Lok: Yes. Yes. And let me give another example. In this respect, why I think we need to do more and step up the efforts to get more companies worldwide to implement these approaches. 

Last year, the UN concluded a long negotiation for future policies, a very long title. It's now called the Kunming Montreal global biodiversity frame. The plan was to conclude this framework in Kunming in China, but due to COVID circumstances, it ended up in Montreal Canada. And it was concluded last year there. We brought together with many of our partners over 700 business representatives to this negotiation. 

And one of the key messages from those frontrunners was that they need mandatory requirements for large and transnational companies to assess and disclose their impacts on nature, on biodiversity. And these businesses advocated for this because what they see is that it is doable to assess and disclose your impacts and dependencies on nature, but the majority is not doing it. Because of that, there's not a level playing field. Because of that, there's not enough push to create the data that is needed to implement this in an aligned standardized way. And because of this, there's also an uneven position because some companies show their impacts positive sometimes, but also, of course, negative, and they become vulnerable for discussions with, for example, local communities or indigenous communities, while others are not making those impacts and dependencies known to the public around them. 

And again, that's not a level playing field. So there really was a strong push for more regulation in this field because the regulation is needed to help increase the application of natural capital approaches in the business community.

Lindsey Hall: Okay. Yes, I was actually in Montreal for COP15, and it was really remarkable to see the number of businesses there talking about nature, at least for me, that was surprising and there was a whole day focused specifically on finance. So it was really, again, remarkable to see financial institutions starting to engage with this question of nature and how it impacts businesses and how business impacts nature as well.

Martin Lok: Yes. And it was not only remarkable for you, I would say, to be honest, was also remarkable for ourselves to see that the interest was so high as well as for many of the government negotiators and the EU negotiators. 

The negotiators came to us and said that -- they were quite amazed to see that the front-running business community had higher ambitions than many of the negotiators. And that was clearly visible in the negotiations around this assessing and disclosure of impacts and dependencies where -- and that was quite a clear message. It's in the business interest that we were advocating for it. Of course, we want to do good for society and for the planet too. But the underlying business interest definitely was there. And the most shortest was kind of vocalized in one of the slogans business for nature yields, that nature is everyone's business.

Lindsey Hall: We've talked about COP15 and some of the big outcomes from that. Can you tell me a little bit more about the global landscape when it comes to how business is and how government is accounting for the value of nature?

Martin Lok: What we see gradually is a growing understanding we need to do this. And it's fascinating to see how both governments as well as the business community is working on it and within the business community also the financial community. So the UN adopted a natural capital framework for the statistical offices around the globe to use as kind of the standard for when they are including nature into the statistics they are also using for their economies. 

So ecosystem accounting was adopted. And now 40 countries worldwide have already started to implement that. The group of countries that is implementing economic environmental accounting is even a little bit bigger. It's over 90 countries that are implementing that. 

And through those developments, we see a standardized approach from governments to include the value of nature into their statistical systems. At the same level at the end as the system of economic accounts. So it's designed to be compatible with that. I think that's a very important new development. 

The business equivalent of this is the creation of the integrated annual report that not only speak about financial performance, but includes also the value of nature people as society into those annual reports. Many organizations are now publishing those kind of reports, both financial organizations as well as business organizations. I don't think it has compared to governments yet the same kind of percentage. So with 90 governments working on environment, economic accounts that is almost 50% of the countries. So I don't think we had the same figures on the business side, but also there, it is growing. 

And it's interesting to see that there needs to be a relationship between those two. So one of the collaborations we have as Capital Coalition with the United Nations statistical department that is responsible for this government framework is, together with them, we are bringing together the business and the government natural capital accountant to better understand how they are implementing this. So what are the frameworks? What are the underlying assumptions? How do they define the relevant data elements? And what are the options also for combining those and creating the link between natural capital accounting and a business context with that of a government context to improve the data flow within a society?

Lindsey Hall: That's really helpful. Thank you, Martin. Here in the U.S., where I'm based earlier this year, the Biden administration released a national strategy to put nature on the nation's balance sheet. I wanted to just ask you about that. Is that something that is on the Capitals Coalition's radar? Is that something you have any common observations on -- or anything you could say to connect it to the broader global trend that you were just discussing within the UN?

Martin Lok: Definitely, it has been on our radar. It was already on our radar that this was kind of cooking up within the U.S. and government circles way before it was launched. We have been in contact with different government entities in the U.S. over the last couple of years to work around natural capital accounting, how can it be implemented at the government level as well as on a business level. 

And we were thrilled to see that now the decision is taken to put nature on the nation's balance sheet. And the U.S. is now taking a front-running role with that, which is exciting to see. I mean at the end, what I truly believe, if at the end, a nation is also dependent on its national natural resources as well as on the natural resources that it's importing -- then of course, it needs to be on the balance sheet because we all know already for years, if not ages, that we need to think beyond GDP. The domestic product is not measuring fully the wealth of a society. We all know that. 

