The exploration of natural capital on the balance sheet: a case study of a water utility company

There is a growing international consensus that recognising natural capital assets alongside other economic assets can steer investment away from negative outcomes and towards nature-positive outcomes. This consensus was recently validated by the Independent Review on the Economics of Biodiversity commissioned by the UK Treasury (Dasgupta, 2021) which clearly articulated the need to go beyond sustainable management and increase nature’s supply. Dasgupta (2021) argues for change in the way we measure success by accounting for natural capital assets and for a transformation of financial institutions to channel investment towards natural capital.

Government initiatives around the world are working to recognise nature’s contribution to wellbeing more explicitly in financial reporting. In the UK, the Office of National Statistics has been publishing Environmental Accounts since the 1990s and experimental Natural Capital Accounts since 2014 (ONS, 2023a; ONS 2023b). Other leading agencies in Canada, Australia and the European Union are collaborating to progress methods and overcome challenges (Hein et al., 2020; Bagstad et al., 2021; Dasgupta, 2021; Chen et al., 2023).Some international initiatives are also incorporating the accounting framework for monitoring and reporting progress on environmental outcomes. The UN Convention on Biological Diversity (CBD) Kunming – Montreal Global Biodiversity Framework contains 23 targets for 2030 including the integration of biodiversity into national accounting (Target 14), the alignment of public and private activities relevant to biodiversity with fiscal and financial flows (Target 14) and transparent disclosures on biodiversity risks and impacts by large companies and financial institutions (Target 15) (CBD, 2024).

Alongside these government initiatives, an increasing number of organisations are voluntarily reporting on their sustainability performance (KPMG, 2022). Guidance on methods and metrics to improve voluntary disclosure include the Global Reporting Initiative, Sustainability Accounting Standards Board, Natural Capital Protocol (Capitals Coalition, 2016) and ESG metrics recommended by the World Economic Forum’s International Business Council (World Economic Forum, 2020). While sustainability reporting through voluntary disclosures has helped grow awareness of the need to recognise environmental impacts and dependencies, it has not been successful in achieving substantive corporate disclosures (Davern et al., 2021). Rather, the increase in corporate sustainability reporting has seen a corresponding increase in the provision of misleading information, and in conveying a false impression to mislead consumers or investors about the environmental friendliness of the organisation’s products or activities (Hsiao et al., 2022).

Efforts are growing to improve the rigour and transparency in reporting business impacts and dependencies on nature (Capitals Coalition, 2016; Ingram et al., 2022). These efforts aim to improve financial performance, manage risk associated with natural assets and meet stakeholder expectations (World Economic Forum, 2020). However, while this guidance provides some options for disclosing impacts and dependencies on nature, it has not led to the level of commitment and legal obligations associated with assets as recognised under International Accounting Standards (IASs).

There have been recent developments in the mandatory sustainability reporting environment, with the International Sustainability Standards Board (ISSB) issuing IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These standards incorporate the recommendations of the task force on climate-related financial disclosures (TCFD), the role of which has since been fully subsumed by the IFRS Foundation (IFRS Foundation, 2023). Whether IFRS S1 and S2 become mandatory depends on whether individual jurisdictions choose to legislate them. Several countries, including the UK and Australia, have indicated that they will issue their own Standards based on S1 and S2. The Australian Accounting Standards Board (AASB) Standards were approved on 20 September 2024.

The sister initiative of the TCFD, the task force on nature-related financial disclosures (TNFD) released its final recommendations for disclosure requirements in September 2023. Similar to IFRS S1 and S2, the TFND (2023) recommended disclosures are structured around governance, strategy, risk and impact management, as well as metrics and targets. Assuming that the TNFD follows the same path as the TCFD, these recommendations will form the basis of forthcoming ISSB Standards, with one of the future ISSB priorities focused specifically on disclosure about biodiversity, ecosystems and ecosystem services (IFRS Foundation, 2024). However, the TNFD framework has been criticised by environmental groups for failing to take a double-materiality approach, by only focusing on the financial risks to the business, rather than also considering the risks the business poses to nature and potentially facilitating corporate greenwashing (Hawkes, 2022; Sutherlin, 2023). One way of mitigating the risk of greenwash and to strengthen sustainability reporting is a robust accounting system (Horner, 2014), and the recognition and measurement of natural capital can be used as a means to achieve positive impacts (DAWE, 2021), both of which can be addressed through more, and focussed, research (Free et al., 2024). Specific mechanisms to ensure double materiality include providing estimates of change in the value of the natural capital assets not only to the reporting entity but to the rest of society; natural capital impact; and risk assessments (Smith et al., 2023).

Taken together, the current literature indicates the next step in research required: analysis of water filtration services, including sediment and nutrient trapping and water trapping and storage potential of the soils and vegetation, along with associated ecosystem services, and their direct monetary value to society. In conjunction with the system of environmental–economic accounting (SEEA–EA), we begin to paint the requirement for a systematic accounting of the same, as it applies to a corporate entity, in relation to local governance. This analysis requires a synergy of internal corporate data, external government policy and independently verified methods to assess ecosystems with a theoretical framework for accountancy. Here, we combine such internal and external data and expertise.

The purpose of this study is to explore whether natural capital concepts can be incorporated into existing financial accounts to improve sustainability reporting practices. Specifically, we ask:

To answer these questions, we collaborated with Sydney Water, a large water utility in New South Wales (NSW), Australia. Water utilities play an essential role in securing water supply for growing populations, while also sustaining industry development and contributing to economic growth (NSW Water, 2025). In addition to grey infrastructure, urban water utilities manage a wide range of natural assets, including waterways, urban riparian zones and upper catchment lands. Most water utilities have objectives around environmental protection and improved valuation of environmental resources that contribute to their business objectives. These environmental objectives may include maintaining healthy waterways, protecting biodiversity, preventing soil erosion, providing flood mitigation measures and recreation opportunities.

