The valuation of natural capital is becoming increasingly important for companies – whether due to regulatory requirements like the CSRD or to better understand risks and opportunities. But which method fits your goals? Here are the five key approaches at a glance:
Each method has advantages and disadvantages. While market prices often provide clear figures, surveys also capture intangible values. A combination of different approaches often delivers the best results.
The market price method draws on existing trading prices for ecosystem goods and evaluates their economic benefit through changes in end products or services. In contrast, the production function method estimates the economic value of ecosystem services by considering them as inputs in production processes.
With a share of 28% of all valuation estimates in the Ecosystem Services Valuation Database (ESVD), the market price method is the most frequently used approach. The production function method, however, accounts for 6% of valuations. This popularity of the market price method stems from the availability of market data and clearly traceable results. Both approaches offer economically sound values and open up direct application possibilities for companies.
Companies use both methods flexibly, depending on the use case. The market price method is primarily used to evaluate provisioning services, such as agricultural products, fishery and aquaculture products, livestock products, timber, firewood, peat, feed, as well as medicinal or genetic resources. These goods are either traded directly on markets or used as inputs in supply chains.
The production function method allows companies to quantify the impacts of changes in the quality or availability of natural resources on their production costs as well as on the price and quantity of end products. This is particularly relevant for industries whose business models heavily depend on ecosystem services.
Both approaches are also suitable for evaluating regulating services, such as climate regulation through CO₂ certificates. The fact that 18% of ESVD users come from the corporate sector highlights the growing interest of the economy in valuing ecosystem services.
The close connection to real markets makes these methods particularly convincing for stakeholders and regulatory authorities. Existing price structures and trading data create an objective basis for valuation. Additionally, the results are easy to communicate and integrate into financial reports.
Acceptance among decision-makers is another advantage. Since the methods are based on established market mechanisms, companies can directly incorporate the values into their risk analyses and strategic planning without having to provide complex methodological explanations.
The greatest weakness lies in the restriction to tradable goods. Many ecosystem services – such as biodiversity, cultural values, or complex regulating services – cannot be captured through market prices. This often leads to systematic undervaluation of total natural capital.
Additionally, market distortions through subsidies, monopoly structures, or external effects can lead to unrealistic valuations. Current market prices do not always reflect long-term ecological value, especially for increasingly scarce resources.
For the market price method, companies need current trading data, including prices, trading volumes, and market trends. Information on price volatility and seasonal fluctuations is also important.
The production function method, however, requires detailed production data, such as input-output ratios, cost structures, and measurable relationships between ecosystem services and production output. Additionally, data on alternative production methods or substitutes is necessary to isolate the specific contribution of ecosystem services to value creation.
These market-based approaches form a solid foundation for integrating natural capital valuations into comprehensive ESG strategies. Their limitations can be offset by complementary valuation methods to obtain a more complete picture of ecosystem services.
Cost-based approaches offer an exciting alternative to market-based valuation, as they determine the value of ecosystem services based on the costs that would arise to replace or restore them through human alternatives. Common methods include the replacement cost method, the restoration cost method, and the damage cost avoided method.
An ecosystem is valued at least as highly as the cheapest technical solution that could take over its functions. These approaches are particularly frequently used to evaluate regulating services, such as flood protection or carbon storage.
For companies that need to make sound risk assessments and investment decisions, cost-based approaches are particularly useful. Insurance companies, for example, evaluate the flood protection services of natural wetlands by using the costs of technical protection measures as a benchmark.
In water management, the value of wetlands is often estimated based on the costs of wastewater treatment plants that could provide similar purification services. Energy companies, in turn, use the method to compare the carbon storage of forests or peatlands with the costs of technical CO₂ capture facilities.
These approaches also play an important role in mining: companies calculate their provisions for recultivation measures based on restoration costs. These valuations flow directly into accounting and help fulfill regulatory requirements. The damage cost avoided method is also used in evaluating erosion and storm protection services by considering the saved costs for technical protection measures.
The greatest strength of these approaches lies in their practical applicability. They deliver concrete figures that can be directly integrated into business plans and budgets. This makes them particularly tangible for decision-makers – even without deep methodological knowledge. Additionally, cost data for technical alternatives is often readily available, which facilitates application.
