• The notion of GDP as a simple all-encompassing measure fundamentally ignores the harm caused to ecosystems, land and nature-related stocks.
  • Natural capital may have a material contribution to sovereign GDP and corporate revenues. Overutilisation can lead to loss over time.
  • The financial sector can play a pivotal role in supporting sustainability by directing capital to sovereigns and businesses whose policies and actions seek to mitigate the degradation of natural capital.
  • Where applicable, Western Asset seeks to incorporate material natural capital factors into its assessment of sovereigns and corporates where relevant data is available.
  • Losses to natural capital have increased exponentially due to overutilisation, mismanagement and apathy; these problems should be addressed immediately.

Natural Capital

Natural Capital is defined as natural resource assets and services that contribute to economic production, as per the Organisation for Economic Co-operation and Development (OECD).1 These natural resource assets can typically be categorised into the following four categories: Agriculture, Biodiversity, Fisheries & Aquaculture, and Ecosystems & Forests (that includes soil, minerals and animals). These are key components of natural capital that affect not just sustainability but also the livelihood of businesses and countries, and must therefore be incorporated into investment decision-making where material. A study conducted by the World Economic Forum suggests that nearly $44 trillion or half the world’s GDP is dependent on natural resources and therefore vulnerable to natural capital loss.2

The Need to Account for Natural Capital

The seminal work presented in The Economics of Biodiversity: The Dasgupta Review, identifies nature as ''our most precious asset''3 and emphasizes an escalating and increasingly greater strain humans are putting on the environment now and in recent decades. The report states that when natural capital is misused, the depreciation may end up being irreversible, and the natural resource itself may be difficult to replicate and/or may break down without warning. The report also identifies the limitations of GDP as the only way to gauge economic growth. Economic growth and GDP are implicitly built on natural resource extraction, and over time the gap between what has been removed and what has been restored or replaced has only widened. This notion of GDP as a simple all-encompassing measure fundamentally ignores harm caused to ecosystems, land and any/all ''nature-related'' stocks. Research suggests that the decline in per-capita natural capital resources has reached nearly 40%, with nearly a million species, by some estimates, facing extinction in the next few years.4

Four Important Types of Natural Capital

1. Agriculture

Food crop and agriculture yields are directly impacted by climate change. Studies have shown that rising temperature has resulted in lower crop yields of wheat, maize, rice and soybean, which form staples of global diets.5 The study further posits that loss in yields even if temperature increases were to be kept within the 1.5-degree Celsius Paris Aligned targets would still be between 2% to 7% across main producing countries, while under the 2-degree Celsius targets, this loss increases to between 3% and 13%.6 This also presents challenges for the UN Sustainable Development Goals (SDG), with nearly 9% of the global population currently classified as hungry (SDG Goal 2 on Zero Hunger by 20307).

Moreover, while the contribution of agriculture as a percentage of GDP varies widely across countries, exceeding 50% for some,8 as a percentage of land area the coverage can be in excess of 80%.9 Increased demand for food security and eradication of hunger creates pressure for increased acreage for agricultural purposes, which is often to the detriment of forest cover and biodiversity. A study10 suggests that one-third of the world’s forests have been destroyed by expanding agricultural land. The challenges of finding more efficient ways of farming presents not just a chance to address the issue of deforestation, but also presents an opportunity for further investments in technology and businesses that align with sustainable practices.

2. Biodiversity

According to a study conducted by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES),11 three-quarters of fruit or seed crops depend on insects such as bees, butterflies and birds, nearly 40% of which face extinction. The contribution that these insects make to agriculture is estimated to range between $235 billion to $577 billion annually.12 The Global Biodiversity Framework lays out plans to halt biodiversity loss by 2030 and achieve recovery by 2050, which can only be facilitated through nature-based investments of between 0.7% to 1.0% of annual GDP.13 Healthy ecosystems account for not just half of the global GDP but also align with UN SDGs with their focus on living harmoniously with nature.14

When looking at finance from mechanisms based on biodiversity, various options are available. These may include biodiversity-related taxes levied by OECD countries, Payments for Ecosystem Services (PES) programmes, Biodiversity Offsets and bilateral biodiversity-related Official Development Assistance (ODA) to mention a few. Some estimates currently put this at around $30 billion.15 While there is a general variation in the preference of these mechanisms implemented by various countries currently, the mechanisms employed offer a range of biodiversity-relevant economic instruments for countries to deploy.16

