Business accounting for biodiversity

In a recent report published by the OREE organisation, Joël Houdet summarizes the findings of his PhD on the incorporation of biodiversity and ecosystem services (BES) in business accounting systems. He defended his PhD on October 18th.

BES accounting can be used for management purposes, in companies that are heavily dependent on ecosystem services or biological resources or that operate in a heavily regulated environment concerning their impacts on BES. For the general public however, it is through Corporate Social Responsibility (CSR) reporting that BES accounting systems are best known.

CSR reporting on BES targets external stakeholders. Joël Houdet has identified three main approaches to this reporting:

  • EFA: Environmental Financial Acounting
  • DEE: Disclosure of environmental externalities
  • EEFR: Environmental Extra-Financial Reporting
  • He discusses each one of these options in the report, and in a policy-statement that will be communicated through a side-event at the CBD conference in Nagoya. We summarize it below.

    Environmental Financial Accounting
    EFA is an extension of standard financial accounting, which follows strict reporting rules (set by regulators) for reporting on a company’s financial health or performance to investors, tax authorities etc. In EFA, BES issues are included as financial provisions and liabilities related to the environment, such as provisioning funds for paying for damages and restoration actions in the case of a pollution event. Expenses and revenues related to environmental management (e.g. wastewater treatment) can also be reported through EFA.

    The main advantage of EFA for reporting on BES is that it is included in standard financial accounting standards, that has a true impact on corporate strategies and their bottom-line. Reporting of expenses and revenues or provisions and liabilities does not however give any indication of environmental performance – on the ground. Is the company’s impact on biodiversity increasing or decreasing? Which is the most cost-efficient tool or process for decreasing it?

    Disclosing environmental externalities
    Environmental externalities are the costs or losses supported by others because of the effects or impacts of a business on biodiversity or ecosystem services. These can be assessed using a variety of economic valuation methods (reviewed in TEEB).

    Using these valuations for accounting purposes has several important flaws:

  • Many of the methods used to value externalities are not reliable (e.g. contingent valuation techniques)
  • The company does not actually pay for these externalities, making their reporting symbolic
  • Disclosing environmental externalities does not allow the company’s environmental performance to be properly assessed
  • Environmental Extra-Financial Reporting
    EEFA is not linked to legal financial accounting standards but fits into corporate CSR reporting choices and strategies. It reports on a company’s management of environmental issues, including BES. A limited number of non-financial indicators are used for this, such as progress towards the implementation of environmental management systems, changes in resource-use efficiency (e.g. water consumption in production processes) or carbon emissions.

    The Global Reporting Initiative proposes a variety of environment performance indicators for CSR reporting. These include (1) the presence of remarkable species or habitats on or near business assets (e.g. factories, land holdings or concessions), (2) impacts on these biodiversity elements and (3) the company’s actions to mitigate these impacts. The main advantage of this albeit limited approach is that it truly falls within the company’s responsibilities to avoid and reduce the impacts of its activities on biodiversity and ecosystems (and offset any residual impacts).

    The main disadvantages of the EEFR approach is that

  • There are no standardized set of indicators for BES
  • In many cases, BES impacts are only assessed for new projects but not required for on-going activities
  • Supply-chain impacts on BES are rarely accounted for
  • It has no link to financial accounting and business performance (both short and long term)
  • Image found on

    After reviewing the three approaches above, Joëll Houdet came up with a Biodiversity Accountability Framework (BAF) that aims to mix the best of EFA (bottom-line effect) and EEFR (on-the-ground environmental performance).

    Biodiversity Accountability Framework
    The aim of Houdet’s BAF is to report both on a company’s financial dependence on BES and its impacts on BES. Concerning the former, he suggests that companies assess (1) the share of their revenues that stream from material flows from biodiversity and/or the appropriation of ecosystem services, (2) the financial dependence of their expenses / revenues and assets / liabilities to these flows and (3) how ES benefits are shared with other stakeholders along these biodiversity resource and ecosystem service flows.

    In reporting a company’s impacts on BES, Joël Houdet suggests that they be assessed beyond the company’s business assets to include the indirect effects of its activities (including its supply-chain) on ecosystems and the company’s actions to mitigate these effects. Such reporting would involve assessing (1) the trends in BES used or impacted by the company, (2) the impacts of its activities and threats posed by them to BES (e.g. location of business assets relative to key BES) and (3) mitigation action by the company and its suppliers (e.g. costs incurred for restoring impacted BES) and (4) the outcome of these actions (e.g. success / failure of restoration operations).

    Developing such an accounting framework requires considerable involvement by businesses (until it becomes a legal obligation that is…) as well as close collaboration between the BES science community and business. Good luck!

    One Response to “Business accounting for biodiversity”

    Leave a Reply