Another advantage: These methods are excellent for fulfilling regulatory requirements. They are frequently used as a basis for compensation measures or as conservative estimates of environmental damage.
A significant weakness of cost-based approaches is systematic undervaluation. They only capture the costs of the cheapest replacement solution without depicting the entire economic benefit of an ecosystem. Many functions of natural systems – such as pollination by insects or regulation of nutrient cycles – cannot be technically replaced or only incompletely so.
Another problem is the lack of consideration of the multifunctionality of ecosystems. Forests, for example, not only store carbon but also regulate water balance, provide habitat for numerous species, and often have cultural significance. These aspects often fall by the wayside in cost-based valuations.
Furthermore, for many ecosystem services, there are simply no adequate technical alternatives. This makes the application of these approaches difficult or even impossible in such cases.
The application of cost-based approaches requires precise data. Companies need detailed information on the costs of technical alternatives – including investment, operating, and maintenance costs over the entire lifecycle. This is complemented by site-specific data such as soil quality, climatic conditions, and regulatory requirements.
Equally important are quantitative measurements of the ecosystem services to be valued. These include filter capacities, storage volumes, or protective effects. The availability and quality of this data significantly influence the accuracy of the valuation and its usability for business decisions.
In combination with market-based approaches, cost-based methods provide a solid foundation for a comprehensive ESG strategy and enable sound decisions that consider both ecological and economic aspects.
The travel cost method and hedonic pricing model belong to the special approaches of natural capital valuation. They are based on deriving the value of ecosystem services from people's actual behavior. Specifically, this means that these methods derive the value of natural resources from users' actions and preferences.
The travel cost method values natural areas based on the costs people are willing to incur to visit them – including travel costs, accommodation, and time investment. The hedonic pricing model, on the other hand, analyzes how environmental factors, such as air quality or proximity to green spaces, influence property prices.
Both approaches are particularly helpful when it comes to valuing cultural ecosystem services and regulating services that cannot be measured directly through markets. Their versatility is shown in numerous application possibilities, which we will examine more closely below.
Companies from real estate, tourism, and energy sectors use these methods to make sound location assessments and investment decisions.
A central advantage of these approaches lies in their empirical basis: They are based on actual behavior and real market data, which significantly increases their validity. Unlike hypothetical surveys, they reflect real preferences that are shown in spending or purchasing decisions.
Hedonic pricing models benefit from the availability of extensive data, particularly from real estate markets, which are continuously updated. This makes them excellent for long-term monitoring programs.
Another plus point is the methodological traceability. The statistical procedures are established and transparent, which facilitates acceptance among stakeholders and authorities. Additionally, the results can be easily integrated into existing valuation frameworks.
Despite their advantages, there are also weaknesses that limit applicability.
The application of both methods requires extensive datasets.
Additionally, statistical competencies for modeling and interpreting results are necessary. Companies must either invest in internal analytical capabilities or bring in external expertise.
Another factor is the availability of georeferenced data. Modern GIS systems and satellite data have facilitated the application of these methods but require technical know-how and appropriate infrastructure.
Contingent valuation and choice experiments are among the direct survey methods used in natural capital valuation. Their special value lies in their ability to capture so-called non-use values by directly asking about respondents' willingness to pay.
Contingent valuation uses hypothetical scenarios to determine participants' maximum willingness to pay for environmental improvements. Choice experiments, on the other hand, present various alternatives with different environmental characteristics and costs from which respondents choose. These direct approaches complement indirect methods and offer another perspective.
Such flexible procedures help companies integrate hard-to-measure environmental values into their sustainability strategies.
In addition to market- and cost-based approaches, survey methods enable direct capture of values that often remain hidden otherwise. This allows companies to better understand their stakeholders' preferences and incorporate them into strategic planning.
One of the greatest advantages of these methods is their comprehensive scope. They allow capturing values that market-based approaches would not consider – such as willingness to pay for protecting the Amazon rainforest, even if one never visits it.
The methodological versatility enables modeling of complex environmental scenarios. Choice experiments can simultaneously evaluate multiple attributes, such as air quality, biodiversity, or landscape aesthetics, and work out their significance for respondents.