3. Fisheries and Aquaculture

Fisheries and aquaculture have seen steady growth over the past few decades driven by increased consumption of fish. However, what this growth masks is the dichotomy between sustainable and unsustainable fishing driven by overfishing or inefficient fisheries management. Research conducted by the Food and Agricultural Organization (FAO), finds that the percentage of fish stocks within biologically sustainable levels has fallen by nearly a quarter from 90% to 66% over the past three decades.17 The introduction of Individual Transferable Quota (ITQ) for fisheries is a mechanism that can be used by countries as a means to tackle overfishing.18

Fishing is an important contributor to GDP. According to the OECD,19 nearly $1.5 trillion is contributed annually from the ocean economy and this number is expected to rise to a $3 trillion annual contribution by 2030. While there are global variations, certain countries such as those in the Pacific Islands can depend on fishing to contribute in excess of 10% of their GDP.20 Additionally, the sector employs nearly 60 million people worldwide based on study by the Food and Agriculture Organization (FAO) of the United Nations.21

Further research indicates that the sector employs a high proportion of women across the supply chain although challenges remain in terms of pay or the types of roles employing women. It is clear that a decline in fishing would have a direct impact on employment and GDP. UN Sustainable Development Goal (SDG) 14 focuses on marine conservation and sustainable development of marine ecosystems. Among the various targets, this SDG focuses on reduction in marine pollution, overfishing and increasing benefits to small island developing states such as those mentioned earlier.

4. Ecosystems and Forests

A study finds that over a quarter of forest loss was driven by deforestation, while the rest was a consequence of logging of forestry products from plantations (26%); shifting local agriculture (24%); and wildfires (23%).22 In Latin America and South East Asia, clearance of forests to grow soy, palm oil and to provide pastures for beef accounted for nearly two-thirds of forest loss.23 Typically, deforestation occurs in forests that have been around for a long time and cutting these tends to result in disruption of the natural biodiversity which cannot be replaced overnight. While an argument can be made in terms of the benefits provided either directly or indirectly in terms of the livelihood for millions, it is equally true that the pressure these unsustainable forms of agriculture put on the natural capital of the region is consequential and can no longer be ignored.

It is important to qualify that while significant deforestation has occurred in emerging markets such as Brazil and Indonesia, data would suggest that consumption patterns in developed market nations such as the UK, Germany and Spain are such that the deforestation created elsewhere through the import of products is not offset by forest growth within these nations.24 A report published by the World Wildlife Fund (WWF) and the Living Planet Report 2020 suggests that since 1970 there has been a 68% decline in species worldwide.25 The report identifies “human consumption, population, global trade, and urbanization”26 contributing to this decline.

Some of the factors such as agriculture, biodiversity, fisheries and aquaculture, and ecosystems and forests, share an interdependency with sovereign GDP and corporate revenue streams either directly or through supply chains on nature. Similar to the physical effects of climate change, the risks posed by commodity overutilisation and supply-chain degradation pose market risks, reputational damage and regulatory and legal risks, which need to be factored in when making investment decisions.

Natural Capital Accounting and Taskforce on Nature-related Financial Disclosures (TNFD)

The System of Integrated Environmental and Economic Accounting (SEEA), under the aegis of the UN Committee of Experts on Environmental-Economic Accounting (UNCEEA), links environmental and economic metrics to allow for a more meaningful decision-making.27 Comprising three parts: SEEA Central Framework, SEEA Ecosystem Accounting and SEEA Applications and Extensions, the SEEA framework and data provide a useful methodology for investors to evaluate the implications of natural capital on economic decision-making.

The Taskforce on Nature-related Financial Disclosures (TNFD) is an umbrella group of organisations comprising asset owners, asset managers, third-party data providers and corporates that is focused on creating a framework that allows organisations to incorporate and report on nature -related risks and opportunities into their strategic decision-making. It is hoped that similar to what transpired with disclosures on emissions, better disclosure on nature-related metrics will allow investors to direct capital away from investments that harm natural capital and towards those with more positive outcomes.

