What Is Natural Capital?
Natural capital is a reference to the inventory of natural resources held by companies, such as water, gold, natural gas, silver, or oil. Like all commodity resources, these natural capital commodities must be certificated in order for the company to write a derivative on the natural capital for sale in the futures market.
Natural capital must also be managed on a company’s financial statements which requires natural capital accounting.
Key Takeaways
- Natural capital is the inventory of natural resources held by or claimed by a company.
- Natural capital holdings will be listed on a firm's balance sheet as it is a type of asset.
- Natural capital typically must be certified before a derivative contract, like a futures or forward contract, can be written on it.
Understanding Natural Capital
Natural capital is a type of commodity capital that includes natural resources mined, stored, or produced by a company. Natural capital trades alongside agricultural capital on futures exchanges. Both types of commodities require similar operational procedures for writing options or futures on public market exchanges. Both types of capital also comprise a section of a company’s balance sheet assets.
Natural capital explorers and refiners also have an obligation to adhere to environmental regulations. Regulations may include rules on exploration conditions and production locations in order to limit risk to the environment. Explorers and producers spend a substantial amount of their expenses on recovery and protection measures.
Futures Market Procedures
To write a derivative to sell a commodity on a public futures market, a producer must follow certain procedures and adhere to certain rules.
To write futures contracts a producer must be registered with the required regulatory authorities. Registration provides producers with connections to local stock inspectors who inspect and certificate natural capital stock. A producer can write contracts to sell its natural capital on a futures exchange once the natural capital is certificated.
Inventory stock that is tied to a futures contract on an exchange will receive a warehouse or storage receipt. The storage receipt verifies the capital for futures contract transactions. It also provides information on where the capital stock is stored and other details about the inventory. Producers with capital stock tied to futures contracts must hold the inventory as collateral.
Financial Statement Accounting
Accounting for natural capital on financial statements can be complex. Natural capital is an asset of the firm. Management must create a schedule for valuing natural capital on an ongoing basis.
Overall, depletion is one of the most important components of natural capital accounting. This can be compared to depreciation. There are two main depletion accounting methods that are used for natural capital accounting, cost, and percentage. Depletion allows a company to record expenses associated with natural capital over time.
The cost depletion method generates per-unit costs that are based on extraction costs. Percentage depletion calculates natural resource extraction expenses as a percentage of revenue. The cost depletion method is usually favored over percentage depletion as it is generally considered to create the most accurate estimates.
Example of Natural Capital For an Oil Company
Natural capital appears on the balance sheet of a natural resource producing company. Consider Exxon Mobil (XOM), which is a large oil company. On their balance sheet, they state how much crude oil (or related products) they have at the time when they compile their financial statements.
At the end of 2018, under assets, the company reported $14.8 billion in crude oil, products, and merchandise. This is often summarized as inventory. The company can do what they wish with this inventory, although if they wish to sell it via futures contract, the crude oil will need to be certified in order to ensure it meets exchange standards and specifications.
Summary financial statements may group multiple types of natural capital into the inventory, but the breakdown of that inventory is often included in the Generally Accepted Accounting Principles (GAAP) financial statement and/or in the footnotes to those statements.
FAQs
The term natural capital refers to the elements of the natural environment that provide valuable goods and services to society. It applies an economic lens to the world's stocks of natural assets — like forests, rivers, and soil — and how society and businesses rely on them to function.
What is the best description of natural capital? ›
Natural Capital can be defined as the world's stocks of natural assets which include geology, soil, air, water and all living things. It is from this Natural Capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.
What is a natural capital for dummies? ›
Natural capital is the set of renewable and non-renewable natural resources of an ecosystem. These biological systems provide us with goods such as water, wood, construction materials, energy, medicines, and genetic resources.
What is natural capital Quizlet? ›
Natural Capital. The natural assets and services that are not manufactured but have a value for humans. Natural Income. The renewable resources such as plants, animals, and soil provided by natural capital.
What is natural capital summary? ›
Natural capital refers to the aspects of the natural environment that provide benefits to people. The benefits are wide ranging and can be anything from clean air and water, wildlife to enjoy, to crop pollination. The environment's contribution to these benefits are referred to as ecosystem goods and services.
What are the 4 major components of natural capital? ›
Natural capital consists of four categories of ecosystem services (MA, 2003) provided by marine and terrestrial ecosystems: (1) provisioning services, or tangible benefits, obtained from ecosystems such as water, food, timber, and minerals; (2) regulating services that regulate ecosystem processes such as climate, ...
What is natural capital kid definition? ›
Lesson Summary. Let's review. Natural capital is defined as the land, air, water, living organisms and natural resources of the earth that produce value to people. Nature has many economically important assets, including mineral deposits, energy resources, farm land, forest timbers, and fisheries.
Why does natural capital matter? ›
Nature, which includes biodiversity and the vital services for human wellbeing provided by healthy ecosystems, is at the heart of critical development challenges like climate change, food security, health, jobs, poverty, inequality, and fragility.
What is an example of a natural capital in a business? ›
Natural capital is a reference to the inventory of natural resources held by companies, such as water, gold, natural gas, silver, or oil.
What is natural capital benefit? ›
Ecosystem Services are the direct and indirect contributions ecosystems (known as natural capital) provide for human wellbeing and quality of life. This can be in a practical sense, providing food and water and regulating the climate, as well as cultural aspects such as reducing stress and anxiety.
Natural Capital Accounting: Water
Water accounts link the physical amount of water used by each sector with what value the same sector contributes to the economy. This can help policymakers design better policy around, for example, water allocation between households, manufacturing, services and agriculture.
What are the two types of natural capital? ›
Abiotic natural capital comprises subsoil assets (e.g. fossil fuels, minerals, metals) and abiotic flows (e.g. wind and solar energy). Biotic natural capital or ecosystem capital consists of ecosystems, which deliver a wide range of valuable services that are essential for human well-being.
Which of these are examples of natural capital? ›
Natural capital is the world's stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. All of these underpin our economy and society, and thus make human life possible.
What are some examples of natural resources? ›
Any natural substance that humans use can be considered a natural resource. Oil, coal, natural gas, metals, stone and sand are natural resources. Other natural resources are air, sunlight, soil and water. Animals, birds, fish and plants are natural resources as well.
What is critical natural capital? ›
Critical natural capital (CNC) is commonly defined as that part of the natural environment, which performs important and irreplaceable functions.
How is natural capital calculated? ›
Equation (10) says that the price of a natural capital asset equals the marginal ecosystem service flow, Ws(s, x(s)), adjusted by anticipated price (scarcity) changes (i.e., capital gains or losses) divided by a discount rate adjusted for the overall effect on natural capital growth from adding a little more natural ...
What are the risks of natural capital? ›
Our emissions to air, discharges to water and use of land and other natural resources frequently impose impacts on others for which they are not properly compensated. These uncompensated environmental impacts are called 'externalities' and they too can result in serious business risks.
What are the benefits of investing in natural capital? ›
Investing in natural capital can increase the productivity of your land. You could see higher yields or lower costs thanks to co-benefits like improved soil quality and water retention, increased pollinators, stock protection from windbreaks or more efficient fertiliser application rates.
What is the natural capital accounting process? ›
Natural capital accounting is a tool to measure the changes in the stock and condition of natural capital (ecosystems) at a variety of scales and to integrate the flow and value of ecosystem services into accounting and reporting systems in a standard way.