Another advantage is the direct involvement of stakeholders. Companies receive direct feedback on planned projects and can identify potential conflicts early. This significantly facilitates dialogue with communities and authorities.
The approaches are based on sound economic concepts and can be well integrated into cost-benefit analyses. Thus, they often also fulfill regulatory requirements.
Despite their advantages, these methods also have weaknesses. A common problem is inflated or unrealistic statements about willingness to pay, which can arise from hypothetical biases or strategic responses.
The complicated design of questionnaires presents a challenge. Unclear or unrealistic scenarios can distort results. Particularly with technical environmental topics, respondents often find it difficult to make informed decisions.
Cultural and socioeconomic differences also strongly influence results. Willingness to pay varies by population group, which limits the transferability of results.
Conducting such methods requires careful planning and sufficient resources.
While direct methods like surveys specifically capture specific use values, benefit transfer offers a pragmatic approach by drawing on existing studies. This method saves costs since no extensive primary studies are needed. Instead, results from previous investigations are transferred to new locations or questions – adapted to the respective situation. This allows companies to evaluate natural capital without sacrificing scientific foundation.
Benefit transfer systematically uses comparable studies to evaluate ecosystem services. Either individual values can be directly adopted or more complex valuation models can be adapted to regional characteristics. Particularly for projects with limited budgets, this makes solid valuation accessible.
In practice, benefit transfer offers diverse application possibilities. Companies from different industries use the method, for example, in environmental impact assessments, analysis of urban ecosystem services, or risk assessment for natural events. For instance, valuations of forest ecosystems or urban green spaces from existing studies can be adopted and tailored to new projects. This allows environmental aspects to be efficiently integrated into planning or compensation processes.
Another advantage: Companies can directly integrate this method into their ESG strategies to conduct sound and cost-effective environmental valuations.
The greatest advantage of benefit transfer lies in its cost efficiency. Compared to expensive primary studies, it enables quick and inexpensive valuations – ideal for time-critical projects.
Another advantage is the use of already tested studies that ensure scientific consistency. Additionally, the method is flexible: it can also provide suitable values for less well-researched or difficult-to-access ecosystems by drawing on similar contexts.
The greatest challenge of this method is the transferability of results. Ecosystems often differ significantly in structure and function. A value derived from a specific forest area is not automatically transferable to another, ecologically similar but nevertheless different area. Similarly, regional and socioeconomic differences, such as willingness to pay, can lead to inaccuracies.
Further limitations arise from the limited availability of high-quality studies for certain ecosystem services or regions. Methodological differences between studies – such as in approaches, time periods, or definitions – also complicate the comparability and transfer of results.
Successful benefit transfer requires thorough literature research in scientific databases and journals to find current and high-quality studies. Additionally, site-specific data is crucial to optimally adapt the transferred values to local ecological and socioeconomic conditions.
Evaluating study quality requires methodological expertise, and for more precise adjustments, statistical knowledge and specialized software are helpful. Thus, benefit transfer complements the other methods and offers companies a flexible way to efficiently evaluate natural capital.
The choice of the right valuation method depends heavily on the specific use case, available resources, and desired accuracy. Market-based approaches offer an objective data basis, while survey-based procedures can additionally capture values that are culturally or emotionally influenced.
Cost-based methods have proven particularly practical in practice, and so-called benefit transfer enables quick and cost-effective initial assessments. The key lies in the balance between precision and economic efficiency.
The following table provides a compact overview of the most important aspects of individual methods:
| Method | Corporate Applications | Strengths | Limitations | Data Requirements |
|---|---|---|---|---|
| Market Prices and Production Function | Forestry, resource extraction, agricultural optimization | Objective market data, high stakeholder acceptance, direct integration into financial reports | Limited to marketable goods, no consideration of non-use values | Market prices, production data, input-output coefficients |
| Cost-Based Approaches | Compensation measures, environmental damage assessment, infrastructure planning | Clear cost structures, regulatory acceptance, practical implementability | Often underestimates actual value, technical feasibility not always given | Cost calculations, technical specifications, replacement costs |
| Travel Costs and Hedonic Prices | Location assessments, real estate projects, tourism development | Based on real behavior, established methodology | Only captures use values, methodologically complex, data-intensive | Travel data, property prices, socioeconomic variables, statistical software |
| Contingent Valuations and Choice Experiments | ESG reports, stakeholder engagement, product development | Captures all value categories, detailed preference analysis, flexibly applicable | Hypothetical biases, high costs, methodologically demanding | Representative samples, survey design, statistical analysis software |
| Benefit Transfer | Quick assessments, feasibility studies, risk assessments | Cost-efficient, quick results, builds on existing studies | Transferability problems, limited study selection, methodological differences | Literature databases, site-specific adaptation data, quality assessment |
While benefit transfer provides quick orientation, market- and survey-based approaches can significantly refine the valuation. Companies therefore often rely on a combination of different methods to obtain a more comprehensive picture.
