What Is Natural Capital?
Natural capital is a reference to the inventory of natural resources held by companies, such as water, gold, natural gas, silver, or oil. Like all commodity resources, these natural capital commodities must be certificated in order for the company to write a derivative on the natural capital for sale in the futures market.
Natural capital must also be managed on a company’s financial statements which requires natural capital accounting.
- Natural capital is the inventory of natural resources held by or claimed by a company.
- Natural capital holdings will be listed on a firm's balance sheet as it is a type of asset.
- Natural capital typically must be certified before a derivative contract, like a futures or forward contract, can be written on it.
Understanding Natural Capital
Natural capital is a type of commodity capital that includes natural resources mined, stored, or produced by a company. Natural capital trades alongside agricultural capital on futures exchanges. Both types of commodities require similar operational procedures for writing options or futures on public market exchanges. Both types of capital also comprise a section of a company’s balance sheet assets.
Natural capital explorers and refiners also have an obligation to adhere to environmental regulations. Regulations may include rules on exploration conditions and production locations in order to limit risk to the environment. Explorers and producers spend a substantial amount of their expenses on recovery and protection measures.
Futures Market Procedures
To write a derivative to sell a commodity on a public futures market, a producer must follow certain procedures and adhere to certain rules.
To write futures contracts a producer must be registered with the required regulatory authorities. Registration provides producers with connections to local stock inspectors who inspect and certificate natural capital stock. A producer can write contracts to sell its natural capital on a futures exchange once the natural capital is certificated.
Inventory stock that is tied to a futures contract on an exchange will receive a warehouse or storage receipt. The storage receipt verifies the capital for futures contract transactions. It also provides information on where the capital stock is stored and other details about the inventory. Producers with capital stock tied to futures contracts must hold the inventory as collateral.
Financial Statement Accounting
Accounting for natural capital on financial statements can be complex. Natural capital is an asset of the firm. Management must create a schedule for valuing natural capital on an ongoing basis.
Overall, depletion is one of the most important components of natural capital accounting. This can be compared to depreciation. There are two main depletion accounting methods that are used for natural capital accounting, cost, and percentage. Depletion allows a company to record expenses associated with natural capital over time.
The cost depletion method generates per-unit costs that are based on extraction costs. Percentage depletion calculates natural resource extraction expenses as a percentage of revenue. The cost depletion method is usually favored over percentage depletion as it is generally considered to create the most accurate estimates.
Example of Natural Capital For an Oil Company
Natural capital appears on the balance sheet of a natural resource producing company. Consider Exxon Mobil (XOM), which is a large oil company. On their balance sheet, they state how much crude oil (or related products) they have at the time when they compile their financial statements.
At the end of 2018, under assets, the company reported $14.8 billion in crude oil, products, and merchandise. This is often summarized as inventory. The company can do what they wish with this inventory, although if they wish to sell it via futures contract, the crude oil will need to be certified in order to ensure it meets exchange standards and specifications.
Summary financial statements may group multiple types of natural capital into the inventory, but the breakdown of that inventory is often included in the Generally Accepted Accounting Principles (GAAP) financial statement and/or in the footnotes to those statements.