Natural capital accounting is a systematic method that directly illustrates the costs and benefits of leveraging natural assets. In turn, this accounting financially justifies operational or strategic decision-making, including investment in natural capital. For instance, natural capital accounting can assist in steering appropriate investment to natural stormwater assets to achieve multiple sustainability objectives in new, urbanising catchments, as in the Rouse Hill sub-catchment examined in this study. Natural capital accounting, therefore, has direct application into business strategic planning, investment decisions, supply chain management, operations management, risk management and corporate reporting (Ingram et al., 2022) which are important business management processes in the water industry. A natural capital accounting approach can measure the effort in- and quality of-stewardship over the natural environment under the water utility’s control to meet stakeholder expectations as well but also provides the necessary data and summaries to meet proposed reporting requirements of the TNFD (2023) and other nature-related commitments.

The concept of accounting for the environment is not new, with calls for new forms of accounting dating back several decades (Gray, 1992). Despite that, the “invisibility” of nature in economic decision-making persists, and has long been considered a major contributor to the ongoing degradation of the natural environment (Hines, 1988; Pearce et al., 1989; Helm, 2015). Government seeks to address this, and so environmental valuations are incorporated into cost-benefit analysis aiming to increase the recognition of nature’s value, at least in government policy settings (Pearce et al., 1989; Helm, 2019). Problematically, traditional cost benefit analysis, based on the concept of marginal utility, fails to account for the cumulative effects of individual projects on complex environmental systems (Helm, 2019). Natural capital accounting is well placed to rebalance this as it provides a framework to systematically measure, value and report the contributions of natural ecosystems to human well-being and economic activities as well as internal management decision-making (Schaltegger et al., 2015). Natural capital accounting emphasises the long-term maintenance of ecosystem services and the cumulative impacts of human activities on natural systems. By aligning with established financial reporting practices, such as balance sheets and risk registers, natural capital accounting can integrate environmental considerations into decision-making processes in a way that resonates with policymakers, businesses and investors, thus, helping to drive investment in nature and supporting long-term environmental stewardship (Pearce et al., 1989; Helm, 2019, Carlucci, 2023; O'Grady et al., 2024; Telfer and Bedggood, 2025).

Putting the environment in a traditional economic accounting framework means placing a “value” on nature and raises the question: “value for what, and to whom?” (Russell et al., 2017). Hence, accounting for nature on the balance sheet cannot succeed without explicitly recognising the plurality of values of nature across society (IPBES, 2022) and adopting a new conceptual model of accounting based on that recognition. Such transformation requires interdisciplinary work in the environmental accounting field (Bebbington and Unerman, 2018; Jones and Solomon, 2013; Nawrocka and Parker, 2009; Russell et al., 2017). An interdisciplinary approach facilitates linkages between previously unconnected fields of literature (Aguilera et al., 2007), and has been identified as being essential to the sustainable future of the accounting profession (Tingey-Holyoak and Burritt, 2012).

Herein, we intersect accounting and finance with policy and ecological theory, and we found multiple impediments continue to prevent the application of an interdisciplinary approach to accounting for the environment (Feger et al., 2019; Alden Hull et al., 2022; Himes et al., 2024; Horner et al., 2024). One of these is the lack of an agreed common language. There are key differences across various disciplines as to what might constitute an “account” (Horner et al., 2024), which in the broadest sense could be anything that communicates information regarding an organisation’s activities or performance (Deegan, 2023). Another impediment is the lack of guidance on how to undertake a systematic process of identification, measurement and recognition of environmental information (Horner et al., 2024). There is still much debate in the literature about how to deal with the multiplicity of terminology and measurement methods in environmental accounting, but there is also consensus that immediate action is needed (Cuckston, 2018a, 2018b). The SEEA–EA framework is an open, published and freely accessible systematic method (UN, 2021) being increasingly adopted at both a national and company level as a way of accounting for natural capital (Ingram et al., 2022).

The SEEA provides robust internationally accepted concepts and methods to organise information linking nature to economic statistics. It builds on national accounting practices to expose the dependency, but also the impacts, of the economy on natural capital (UN, 2023a). The SEEA Central Framework provides advice for specific aspects of natural capital such as energy, land, water, air emissions and agriculture. By contrast, the SEEA Ecosystem Accounting (SEEA–EA) describes natural capital as ecosystems providing services that generate benefits for people (United Nations, 2021). Like other economic assets, natural capital assets need to be maintained over time and investment is required to do so.

The SEEA–EA proposes a suite of accounts that can be used to strengthen the measurement and valuation of natural capital. Ecosystems are conceived as assets with extent and condition characteristics that determine their capacity to provide multiple goods and services to beneficiaries (United Nations, 2021). The concept of ecosystem services aligns with the concept of income streams which require physical measurement and monetary valuation. Asset valuation is achieved either using market prices or the net present value approach already used in financial accounting. Figure 1 shows the relationship between the main elements of ecosystem accounting. These concepts and methods, described in detail in the SEEA–EA standard, provide a robust measurement framework to support natural capital accounting.

Although the SEEA–EA was initially designed to align with national accounting practices for reporting on national territories, many of its elements can be applied to subsets of national ecosystems managed by government agencies or by private entities (Bagstad et al., 2021; Ingram et al., 2022). While a general awareness of the relevance of the SEEA–EA to business accounting is growing, there have been very few examples so far demonstrating practical applications of the approach. SEEA–EA methods for valuing the contribution of ecosystems to grazing enterprises have been found to be consistent with Australian Accounting Standards ( Ogilvy and Vail, 2018). Ecosystem degradation resulting from overuse by pastoral activities could also lead to the recognition of financial liabilities under current IASs, where there is an expectation the ecosystem condition would not be compromised by commercial activities ( Ogilvy et al., 2018; Horner et al., 2022). Without explicitly referencing the SEEA–EA framework, Houdet et al. (2020) demonstrated how biophysical measures of biodiversity could be recorded in Statements of Biodiversity Performance and Position to report the physical (but not financial) impacts of business on natural capital. More recently Smith et al (2023) provided guidance on how natural capital statements of position and performance could be prepared using the SEEA–EA framework.

