Recognising natural capital on the balance sheet: options for water utilities

Abstract: Purpose: The aim of this study was to explore the feasibility of natural capital accounting for the purpose of strengthening sustainability claims by reporting entities. The study linked riparian land improvement to ecosystem services and tested options for incorporating natural capital into financial accounting practices, specifically on the balance sheet. Methodology: To test the approach, the study used a public asset manager (a water utility) with accountabilities to protect the environment including maintaining and enhancing riparian land assets. Research activities included stakeholder engagement, physical asset measurement, monetary valuation and financial recognition of natural capital income and assets. Natural capital income was estimated by modelling and valuing ecosystem services relating to stormwater filtration and carbon storage. Findings: This research described how a water utility could disclose changes in the natural capital assets they manage either through voluntary disclosures, in notes to the financial statements or as balance sheet items. We found that current accounting standards allowed the recognition of some types of environmental income and assets where ecosystem services were associated with cost savings. The proof-of-concept employed to estimate environmental income through ecosystem service modelling proved useful to strengthen sustainability claims or report financial returns on natural capital investment. Originality/value: This study applied financial accounting processes and principles to a realistic public asset management scenario with direct participation by the asset manager working together with academic researchers and a sub-national government environment management agency. Importantly it established that natural assets could be included in financial statements, proposing a new approach to measuring and reporting on natural capital.