Natural resources play a crucial role in underpinning economic and financial activities, but existing financial accounting standards fail to reflect how transactions impact and depend on natural resources. This report focuses on Natural Capital Accounting (NCA) as a means to fill this information gap and provides a concise five-step approach for designing and implementing NCA.

Process overview

The report introduces a high-level, five-step approach to compiling Coherent Environmental-Economic Data (CEED) to support policy and decision-making. This approach includes scoping potential policy and decision uses (Step 1), selecting an approach and method (Step 2), tailoring the accounting system (Step 3), transforming and compiling the data (Step 4) and, finally, applying and interpreting the results (Step 5).

Step 1 – Scope potential policy, decision and reporting uses

The first step includes identifying the potential uses of CEED across the organisation and within respective business units, organisations need to identify who is directly or indirectly impacted by natural resource use. This information helps identify the parties that may require analysis of natural resources. The outputs from this step allow organisations to identify priorities and guide the design of CEED. The listed primary uses of CEED include supporting business decisions, sustainability reporting, and performance reporting.

Step 2 – Select approach and method

Step 2 involves selecting an analytical approach and method that is specific and complete enough to determine the benefits and returns of an investment. Examples of approaches include cost-benefit analysis, standard accounts, scenario analysis, impact evaluation, return on investment and sustainability reporting. The method provides explicit measurement of the costs and benefits of an investment.

Step 3 – Tailoring the Accounting System

In step 3, an accounting system tailored to support implementation of analytical approaches and methods identified in step 2 is developed. The accounting system includes multiple accounts, each relating to different parts of the information set to support multiple uses. The standard of granularity and frequency of an account is important to deliver the approach and method.

Step 4 – Transform and Compile

In step 4, specific accounting data is collected, collated and analysed to support the environmental-economic data set. This step involves defining the accounting area, collecting data, selecting data and methods, reviewing steps 2 to 3, transforming, and compiling data.

Step 5 – Apply and Interpret Results

Step 5 involves illustrating the CEED results and producing reports. The outputs from this step resulting from the combination of analytical approach and accounting system in steps 2 and 3 should produce an interpretable, useful and coherent environmental-economic information set ready for use in policy and decision making.

This report highlights ways to incorporate ESG factors into decision-making, in particular via NCA. The process outlined here can offer the much-needed information to show how natural capital and environmental capital affect economic activities. The report provides a comprehensive guide for organisations to follow step-by-step and serves as a highly valuable resource for companies looking to incorporate ESG factors into their operations.