Research has examined the application of the SEEA–EA method to water management at national or sub-national territories: agencies report water assets from a natural resource perspective following SEEA Central Framework with the view to inform government policy and sustainability reporting (Remme et al., 2015; Salminen et al., 2018; Mahdavi et al., 2019; López et al., 2019; Bagstad et al., 2020; Esen and Hein, 2020). Very little research has moved to the next step up the ecosystem services chain or taken a broader ecosystem perspective to consider the role of vegetation in filtering water before it enters water bodies, a process which is a regulating rather than provisioning ecosystem service. Those that do look upstream, so to speak, estimated the physical flow of services without extending to monetary valuation (Warnell et al., 2020; Bagstad et al., 2020; Adem Esmail et al., 2023; Boschetto et al., 2023). Bagstad et al. (2020) report the value of water supplied by ecosystems in the USA but only report physical flows of filtration services. Boschetto et al. (2023) consider instead the water retention and storage capacity of soil as a function of soil characteristics and land cover to describe the water provisioning service, including their monetary values. The effect of soils and land cover in retaining sediments and nutrients however is not assessed.

One study in southern Victoria, Australia showed how an ecosystem service perspective can be used to inform the design of natural assets managed by urban authorities and water utilities, although the work did not extend to incorporating the information into financial accounts (Ghofrani et al., 2020). Quantifying and valuing stormwater abatement, water quality improvement and water provisioning services were found to be useful in highlighting the multifunctional nature of natural capital in urban blue-green infrastructure. Using catchments in the Central Highlands of Victoria, Australia, Vardon et al. (2019) described the SEEA–EA accounting treatment of water provision and filtration for abstracted water supplied to households and businesses in Melbourne. The authors took a national accounting perspective and described alternatives for reporting flows of services, including between ecosystems, for example between a forest and water reservoir. They discussed the role of vegetation cover in filtering water supplies and described how water filtration services could be reported alongside water provisioning services. However, due to a lack of available information, they reported quantities of water filtered rather than quantities of sediments and pollutants avoided. The study further estimated monetary values for water provisioning services using a replacement cost method but omitted monetary values for the filtration services.

The literature reviewed above has revealed several gaps that require further exploration. Thus, the objectives of this research are twofold. Firstly, we seek to overcome the issue of natural asset measurement by testing the application of the SEEA–EA framework in the context of a corporation, which addresses RQ1. Secondly, once the measurement is achieved, we test whether a new natural asset class can be recognised in the financial statements, which addresses RQ2 and RQ3. Specifically, the present study extends previous work from multiple perspectives:

• We recognise natural capital assets on the balance sheet by measuring the benefits accruing to the agency, in the form of cost savings for water filtration obligations.

• We apply the SEEA–EA framework to a corporate setting, rather than national accounting, reporting the level of filtration services provided by a subset of assets controlled by Sydney Water, rather than reporting for a whole territory controlled by a government.

• We consider stormwater assets rather than water supply assets, accounting for water quality alone, not water provision.

• We measure the benefit relating to water filtration according to changes in the condition of vegetation cover.

• We estimate the financial value of the filtration benefit provided by vegetation in monetary terms.

This study uses environmental stewardship as a theoretical framework, which is consistent with previous studies exploring the relationship between people and the environment (e.g. Barry and Smith, 2008; Dumay et al., 2018). Environmental stewardship was defined as “the wise and responsible use of natural resources [to] support social-ecological resilience and human well-being” (West et al., 2018). The determination of what could be considered “wise and responsible” has evolved to take on a range on meanings (Mathevet et al., 2018; Horner and Davidson, 2020). According to the Australian Government’s Strategy for Nature, “stewardship of nature can contribute to Australia’s nature conservation objectives and also build the health and resilience of our society, businesses and economy” (Commonwealth of Australia, 2017). Environmental stewardship manifests as actions that restore, conserve or protect the environment for present and future generations (Mcleod et al., 2024).

The concept of stewardship has received particular attention in the environmental sciences and conservation literature (Mathevet et al., 2018), and is based on the understanding that landowners are stewards of the natural environment, and should account for use of nature accordingly. Stewardship behaviour is motivated predominantly by intrinsic and psychological factors, and an account of this behaviour may be provided for both altruistic and self-interested motives simultaneously (Dumay et al., 2018; Jones, 2003). Stewardship is considered to be both interdisciplinary and transdisciplinary and is based on a framework of care, knowledge and agency (West et al., 2018).

Sydney Water recognises the importance of their environmental stewardship, in that their operations traverse environmentally sensitive areas, including threatened ecological communities (Sydney Water, 2023). Environmental stewardship has often been used as a theoretical underpinning for studies seeking to operationalise environmental accounting and management (e.g. Jones, 2003; Hossain, 2017; Lobley et al., 2013; Horner and Davidson, 2020), and provides a useful framework for interdisciplinary projects such as this, as it facilitates collaboration between researchers and non-researchers of different backgrounds on areas of shared concern (West et al., 2018).

The management of water resources is particularly important from an environmental stewardship perspective. Indeed, it has been suggested that access to water-related information constitutes a human right (Hazelton, 2013), and accountants are seeing increasing demands to produce water accounts for clients using interdisciplinary knowledge (Tingey-Holyoak and Pisaniello, 2019). However, to the best of our knowledge, there is no published literature explicitly linking information on the physical condition of terrestrial ecosystems to financial accounts in the context of water utilities. Doing so has important implications for the discharge of accountability from an environmental stewardship perspective.

