How much is the tree worth on your front yard or the river that runs through your city?
Most of us don't assign dollar signs to our natural surroundings, but that outlook is starting to change amid growing concerns about global warming and the scarcity of water and arable land in parts of the world.
In a report released last year, TD economists crunched numbers showing that Toronto's urban forest provides residents with over $80 million, or about $8 per tree, worth of environmental benefits and cost savings each year. That's about $125 in annual savings per single-family household.
Coming out of all of this is the idea of measuring natural capital, which assesses the economic value, along with the social and environmental benefits of natural resources and ecosystems. For businesses and governments looking to mitigate the rising costs of energy (despite the recent drop in oil prices), the hope is to better understand the true costs, benefits and return on investment of planned activities.
"Natural capital provides enormous measurable benefits each year that people don't fully appreciate or value," says TD Bank chief economist Craig Alexander, whose team has done a number of studies on natural capital in recent months.
Failure to consider natural capital impacts can also lead to "sub-optimal outcomes and unrecognized costs," he says, such as in the case of knocking down a tree that blocked sun in the summer and cold wind in the winter.
According to the report, Toronto's urban forest is valued at more than $7 billion, or about $700 per tree. "Beyond their value as a commodity, our urban forests provide a range of important environmental benefits that improve living standards, while also providing major cost savings to households," it says.
In another report, TD did a case study showing that the rivers and wetlands in B.C.'s Lower Fraser Valley provide annual benefits of more than $500 million each year, which includes such positives as tourism and recreation, water supply and carbon sequestration.
The challenge however, is in the methods of measuring natural capital.
"How you value a wetland is completely different than how you value trees," says Alexander.
So far, there are no uniform, globally recognized standards, but natural capital today is generally calculated based on direct use, indirect use (which doesn't require consumption) and non-use (which includes having the option to use the resource in the future).
An example is a forest that can be used directly for recreation use, such as hunting or hiking, indirectly by purifying the air and supporting wildlife, and non-use, which would be the option for tourists to use it down the road.
But valuations often underestimate some impacts of nature, such as how beautiful scenery can help increase property values or tourism in a particular town or city.
"We cannot put a complete price on it. We have to be very careful to emphasize that point because people can often be very upset about putting a value on the environment," Alexander says, adding that the intention with natural capital is to create awareness, affect change and create opportunities.
According to Mike Kennedy, president and CEO of consulting firm Green Analytics, more and more entities are driven to natural capital because "companies want to understand, under future scenario types of modelling techniques, [if] they going to get hammered from a social licence perspective."
For example, he said, many resource companies are required to perform environmental impact assessments before receiving approval of a new development. Kennedy says information about natural capital can help a company make a case for a project, including how they plan to offset or mitigate environmental impacts.
On the other hand, long-term investors such as retirement investors, endowments and foundations also stand to gain from natural capital valuations, says Tim Nixon, director of sustainability at Thomson Reuters and managing editor of its Sustainability publication.
"It makes sense since these are long-term investors, who are planning for their future and assuming a healthy planet on which to live," Nixon says.
"There is increased interest by investors in understanding where they are investing their money, including who is managing their natural capital well and who isn't … If there's poor management of natural capital by a company there's more risk there. "
In a recently released report, the Natural Capital Coalition, which includes a range of international companies and non-profit groups, said that many current business models don't price in factors such as damages from climate change, pollution, land conversion and depletion of natural resources.
"As a result, there is a growing case for understanding the dependencies business has on natural capital, the risks and opportunities associated with this relationship and their real value," it says.
Valuing natural capital can help companies make better business decisions, the report says, especially when it comes to risk management, supply chain sourcing decisions, new investments and environmental performance.
That's why Kaveh Zahedi, regional director and representative for Asia and the Pacific at the United Nations Environment Programme (UNEP), believes that measuring natural capital will help lead society to conserve and unleash its potential in the form of opportunities such as recycling and energy efficient businesses.
"If we consider the environment as a form of natural capital, then clearly it needs to be measured," Zahedi said last November during a panel at the Responsible Business Forum on Sustainable Development in Singapore.
"Clearly it needs to be invested in … to be exploited in an efficient manner and, to some degree, it needs to be increased in value."
Numbers are step one. Capitalize applies context to data – helping professionals leverage powerful information to make confident decisions. For more information, go to www.thomsonreuters.ca
Now experience Thomson Reuters Exchange. A new digital publication for fresh ideas and insights in a dynamic, interactive format. Download the free App from the App Store, Google Play and Amazon Appstore.
This content was produced by The Globe and Mail's advertising department, in consultation with Thomson Reuters. The Globe's editorial department was not involved in its creation.