Role of the Financial Sector

The financial sector can play a pivotal role in supporting sustainability by directing capital to sovereigns and businesses whose policies and actions seek to mitigate the degradation of natural capital. This may include methods such as, but not limited to, decarbonisation of portfolios, investment into new businesses and technologies that improve agricultural and fishing efficiency and yields, activities that promote recyclability and circular economy while seeking to do so sustainably to mitigate the risks of overconsumption and harming long-term cash flows. Given the direct linkage between rising temperature and loss of natural capital—particularly as observed in the loss of forest cover, biodiversity, food crop and agricultural yields, water resources and fisheries—it is imperative to address climate change and temperature rise when making investment decisions. When evaluating sovereigns and corporate issuers an assessment has to be made of the contribution natural capital has on GDP and revenues, capex and free cash flows, respectively, the risk arising from these natural capital factors and the consequences on debt refinancing, economic growth and creditworthiness of issuers.

Additionally, labelled green, sustainable and sustainability-linked bonds can also be issued to help direct investment into natural capital-related projects. A study suggests that while an overwhelming majority of such bonds issued in the markets target projects related to renewable energy, energy efficiency, and clean transportation, among others, only about 5%-10%28 are directly used to address natural capital-related factors such as biodiversity, ecosystems and other nature-based solutions.

One such bond was issued by Klabin SA, which is the largest packaging producer and exporter in Brazil with multiple mills and a history that spans a century. In January 2021, Klabin issued a 10-year sustainability-linked bond maturing in 2031 that aligns with the Sustainability Linked Bond Framework on three key KPIs (key performance indicators) related to water consumption intensity, waste reuse and biodiversity preservation with step-up margins of 12.5 basis points (bps), 6.25 bps and 6.25 bps, respectively. The reduction in water consumption was by 16.7% against a 2018 baseline (equal to 3.68 m3/ton of product), increase total waste reuse and recycling by 3.2% (equal to 97.5% of all hazardous and non-hazardous waste) against a 2017 baseline, and to reintroduce or reinforce at least two species threatened with extinction.29 Additionally, as a firm, Klabin has a 2030 Sustainability Agenda that focuses on Biodiversity in terms of restoring degraded areas, enhancing bird species, reducing animal collision points from accidents, re-introduction of at least two species shown to be threatened with extinction among others. Reduction of waste, improvement of water security and reduced consumption of industrial water usage are some other aspects monitored and reported by Klabin.30 Despite a soft regulatory environment in Brazil, the company has taken a proactive approach towards waste management and the use of recycled materials.

Western Asset’s Approach to Natural Capital

Assessment of Natural Capital for Corporates
Although the kind of natural capital factors varies across corporate sectors, it is still important to incorporate these considerations into analysis, where material, and based on the availability of data. Additionally, certain sectors by the very nature of the businesses may be exposed to elevated risks. These include sectors such as paper and pulp-related products, metals & mining, construction, oil & gas, transportation, chemicals and beverages to name a few. For instance, the paper and pulp industry demands a very specific focus on biodiversity and resource consumption, water utilisation and carbon emissions, among others. As an example, we have illustrated this through an issuer such as Suzano.

Natural Capital for the Paper and Pulp Industry Examined Through Suzano
From a natural capital assessment perspective, one has to be able to distinguish between the treatment of net versus gross carbon emissions as well as recycled paper content, when assessing the paper and pulp sector. For example, virgin fiber producers typically receive “green bond” treatment despite having much larger carbon and environmental footprints than paper companies utilising recycled fiber. As a sector with significant water stress exposure risks, issuers’ ability to recycle or reuse water is critical. Additionally, the impact on biodiversity stemming from potential deforestation and its impact on natural capital is crucial when assessing issuers. Finally, research should be backed up by engagement to form a more thorough assessment of the future pathway of the issuer in mitigating risks posed to natural capital.