This research used a case study in a single reporting entity in the Australian water utility sector. Sydney water is an industry leader in the NSW water sector and an ideal candidate for testing new procedures that may improve industry practice. It is a government-owned statutory corporation providing drinking water and wastewater services to over 5 million people in Sydney and surrounds (Sydney Water, 2022). The utility also provides recycled water and stormwater services to specific areas including the study area at Rouse Hill, a sub-catchment of the Hawkesbury–Nepean River system located about 45 km northwest of the Sydney CBD. The focus for this “proof of concept” project was on the Rouse Hill riparian land assets and specific flood zones, most of which are owned and/or managed by Sydney Water.

Our case study first aimed to understand the utilities’ operations, the role of stormwater assets in the riparian zone and the internal availability of environmental information useful to asset measurement. We examined multiple data sources including internal policy documents, annual reports and financial statements. Early discussions revealed the need to enlist support from a wide range of actors within the agency (Bebbington et al., 2024). We conducted a series of workshops with key stakeholders within the agency including on-the-ground asset managers, data custodians, management accountants and financial accountants.

The naturalisation and revitalisation of stormwater assets are an example of natural capital assets that improve the quality of water released to waterways. These “soft engineered” approaches typically comprise natural or constructed wetlands for sediment control and vegetated riparian land assets that filter overland precipitation runoff before it enters adjacent streams. More dense vegetation in the riparian zone generally performs better than sparse vegetation, bare land or impervious surfaces such as roads and building roofs. In addition to water filtration, natural assets provide extra benefits to the community including climate mitigation in the form of carbon capture and sequestration, habitat for biodiversity, protection against soil erosion, flood mitigation and recreation opportunities.

Maintaining and improving vegetation in the riparian zone to meet both stormwater quality standards as well as community expectations of environmental stewardship requires adequate funding. Sufficient funding can be difficult to secure as the benefits provided by natural assets are not easily valued in standard accounting practices, and consequently their contribution to business activities and social wellbeing may be underestimated in investment decisions. Natural assets are generally not recognised the same way grey infrastructure assets are, despite delivering similar benefits. As a result, improving riparian land vegetation may not be easily identified as an essential activity requiring ongoing funding. This under-representation as fully-fledged assets can lead to inconsistencies in performance evaluation of natural assets relative to grey infrastructure.

We collated environmental information specific to the natural capital assets from both external and internal sources. We used this data to estimate environmental income flows using a publicly available ecosystem service modelling platform, allowing our method to be replicated by any organisation at no cost. These estimates were then used to generate natural capital accounts for the purpose of asset measurement and financial recognition consistent with AASB Standards. The steps leading to the financial recognition are identified in Figure 2.

The findings of the research are presented in two sections: Section 1 seeks to describe how the SEEA framework was used to achieve physical and financial measurement of the natural capital assets investigated. Section 2 describes how the measurement can be used to improve the visibility of the assets in financial reports, including the financial statements.

We selected the Rouse Hill riparian lands assets which provide water filtration services for the increasing stormwater flows from urban growth. The riparian land assets were classified according to the nature of the land cover present at the time of survey (Figure 3). The spatial data used for this study was collated from various publicly available sources: SRTM-derived 1 Second Digital Elevation Models from Geoscience Australia (Gallant et al., 2011), vegetation cover from the NSW State Vegetation Type Map (Department of Planning and Environment (DPE), 2022), land use from Sixmaps (NSW Department of Customer Service – Spatial Services, 2022). The area consisted of nine different land asset types: five native plant community types, grass, non-vegetated still water body, watercourse and medium density urban fabric (Figure 3).

Following the SEEA–EA guidance, the extent of the riparian vegetation (Table 1) refers to the spatial area occupied by ecosystem assets, in this case riparian land assets (United Nations, 2021). Asset extent is described in hectares or square kilometres at the beginning and closing of the accounting period. The total area of riparian land assets in this example was 369 hectares.

Most environmental change, including incremental natural regeneration may not be meaningful on annual cycles. Environmental accounting, therefore, tends to span longer time periods to capture meaningful change. The choice of a reporting period was constrained by the availability of environmental information. This is a consequence of the current funding model for environmental monitoring, where the utility must seek funding for each iteration with the price regulator, the Independent Pricing and Regulatory Tribunal. As a result, monitoring is carried out to meet short-term policy objectives and repeated measures over longer timeframes are not implemented.

In this case study, the most comprehensive suite of environmental data useful for reporting on the riparian lands was 2013, so it was used as the opening period. The closing period was set to 2023 and in the absence of better information, it was assumed the water utility did not acquire or sell any riparian land assets over the accounting period, so no change in asset extent was recorded. Ecosystem extent was assessed using spatial analysis carried out using free and open source QGIS and R software (R Core Team, 2023; QGIS Development Team, 2023).

Ecosystem services are the contributions of nature to economic production and social wellbeing. They correspond to the accounting concept of economic benefits flowing or expected to flow to the controlling entity [Australian Accounting Standards Board (AASB), 2019]. A measure of the physical quantity of ecosystem services flows has multiple uses for a water utility seeking to better understand the effects of their asset management practices or to optimise resource allocation. Here, we focus on stormwater filtration services and carbon services relating to global climate regulation. These were identified in the study scoping stage as being core business objectives for the water utility. They do not span the whole range of benefits provided by the assets, but they provide the most robust measurement opportunity. We compared ecosystem services in 2013 with a theoretical “optimal” scenario in 2023 (“the optimal 2023 scenario”).

Ecosystem service performance varies through time but also in space across an area of interest, for instance, some areas sequester carbon faster than others. We capitalised on this spatial variability and simulated the optimal 2023 scenario where asset management activities such as tree planting, fertiliser use and weed control led to higher condition riparian land assets by 2023. This comparison of 2013 with the optimal 2023 scenario illustrates the impact of a new land management scenario without confounding effects of land use changes across the entire catchment, for example new urban development farther up in the catchment.