There have been several attempts to go beyond GDP. But I think what we need to do at the end is to have a balance sheet that provides information on all the relevant key resources that you need for a nation, for a business, for an organization. So adding nature to the nation's balance sheet in the U.S. is a key example of the direction we need to travel.

Esther Whieldon: We just heard Martin talk about how the US's new strategy to put nature on the nation's balance sheet is a key example of the direction the world needs to head. But what exactly does the U.S. strategy entail? For this, let's turn to my interview with Aniket Shah of Jefferies Group.

Aniket Shah: Yes. The Biden administration put out a document in January of this year titled the National Strategy to develop statistics for environmental economic decisions. And most people at that point will yawn and not click on the PDF and not go through it, but having reviewed it in detail, it's actually a profound document because it sets forth an agenda for the US government to put natural capital into the formal official accounting data of the US government so that when we look at the total economic output of our country, we will start integrating natural capital into that kind of accounting. 

And so what this document is it is a strategy around how the US government is going to formally integrate natural capital into its official economic statistics -- it's a huge project. It required a working group of 27 different agencies to come together to put together the strategy, and I'm quite optimistic around what it will mean for this country and for decision-makers all around the world.

Esther Whieldon: So why is this creating the strategy and implementing this idea so important?

Aniket Shah: We have known for -- frankly, for the last 100 years or so, that there is something missing in how we look at our economy. And that is that we do not take changes in the natural capital into account when we look at our economic progress. This is not a new insight. And it's actually in the strategy document itself, the Irving Fisher from -- who's a very well-known economist from 100 years ago saying that this is actually a shortcoming in economic analysis and economic data. So for 100 years plus, and some would say even more, we've known that we have an incomplete picture of how we look at the economy. But frankly, our official accounting and statistics efforts have not kept up with that insight. 

What this strategy will mean and what its ultimate goal is, is to have a number, just like we have a gross domestic product data point that comes out every quarter, what this document is aiming for is for there to be another data point, not as that "changes in natural asset wealth" that will come out once a year and that we'll look at the balance sheet of our country's natural assets and whether that's going up or down year by year. 

And so what it does is it formally makes nature a part of how our country does its statistics. And with the goal that, that will eventually impact how businesses and policymakers make decisions. And this is all a -- it's a huge undertaking. 

Thankfully, there are frameworks that the U.S. government can use, which we can talk about, but the U.S. has never really made a concerted effort to do this unlike some of its developed country peers. 

Esther Whieldon: The U.S. is implementing its strategy in phases starting this year, and it aims to finish the final phase in 2036. That's about 13 years from now. I asked Aniket why the US need so many years to make it happen. Here's his reply. 

Aniket Shah: Yes. Look, I think it's important to note that there is a phased approach that is being recommended in the strategy. The phases are based on what are deeming the most important natural capital stocks that would have the most economic implications. So under Phase 1, air quality, land, marine, natural capital and water are sort of the high priority natural capital stocks. And then in Phase 2, you have forests, pollinators, urban green space and then there's a Phase III, which is a whole bunch of other natural capital stocks. 

So the first point is that there is a phasing of this -- the second point I would say in the strategy, it's clear that what they have said is 2036 is the time frame by which they want this whole project to be finalized, but they want pilots of these data to be published along the way, starting in 2023. So we're going to start seeing movement from the federal government along the lines of publishing this data pretty soon. 

It also just shows that how complicated, Esther, this project is that it will require the U.S. government with all of the resources and arguably the most advanced scientific country in the world, it will require a decade plus to actually get this kind of accounting right. And even when that happens, there's going to be a lot of adjustments just like there is with GDP and traditional economic measures. Before we get to that point where we have this completely correct and right, the main point why this is important is that policymakers and investors will start getting this kind of information both from governments and from companies. 

At the company level, as you know, you have the Taskforce on Nature-related Financial Disclosures, which is going to put out its final recommendations around corporate disclosures by the end of this year. You had the whole COP15 effort with the convention on biological diversity that puts companies really front in center in terms of reporting around biodiversity and natural capital. You've had the World Bank that's put out really a remarkable report, which I hope gets read by the investor world known as the changing wealth of nations that provides a very rich analysis and a database on a country's wealth accounts and it looks at natural capital, produced capital, and human capital for 146 countries. 

So look, there is a mindset shift that is happening beyond just the US government, I think the important takeaway around this strategy is, look, when the US gets involved in anything and it brings the might of the U.S. government behind it, he can really change the game. And this document and this strategy is one such catalyst.

Esther Whieldon: Aniket also noted that accounting for natural capital from an economic standpoint poses some tricky conceptual questions.

Aniket Shah: First of all, it is a very difficult project to just put together an account of the quality of the water health, the quality of air emissions, of land. I mean just mechanically to put that together into a dabs and do it in a way that harmonizes what is actually quite a disparate data set, that will take a long time. So that's point number one. 

Point number two is that once you scratch under the surface, you realize there's actually a lot of really tricky conceptual questions. How do we put a dollar value on water? How do we compare that between different water basins across the country? How do we make sure we do that in a way that is defendable to the point that it can actually be part of official national economic statistics? 