The use of multiple approaches – particularly so-called triangulation – makes it possible to compensate for weaknesses of individual methods and gain a more complete understanding of ecosystem services. Particularly with complex ESG strategies, this multidimensional approach proves extremely useful.
In practice, it shows: Market-based methods and benefit transfer can often be implemented with little effort. Higher investments in survey studies are worthwhile, however, when non-marketable values play a central role in corporate strategy. This consideration provides a solid foundation for strategically and purposefully combining valuation methods.
The valuation of natural capital has evolved into a practical tool for strategic corporate management. For German companies, the challenge lies in finding the appropriate methodology that meets their individual requirements and can be successfully implemented.
The presented approaches particularly highlight the regulatory benefit: With regard to the mandatory CSRD reporting from 2024, cost-based methods and market price approaches are particularly helpful. They deliver clear figures that can be seamlessly integrated into sustainability reports. Benefit transfer offers a cost-effective option for initial assessments, while primary valuation studies enable more detailed analyses.
For EU Taxonomy compliance, market-based approaches are also of central importance, as they directly connect economic activities with ecological services. Companies from sectors such as energy, forestry, or real estate can precisely calculate and document their taxonomy-compliant revenues using production function approaches.
For investments in nature-based solutions such as restoration projects or green infrastructure, contingent valuations and choice experiments provide valuable insights. These methods consider societal preferences and deliver important insights for developing business models based on ecosystem services.
A strategic combination of different approaches shows how versatile natural capital valuations can be used: While benefit transfer provides quick orientation, primary valuation studies provide the necessary precision for regulatory requirements. Cost-based methods are often the basis for compensation strategies, while market-based approaches bridge to financial reporting.
Solid valuation methods offer long-term advantages: They not only help fulfill regulatory requirements but also create a sound data foundation for strategic decisions in an economy increasingly focused on sustainability. Companies that invest in these competencies today position themselves ideally for future regulatory and market-related requirements. A smart combination of methods strengthens ESG strategy and lays the foundation for sustainable success.
Companies face the challenge of selecting the appropriate method for natural capital valuation. Several factors play a role: on one hand, the type of ecosystem services to be valued, on the other hand, the availability of relevant data and the goals pursued with the valuation – whether in the context of ESG strategies or to fulfill regulatory requirements.
It's important that the chosen method is not only scientifically sound but can also be implemented in practice and adapted to local conditions. Only this way can a valuation succeed that realistically depicts both ecological and economic aspects. By considering specific company requirements and regional standards, decisions can be made that deliver long-term sensible and sustainable results.
The valuation of natural capital plays a central role in meeting the requirements of the CSRD (Corporate Sustainability Reporting Directive). It enables companies to disclose their dependence on natural resources and more clearly recognize both ecological risks and opportunities.
By expressing ecosystem services in monetary values, sustainable approaches can be specifically integrated into corporate strategies. At the same time, this helps fulfill reporting obligations and meet stakeholder expectations regarding ecological responsibility. The result? Stronger compliance with regulatory requirements and a contribution to long-term value creation and sustainable business practices.
Valuing natural capital through surveys brings several hurdles. Since results heavily depend on individual opinions and perceptions of respondents, there is an increased risk of bias. Additionally, the selection of respondents can have a significant influence on results, which limits the validity and reliability of the valuation.
These weaknesses make it difficult to reliably and objectively quantify the economic value of natural capital. For companies and decision-makers, it becomes more challenging to meaningfully integrate such information into sustainable strategies and processes.