The optimal 2023 scenario relied upon the same spatial data, except for one parameter each in the sediment filtration and in the carbon storage models. In the sediment filtration model, the maximum filtration performance observed for native vegetation in 2013 was used to inform filtration performance for native vegetation in the optimal 2023 scenario. This means we assumed that management actions were taken by the water utility to improve the vegetation in the riparian land assets with a view to optimising water filtration services, while other land within the catchment remained constant. In the carbon storage model, maximum carbon storage observed in the native vegetation of 2013 was used to inform carbon storage for the optimal 2023 scenario. This assumes that management actions between 2013 and 2023 optimised carbon storage.

The Integrated Valuation of Ecosystem Services and Tradeoffs (InVEST) and Sediment Delivery Ratio model (version 3.11.0, Sharp et al., 2018) was used to estimate sediment trapped by vegetation within the catchment. Waterflow is estimated across the watershed interest based on a hydrologically-enforced digital elevation map and annual rainfall data. This, along with soil properties, allows calculation of the rate of sediment generation, runoff and entrapment for every pixel as tonnes/hectare using the Revised Universal Soil Loss Equation (RUSLE). The RUSLE is a widely used model (Sharp et al., 2018) that predicts soil erosion caused by overland flows. The RUSLE model incorporates average annual rainfall, soil erodibility, the likeliness of soil to erode, the length and steepness of the slope, the crop or vegetation cover and conservation practices/landscaping for the area. The InVEST implementation estimates sediment loss, transport and trapping, per pixel, which is summarised through aggregate statistics. Data used to parameterise the RUSLE model, rainfall, erosivity and erodibility factor, were extracted from a comprehensive spatial model of hillslope erosion in NSW (Yang, 2014), while other parameters were informed by recent literature (Bakker et al., 2008; Kouli et al., 2009).

Carbon sequestration includes both additions (plant growth) and losses (respiration, fires, etc.), and corresponds to a flow of carbon from the atmosphere to the ecosystem asset over some period, in this case 10 years. Net sequestration can be positive (adding to the carbon pool) or it can be negative (emitting carbon from the pool). Using remote sensing data, carbon sequestration can be estimated as the difference in carbon storage among contiguous years. The InVEST carbon model (Sharp et al., 2018) used three carbon pools, above-ground, below ground and dead-carbon pools, to estimate carbon stocks by landcover type. Observed carbon pools were modelled as part of a collaboration between the Natural Resources Commission of NSW and the Mullion Group (Roberts et al., 2022).

The model estimated 442 tonnes of sediment were filtered by the riparian land assets in 2013, and that 654 tonnes of sediment would be filtered in the optimal 2023 model, an increase of 212 tonnes per year of sediment filtered (Table 2). The majority of filtration services were supplied by Cumberland Red Gum Riverflat Forest (150 tonnes) and Grass (103 tonnes). The greatest increase in total sediment filtration under the 2023 optimal scenario was also found in Cumberland Red Gum Riverflat Forest, increasing by 141 tonnes. Shale-Sandstone Transition Forest had the highest improvement in sediment filtration per unit area (1.1 t/ha).

The riparian land assets in the optimal 2023 scenario (78,956 tonnes) stored 30,161 tonnes more carbon than the 2013 model (48,795 tonnes), an average increase of 81.8 t/ha (Table 3). The greatest increase was in vegetation in the Cumberland Red Gum Riverflat Forest (9,199 tonnes), the greatest average per hectare increase was in the Coastal Valleys Swamp Oak Riparian Forest (153 t/ha), although this asset covered only 9 hectares. Cumberland Red Gum Riverflat Forest had a low per hectare increase (65 t/ha) but covered a large area (141 ha).

The environmental income from sediment filtration is an estimate of the avoided cost from all sediments filtered by the riparian land assets. Sediment filtration services for 2013 are valued at AU$110,456 using the avoided cost of sediment removal from stormwater infrastructure reported by Perth NRM (Sallan, 2021).

Costs of sediment removal vary widely depending on the asset type, ease of access and type of work required. A wide range of costs are presented in the Perth NRM report, from $250/tonne to $5,143/tonne. We used the lowest cost reported ($250/tonne) to achieve a conservative estimate of value for sediment filtration services.

Present asset values were obtained by discounting the value of future flows of sediment filtration using a private discount rate of 7% to reflect the private nature of the benefit (accruing to the business), noting that this private benefit specifically relates to the cost savings provided by natural filtration, rather than the public benefit of improved water quality which accrues to the environment and society. This discount rate is also in line with NSW Treasury recommendations for government cost-benefit analysis [Treasury New South Wales (NSW), 2017]. Flows were discounted over 100 years as recommended by the SEEA–EA for assets expected to persist in the long run.

Table 4 shows the estimated value of sediment filtration services for the range of riparian vegetation types present in the catchment. Values for 2013 are compared to values under the optimal 2023 scenario showing an additional $53,057 in service could be generated by improving the sediment filtration capacity of vegetation.

Asset values can be derived by valuing standing carbon using either market values or the social cost of carbon (SCC). Stored carbon is valued at Australia’s Emissions Reduction Fund (ERF) market price at the time (October 2022), which corresponds to a fair value measure in accounting practice. The SCC is an estimate of the social harm resulting from every additional tonne of CO2-e released to the atmosphere and is typically a lot higher than carbon market values based on abatement costs. SCC is a function of climate system models, the choice of discount rates and the expected damage of rising temperatures on human health, agriculture and sea level rise. The US Government’s recommended SCC of US$51 (AU$73) per tonne of CO2-e is set to increase to US$190 (AU$274) per tonne as a result of updated research (Rennert and Prest, 2022; Rennert et al., 2022).