Suzano Papel e Celulose is a Brazilian pulp and paper company with a presence in multiple countries. As one of the largest pulp and paper companies in the world, Suzano’s products are used extensively in multiple products. Suzano scores poorly by a third-party data provider on biodiversity. However, Western Asset’s analysis and research suggested that Suzano dedicates 40% of its land to conservation purposes, which exceeds Brazil’s legislated standards. This serves as an ecological corridor and a natural buffer that reduces risks of plague on its eucalyptus plantation. More specifically, Suzano has been one of the largest investors in nature-based herbicides/pesticides that reduce glyphosates’ adverse impact on biodiversity and public health. In 2020, it produced 49 million natural pest enemies, which resulted in net avoided costs of over BRL$14 million during the 2019/2020 period. It also added two laboratories in 2021 to advance R&D in this under-researched area. Furthermore, Suzano sits on the Task Force on Nature-Related Financial Disclosures, a leading ESG standard-setting body, to develop and standardize nature-related risk and impact KPIs. The firm aligns with the Below 2 degrees scenario and has set medium term targets to align with the 1.5-degree scenario, by working with the Science Based Target Initiative (SBTI) to establish a decarbonization methodology for the paper and pulp industry. Additionally, Suzano's forest base is certified by ISO 14001, the Forest Stewardship Council and the Program for the Endorsement of Forest Certification.

Assessment of Natural Capital for Sovereigns
At Western Asset, based on data availability, we may consider four key natural capital-related metrics, as part of several other material ESG Metrics, when it comes to evaluating sovereigns. These include agriculture, biodiversity, ecosystem and fisheries as described earlier. Sovereign exposure to these factors is evaluated by normalising for the 3-year average GDP per capita, to assess the ability to withstand changes, adapt and mitigate risks. Western Asset seeks to score each natural capital factor on a scale of 0-10 comparing it versus sovereigns with similar per-capita GDP. Applying this methodology allows Western Asset to understand a sovereign’s exposure to natural capital risk as illustrated in Exhibit 1.

Exhibit 1: Comparing Sovereign Natural Capital vs GDP Per Capita
Comparing Sovereign Natural Capital vs GDP Per Capita
Source: Western Asset, World Bank, Environmental Performance Index, Yale University. As of 31 Dec 20. Select the image to expand the view.

For instance, for a sovereign such as Australia, there are concerns around fisheries, ecosystem services, agriculture and biodiversity loss. Over the past two centuries Australia has suffered the greatest loss in biodiversity.31 The Australian Bureau of Agriculture and Resource Economics (ABARES), which is the research arm of the Australian Government Department of Agriculture, Water and the Environment, has developed a model that among others looks at factors such as rainfall, temperature, soil moisture and the impact on agriculture yields. Average farm profits have declined by 22.6%32 over the past 20 years. In 2017–2018, agriculture contributed $59 billion to the Australian national economy and tourism contributed $57.3 billion,33 both dependent on natural capital. While we welcome the publication of Australia’s Strategy for Nature,34 which lays out a framework for federal, state and regional governments to manage nature conservation, tangible action is needed to address some of the concerns highlighted. The progress of schemes such as the New South Wales Biodiversity Offsets Policy, National Landcare Program, Environmental Stewardship Programme, National Wildlife Corridors Plan, National Reserve System among other plans initiated by the government will need to be monitored to assess the impact on natural capital for Australia.

Collaborative Industry Engagement
In addition, Western Asset is a member of the UN Principles of Responsible Investment (PRI) Plastics Working Group focusing on Circular Economy. A circular economy stops waste from being produced in the first place; it eliminates waste and pollution, keeps materials in use and regenerates nature. With that in mind, Western Asset actively engages companies in the packaging sector to support the vision of the Ellen McArthur Foundation’s New Plastics Economy. Packaging accounted for 45% of all plastic produced in 2015. In collaboration with other asset managers and owners, the Firm engages companies in this sector, where material, to increase the share of recycled content in plastic packaging, ensure packaging is reusable, recyclable or compostable, and eliminate unnecessary or problematic plastic packaging, among others.


This paper seeks to outline the need to consider natural capital and its linkage (where material) to sovereign GDP, corporate revenues and the general well being of people. Considering natural capital estimations along with traditional financial metrics during investment decisions is likely to produce a more holistic assessment of an issuer. Losses to natural capital have increased exponentially due to overutilisation, mismanagement and apathy; these issues need to be addressed to align with the UN SDGs to mitigate losses to the global economy. While data availability is currently low, it is hoped that with greater material data investors will be able to make more nuanced judgments around investment decisions.