What natural capital disclosure for integrated reporting? Designing & modelling an Integrated Financial - Natural Capital Accounting and Reporting Framework

Business and government leaders from around the world are increasingly sounding the alarm about the need for effective management of business dependencies and impacts on ecosystems. As a consequence, financial institutions have recently made a formal commitment to work towards integrating natural capital considerations into their decision-making processes, including helping improve the accounting and disclosure practices of reporting organisations. Though various frameworks and standards have been developed and implemented to improve extra-financial accountability to stakeholders, current "sustainability reporting" falls short in providing the information needed for accurate investment decision-making. The recent releases of Integrated Reporting (IR) guidelines, notably by International Integrated Reporting Committee, have been presented as a significant step in the right direction by professionals and academics. This paper argues that a solid accounting foundation is required for these to be able to effectively incorporate the broader and longer-term social and environmental consequences of corporate decision-making. To support this argument, this paper first provides a brief review of Natural Capital accounting methods and main reporting practices. Based on this analysis, the paper proposes the key principles and methodological foundations for an Integrated Financial - Natural Capital Accounting and Reporting Framework which can be used to fulfil the aspirations of IR guidelines. A theoretical case study involving selected natural capital accounts (GHG emissions, wood consumption, water footprint, habitat loss) illustrates the practical implications of such a framework over three years, by notably explaining: i) the integrated financial - natural capital accounting journal entries, ii) the ensuing Integrated Financial - Natural Capital Statements of Position and Performance; and iii) how to calculate and disclose the natural capital biophysical and externality intensity of financial accounts. In doing so, this Framework provides the concrete foundation for building up a time and space distributed "catalogue" of natural capital dependency and impact information aligned with financial information recorded by companies, hence providing the integrated accounting application for other environmental accounting standards and guidelines, such as the forthcoming Natural Capital Protocol. It can hence be used to improve business decision-making, drive sustainable organisational changes and improve natural capital accountability.