Table 4 also presents the estimated value of carbon stocks for the range of riparian vegetation types. We applied the more conservative market value of AU$37/tonne CO2-e to obtain a standing carbon value of AU$6.6 million for 2013. Values for 2013 are compared to values under the optimal 2023 scenario, showing a potential increase in asset value of $4.0m, should the land assets (vegetation) be restored to optimum condition. Using the initial (AU$73) and proposed (AU$274) US recommendations for SCC, the value of the carbon stored in the riparian land assets could reach AU$13m to AU$49m.

The purpose of this study was to explore whether natural capital concepts can be incorporated into existing financial accounting practices. Specifically, we asked: Can natural capital be recognised in the financial statements? And if so, what methods can be used in a water utility to recognise natural capital on the balance sheet? Following collaboration with Sydney Water, three possible alternatives are proposed for the financial recognition of the elements of their natural capital (riparian vegetation and carbon storage) identified in this study. They are:

• balance sheet item;

• notes to the financial statements; and

• voluntary disclosures.

These were presented to Sydney Water as a portfolio of disclosure alternatives. They can also be applied to other water utilities that have similar stormwater management responsibilities, provided they have the necessary resources to undertake the abovementioned measurement techniques.

To determine whether natural capital can be recognised on the balance sheet, we must first consider whether it meets the definition of an asset. An asset is defined as “a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits” (AASB Conceptual Framework paras 4.3 and 4.4). These rights take many forms (AASB Conceptual Framework para 4.6), including the provision of economic benefits by enabling the entity to avoid cash outflows through the provision of services [AASB Conceptual Framework para 4.16(c)(i)]. The right must have both the potential to produce economic benefits beyond those available to other parties and be controlled by the entity (para 4.9). It does not need to be certain or even likely that the right will produce economic benefits, it is only necessary that the right exists (AASB Conceptual Framework para 4.14).

Based on the definition and requirements set by the AASB, it appears that the riparian vegetation under the control of the water utility meets the criteria of an asset, due to the water filtration services the vegetation provides. These services provide economic benefits in the form of avoided cash outflows, and assuming that no other entity has an obligation to undertake sediment removal in the region, these benefits are not available to other parties. Furthermore, the economic benefits can be controlled by the water utility through their ongoing management of the riparian vegetation. Therefore, we believe the riparian vegetation appears to meet the definition of an asset as per the requirements set out in the AASB Conceptual Framework [Australian Accounting Standards Board (AASB), 2022a, 2022b], which also suggests that a failure to recognise such items limits the usefulness of the reports, noting that:

The line items that could be included in a balance sheet are set out AASB 101 (para 54), and include, for example, items such as “Non-current receivables”; “Property, plant and equipment”; “Right-of-use assets”; and “intangible assets”. According to AASB 101 (para 55), an entity shall present additional line items when it is relevant to an understanding of the entity’s financial position, thus, Sydney Water may present an additional line item of “natural capital” (or similar), which would allow it to group together additional natural capital assets, as they are identified (as per the definition provided above) and quantified in the future. Therefore, in answer to the first research question, it appears that the water utility may include riparian vegetation as a non-current asset under an additional line item of “natural capital” on the balance sheet.

The second research question explores what methods can be used in a water utility to recognise natural capital on the balance sheet. As noted previously, the asset value is measured using the value in use method. The present value was calculated by discounting future flows of sediment filtration (conservatively $250/tonne at 442 tonnes per annum) using a private discount rate of 7% to reflect the private nature of the benefit (accruing to the business). This discount rate is also in line with NSW Treasury recommendations for government cost-benefit analysis. Flows were discounted over 100 years as recommended by the SEEA–EA for assets expected to persist in the long run.

This asset valuation requires some estimates and assumptions, and it is noted in the AASB Conceptual Framework (para 2.19) that:

The AASB accepts that there may be trade-offs between characteristics of information such as “relevance” and a “faithful representation” to provide information that is useful for decision-making (AASB Conceptual Framework para 2.22). For example, relevant information may be based on uncertain estimates. It is noted that if the level of measurement uncertainty involved in making an estimate is so high that it is questionable whether the estimate would provide a sufficiently faithful representation, the most useful information may be the uncertain estimate, accompanied by a description of the estimate and the associated uncertainties (para 2.22).

The notes to the financial statements may provide information that is not provided elsewhere in the financial statements, but that Sydney Water deems relevant to understanding the financial statements or supporting information for items presented in the financial statements [AASB 101 para 114(c)(iii)]. The notes may also include information about items that meet the definition of an asset, or other elements, but have not been included in the financial statements [AASB Conceptual Framework, paras 3.3(c)(iii) and 5.6].

The recognition of riparian vegetation as an asset will depend on the extent of Sydney Water’s obligation to remove the sediment (and the corresponding rights to the benefits that the riparian vegetation provides). For the purposes of simplicity, in this study the valuation figure is based on the assumption that all of the benefits, in the form of cost savings for water filtration obligations, accrue to the agency. Assuming that the riparian vegetation meets the definition of an asset due to the rights Sydney Water has to the economic benefits that it provides, according to the AASB (Conceptual Framework para 5.11):

This suggests that information regarding natural capital assets that provide economic benefits in the form of avoided cash outflows that accrue to the entity should be provided in the notes, at minimum.

In the absence of a more robust level of disclosure in the financial statements, water utilities such as Sydney Water may choose to provide voluntary disclosures regarding their management of natural capital. Voluntary disclosures in the Annual Report may be in the form of a narrative, or in the form of an Environmental Profit and Loss Statement (Table 5) and Natural Capital Balance Sheet (Table 7).

Currently, there is no requirement for natural capital accounting disclosures to meet the requirements set by the AASB. It should be noted that Tables 5 and 7 are incomplete due to insufficient data and, thus, are provided for illustrative purposes only. However, they do demonstrate how organisations may use data collected under the SEEA–EA framework and present them in a manner that is consistent with, and understandable by users of general purpose financial reports.