So it's not just the mechanics of this, but even conceptually, these are difficult questions. Thankfully, there are great scholars and great scientists who've been working on this for a long time. But it's going to require a while and a big effort for us to get comfortable with the data. And then for -- more importantly, it's one thing if the US government just puts this information out, but then you need decision makers to feel comfortable to make decisions based off of this data. And if you ask me, that's going to take at least 10 to 20 years to make that part of how decision-makers make decisions.

Esther Whieldon: Yes, partly because it's just not -- it's something so new, right?

Aniket Shah: Yes. We don't think about nature when we make economic decisions. When a CEO decides to look at whether or not they should build a factory, maybe they are looking at the dependencies of that factory on different natural assets. In other words, if you need water for that factory, what's the water health? Is there drought? How do you actually mitigate against that? That's just starting to enter the mindset of the business community today. 

But to look at it from an even broader perspective of I'm going to make decisions that will overall be a net benefit to the natural wealth of a country, which will mean that I might not make things that are economically beneficial for me, but from a total holistic wealth perspective may not be, that requires a mindset shift. And I don't think we are anywhere close to that right now.

Esther Whieldon: We heard Aniket describe how thinking of nature from a total holistic wealth perspective requires a mindset shift. He also noted that one of the main drivers behind the US strategy is the business community, which fits with what we've heard from Martin earlier. All right, here's Aniket.

Aniket Shah: One of the big drivers of why the U.S. government is doing this is the business community. And frankly, within that, it is the ESG community. In fact, they even cite reports from investment banks around natural capital around the importance that business leaders and investors are now putting around natural capital and natural wealth. 

And to me, the takeaway of that is in all of this ESG backlash when people are questioning whether the ESG push is having any real-world impact. This to me is just one of several indications that, in fact, investors and business people showing that they care about sustainability has all of these implications and things that we may not see day-to-day that will have longer lead times, but actually it would be quite transformational in how the economy operates..

Esther Whieldon: How much is this strategy subject to the whims of political changes in the White House?

Aniket Shah: Significant. It is significantly subject to those changes, and this is coming out of the executive branch -- and this will require resources. It will require funding. It will require leadership at the agency level. It's a clear indication of the fact that elections matter and why policy is so important for sustainable outcomes to be achieved?

Esther Whieldon: We just heard Aniket say that the US's strategy on natural capital accounting could potentially transform how the economy operates.

Lindsey Hall: Yes and it also stood out to me what he said about how this mindset shift is needed to make this happen. We heard a similar point from Martin at the capital's coalition when he talked about how this paradigm shift is required. In our interview, you also pointed out that this kind of change is achievable. Here's Martin once more.

Martin Lok: We need to remind ourselves that, although it might seem like a daunting and a very difficult exercise, we should approach it simple. So we -- one of the things we developed over the last couple of years with the World Business Council with the World Economic Forum with business for nature with WWF, is what we call high-level steps for business on nature. 

And it's 4 simple steps. And you have to assess your impacts and dependencies on nature, then you have to commit to set science-based targets. So you have to set your direction, whether you want to travel. And if you have done that, you can change the way how you behave, you transform your operations into a major positive direction. 

Then of course, you should decide to share your insights with the people around you with the organizations around you and tell them what you've learned and what you're going to do. So that's all about disclosure. So these are the 4 steps -- and what you hopefully recognize is, these are not really mind-blowing steps. It's quite simple, and it's the steps that you usually go through if you want to change also in your personal life.

Lindsey Hall: Esther, I think that's a good note for us to end on today. Martin said, change is needed, but also that change is possible. 

Esther Whieldon: Please stay tuned as we continue to cover nature and biodiversity and future episodes. And as a reminder, the S&P Global Sustainable1 Summit will take place in Paris and Singapore in the coming weeks, and will include a link in our show notes in case you'd like to register.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.   

Copyright ©2023 by S&P Global  


DISCLAIMER  

By accessing this Podcast, I acknowledge that S&P GLOBAL makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this Podcast. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. This Podcast should not be considered professional advice. Unless specifically stated otherwise, S&P GLOBAL does not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned in this Podcast, and information from this Podcast should not be referenced in any way to imply such approval or endorsement. The third party materials or content of any third party site referenced in this Podcast do not necessarily reflect the opinions, standards or policies of S&P GLOBAL. S&P GLOBAL assumes no responsibility or liability for the accuracy or completeness of the content contained in third party materials or on third party sites referenced in this Podcast or the compliance with applicable laws of such materials and/or links referenced herein. Moreover, S&P GLOBAL makes no warranty that this Podcast, or the server that makes it available, is free of viruses, worms, or other elements or codes that manifest contaminating or destructive properties.  

S&P GLOBAL EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY OR RESPONSIBILITY FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR OTHER DAMAGES ARISING OUT OF ANY INDIVIDUAL'S USE OF, REFERENCE TO, RELIANCE ON, OR INABILITY TO USE, THIS PODCAST OR THE INFORMATION PRESENTED IN THIS PODCAST.