The Environmental Profit and Loss Statement would be accompanied by Note 1, and the Natural Capital Balance sheet by Note 2 (the contents of the notes is subject to change, depending on the methods used). Notes 1 and 2 draw from other sections of this paper.

Note 1

The Rouse Hill riparian land assets consist of natural lands and vegetation located in the riparian zone and managed for the purpose of reducing the sediment load of stormwater before it enters channels and streams. The quantity of sediments filtered by the riparian land assets is modelled using the InVEST platform developed by Stanford University’s Natural Capital Project and Modelled Hillslope Erosion for NSW data on topography, rainfall, land cover management and soil properties.

The environmental income from sediment filtration is an estimate of the avoided cost from all sediments filtered by the riparian land assets. Sediment filtration is valued at the avoided cost of sediment removal from stormwater infrastructure reported by Perth NRM: $250/tonne (see Monetary valuation section for further details).

The following table shows the physical quantity of sediments and the associated value of the filtration services for each asset type presented in the Rouse Hill riparian vegetation (Table 6).

Note 2

Vegetation helps regulate the global climate by removing carbon from the atmosphere and storing it as living or dead biomass. Carbon storage and sequestration are separate processes that contribute to climate regulation. Estimates of carbon sequestration over an accounting period are obtained by the difference in carbon stocks between two time periods.

Biomass carbon in the riparian land assets was modelled using the InVEST platform developed by Stanford University’s Natural Capital Project (Sharp et al., 2018), data from the NSW Forest Carbon Stock 1990–2020 and the NSW State Vegetation Type Map [Department of Planning and Environment (DPE), 2022]. Three carbon pools are included in the carbon stock assessment: aboveground, belowground and dead woody debris. Litter and soil carbon are excluded so the assessment is most likely an underestimate of the total carbon present on site.

The stock of carbon stored on site is measured at fair value using the Australian ERF market price of AU$37/tonne of CO2-e (January 2023). Modelled biomass carbon stocks convert to 3.67 tonnes of CO2-e. The contribution of sediment filtration services to the asset value is measured using the value in use method. Present asset values were obtained from the discounted rate of future cash flows from sediment filtration using a private discount rate of 7% to reflect the private nature of the benefit (accruing to business), noting that this private benefit specifically relates to the cost savings provided by natural filtration, rather than the public benefit of improved water quality which accrues to the environment and society. This discount rate is also in line with NSW Treasury recommendations for government cost-benefit analysis. Flows were discounted over 100 years as recommended by SEEA–EA for assets expected to persist in the long run. The following table shows the physical quantity of biomass carbon and the associated value of the filtration services for each natural asset type present in the Rouse Hill riparian land assets (Table 8).

The primary focus of this study has been to explore how economic and environmental accounting methodologies can assist in providing financial recognition of natural capital assets managed by a water utility. This research showed that many SEEA concepts and data organisation principles are useful to guide the recognition of natural capital in financial statements. Environmental accounting can provide multiple benefits including increasing the visibility of natural assets, making it easier to link to business planning and demonstrate environmental stewardship. The value of the contribution made to a water utility’s business objectives (water filtration) and to broader community wellbeing (carbon sequestration) were also distinguished.

Regular asset measurement using the method outlined in this study would provide multiple benefits to the managing agency. Estimates of the physical flows of ecosystem services and their value provide an avenue for reporting changes in asset performance over time and inform internal asset management decisions. For example, the method could be used to identify what ecosystem types are more effective at filtering water and should be targeted for restoration activities, which is consistent with the prior literature identifying the different uses of environmental information for internal management decision-making (Schaltegger et al., 2015). The scenario explored in this project predicts that restoring the Shale-Sandstone Transition Forest vegetation community would result in more sediment filtration per hectare (1.1 t/ha, Table 2) than other ecosystem types. Better informed asset management decisions that account for the contribution of environmental resources can then help demonstrate responsible stewardship over those resources. However, this is contingent on the scientific basis of assumptions made about the relationship between specific ecosystem services and the selected indicators of ecosystem condition. The SEEA–EA condition typology describes the suite of indicator types to choose from (Czúcz et al., 2021a; United Nations, 2023b) and guidance is available on criteria for selecting indicators (Czúcz et al., 2021b). However, when ecosystem accounting is implemented locally, the choice of indicators can be very limited because of the lack of suitable data, even in relatively data-rich regions (Faccioli et al., 2023). In this case, the density of weeds was used as the primary condition indicator because that was the only local data set available. While that information is useful for guiding management actions aimed at improving the condition of threatened plant communities in the region, there is no information about the relationship between weed density in these riparian ecosystems and the magnitude of sediment retention/water purification ecosystem services provided by these vegetation communities. Our study necessarily relied on posteriori indicator selection but there is clear need to assess the feasibility of a priori indicator selection. This would require managing entities to initiate monitoring programs specifically designed to collect local biophysical data to support environmental accounting based on scientific knowledge on the relationship between condition indicators and critical ecosystem services.

Our analysis could be used to support strategic investment by the utility, for example predicted carbon sequestration might inform the decision to participate in carbon markets and what asset type to register as a project. This builds upon prior research which considered how accounting for natural capital could facilitate strategic decision-making at a government level (e.g. Bagstad et al., 2021). In this case study the Coastal Valleys Swamp Oak Riparian Forest community had the highest carbon sequestration potential (153 t/ha, Table 3). Restoring the Cumberland Red Gum Riverflat Forest, however, the largest ecosystem in the Rouse Hill riparian lands, has the potential to generate AU$1.2m (Table 4) in carbon credits, should the ecosystem condition reach its “optimal” condition. The approach can, thus, be used to compare the outcomes of various investment scenarios across an asset portfolio. It can also be used to align measures of natural asset performance with standard measures of financial performance, including return on investment, or to communicate environmental stewardship to external stakeholders.

We believe the present research demonstrated options for water utilities to achieve “radical traceability that links company actions to outcomes in particular settings” (Bebbington et al., 2024). But reporting on natural capital assets would require more regular and more comprehensive asset measurement exercises, both on the ground and through computational ecosystem modelling. These conditions for regular asset measurement must be understood as essential to deliver the utility’s strategic objectives and become routine activities (Bebbington et al., 2024). Environmental monitoring programs are costly, however, and the utility’s current funding model does not support repeated measurement at regular intervals. In addition, ecosystem modelling requires specialist skills that are beyond the water utility’s current capacity. This research might help demonstrate the value of financial asset recognition to the price regulator, and the utility may be better equipped to secure the additional resources required for these new activities.

The present case study only applied to the riparian assets in a sub-catchment managed by a large water utility. A more comprehensive investigation considering the full range of natural assets and ecosystem services would be required to understand their relative contribution to business objectives. In the case of water utilities, this would include water upper-catchment and reservoirs supplying water as well as biodiversity protection and recreation opportunities. Such an investigation could draw from recent guidance on reporting natural capital impact, dependency and risk/opportunity for assets not controlled by the utility (Smith et al., 2023).

Current accounting standards can allow the recognition of environmental income or assets, as conceptually the economic resource is the set of rights that produce the economic benefit, not the physical object (AASB Conceptual Framework paras 4.9 and 4.12). Our research described how a water utility managing riparian lands for the benefit of stormwater filtration and carbon sequestration could disclose these assets as balance sheet items, and in fact that failing to do so may limit the usability of the financial statements, under the Accounting Standards. Cost savings resulting from ecosystem services could give rise to the recognition of a natural asset, provided that the organisation can demonstrate that the economic benefits (cost savings) are controlled by the organisation and not available to other parties (AASB Conceptual Framework para 4.9). If such assets are not included in the financial reports, they should, at minimum, be disclosed in the notes to the financial statements, with voluntary disclosures being the least preferred option, given suggestions in the extant literature that such disclosures are made for impression management purposes (Hsiao et al., 2022).

However, limitations with current accounting practices mean that they cannot incorporate non-productive environmental income, for example from carbon sequestration or for biodiversity improvements. These limitations have implications for public agencies, where monetary valuation or any other quantification of stocks and flows of natural capital is context dependent. The critical context here is the responsibility given officially to the public agency in relation to natural capital. For water utilities with environmental accountabilities, greater visibility and recognition of natural assets in decision-making can be improved using this methodology. This in turn enables the agency to discharge their environmental accountabilities by demonstrating their stewardship over the resources under their control and provide information regarding their use of a critical resource to which external stakeholders are entitled (Hazelton, 2013).

Our case study bridges the gap between theory and practice, demonstrating how environmental stewardship may be facilitated by the implementation of the SEEA framework at the organisational level. The natural capital assessment conducted in this study pointed to novel applications for ecosystem service science in environmental management accounting and emphasises the importance of interdisciplinary research. More specifically, the research tested the assessment of natural asset performance through modelling change in ecosystem service flows over time and across different asset types. To this end, ecosystem service modelling using the InVEST platform was successful at estimating the value of investment in natural capital. Further research extending to different natural settings and different institutional arrangements would improve our understanding of the approach, areas of potential applications and technological limits.

We have presented an interdisciplinary method to recognise natural capital on the balance sheet under existing, real-world financial accounting standards: we modelled ecosystem processes, translated them into units of monetary value and showed how integrate these concepts into current financial accounts as a means to enhance sustainability reporting practices. We tested measurement methods for natural capital assets that are suitable for inclusion in financial statements and identified options and limitations in current accounting standards for recognising natural capital assets. We used a case study approach with an Australian water utility responsible for the management of stormwater assets in an urban catchment. Natural stormwater assets managed by water utilities deliver similar water quality improvements to grey infrastructure assets, but these natural assets are not recognised as fully-fledged assets and securing funding for their maintenance is challenging. We used the SEEA framework and the INVEST modelling platform to illustrate how riparian land assets can be quantified and valued.

This study confirmed that the SEEA framework provides robust and transparent methods for physical and financial measurement of natural capital within a business context. The assessment of ecosystem condition and ecosystem services proved useful in translating environmental change associated with the utility’s land management practices into financial benefits to the business and to society. While avoided water filtration costs were successfully used to achieve financial asset recognition, the study also highlights the challenges posed by current accounting standards, which often overlook non-productive environmental income. In this case, the value of climate regulation services could only be shown to accrue to the wider community and were not included in the utility asset values.

The findings emphasise that recognising these natural assets on balance sheets not only enhances the visibility of environmental stewardship but also aligns financial performance with sustainability objectives. Demonstrating the financial contribution of natural assets to business objectives could support better investment in their maintenance, rather than treating maintenance as an expense to be minimised. Financial recognition can also be used to manage risk associated with natural assets and they can help meet stakeholder expectations. These findings are important for upcoming mandatory sustainability reporting recommended by the ISSB (IFRS Foundation, 2023).

This study found consistent and repeated measures of ecosystem condition were not sufficient to achieve a comprehensive assessment of change in asset value overtime, or to capture a more complete suite of benefits provide by the assets. The exercise also revealed limited internal capacity to carry out natural asset measurement within the utility, because the expertise required is not yet part of standard business functions. To fully realise the benefits of natural capital accounting, ongoing investment in environmental monitoring and ecosystem modelling is essential. The current case study focused solely on riparian assets. Future research should consider more comprehensive investigations of all natural assets and ecosystem services managed by water utilities, to understand their full contribution to the business objectives of this sector.

Southern Cross University was commissioned by the then NSW Department of Planning and Environment to undertake this research in collaboration with Sydney Water. The authors would like to extend their gratitude to Justine Trounce for her assistance in managing the project.