Natural capital in a nutshell

Water rushes over the Gullfoss, or "Golden Falls," in Iceland. Photo by Lindsay Jensen

Nominal GDP has increased globally a hundredfold since the 1940s, when the present system of national accounts was created by economists Richard Stone and James Meade. But this has not come without a price. The world’s forests have shrunk to half their size and environmental pollution has increased manifold.

The System of National Accounts and its bellwether indicator, gross domestic product (GDP), have together proved an antiquated compass for steering our economies. This has resulted over the years in policy failures, as the compass does not tell us whether our resources are scarce or sustainable, whether the quality of life has improved along with GDP growth or not, and so on. It does a very poor job of measuring what matters.

There have been persistent efforts over the last two decades to reform our national accounting system through “green accounting” or “inclusive wealth” measures. It is expected that one of these new measures will finally provide a yardstick for sustainable development. These improved measures of national performance will also reflect our institutional and political commitments through the Agenda 21 document “Our Common Future,” an outcome of the 1992 Earth Summit at Rio, and “The Future We Want” document accepted at Rio+20 in 2012.

The effort comes not a moment too soon. The United Nations is now formulating Sustainable Development Goals starting in 2015 with the expectation of being able to compare how the world responds to sustainability targets. Fixing the accounts of society so that they measure what matters becomes even more crucial in this context.

Better indicators for economic welfare have been sought as far back as the 1960s. William Nordhaus and James Tobin proposed alternative indicators in 1973, while Herman Daly and John Cobb proposed an index of sustainable economic welfare in 1989.

Pioneering efforts to compute alternatives have also been made by statistical agencies in the Netherlands and the Philippines. The United Nations Statistics Division (UNSD) and World Bank developed a framework for a satellite accounting system in the early 1990s, resulting in the publication of a handbook in 1993 that has since gone through a number of revisions.

Some progress is being made. Efforts to green national accounts are now underway in many countries, including Australia, Austria, Canada, Denmark, Finland, France, Germany, Italy, India, Netherlands, Norway, Sweden, the United Kingdom and United States.

In 2008, Nicolas Sarkozy, president of France at the time, set up a Commission on the Measurement of Economic Performance and Social Progress, headed by economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi. Their prime mission is to identify the limits of GDP as an indicator of economic performance and social progress. The commission’s mandate is also to assess the feasibility of alternative measurement tools, and to discuss how to present such statistical information in an appropriate way.

At the same time, there is a significant global effort underway to build a partnership among countries interested in including natural capital in their national accounts. The initiative was announced at the COP-10 meeting in Nagoya, Japan, in 2010 by World Bank president Robert Zoellick. Christened WAVES, which stands for Wealth Accounting and the Valuation of Ecosystem Services, the goal is to develop guidelines for ecosystem accounting. Several developed and developing countries are part of this initiative, including Australia, Botswana, Colombia, Costa Rica, Madagascar and the Philippines. WAVES partners also include several UN agencies, such as UN Environment Programme (UNEP), UN Development Programme and UNSD, as well as non-governmental organizations and academic institutions.

In May 2012, in the run-up to Rio+20, Botswana President Ian Khama hosted a summit of 11 African nations to discuss the significance of natural capital to their respective countries. No less than five African heads of state attended this meeting in person. The result of this gathering was the Gaborone Declaration, which committed this group of African first-movers to including natural capital in their national accounts. The document sent a powerful political message during Rio+20 negotiations. It told the world that these African nations were not only aware of the importance of natural capital, but also willing to do something about it.

Also at Rio+20, the World Bank and its partners initiated the “50/50” campaign, inviting the public and private sectors to join forces in support of natural capital accounting. The response was overwhelming: 62 countries, 90 corporations and 17 civil society members signed up. UNEP and the United Nations University added momentum to the discussion with the release of their Inclusive Wealth Report, a ground-breaking document that measured the change in man-made capital, natural capital and human capital for a selection of 20 countries over the last 18 years. Although Rio+20 has been criticized as an underwhelming event, it was clearly a success for efforts to boost acceptance of natural capital accounting.

In a related sphere, Rio+20 also saw considerable interest and cohesive action to initiate a parallel process by which corporations could begin to measure and report their own impacts on natural capital. Apart from the obvious dependencies of some business sectors on nature – tourism, agriculture, forestry, fisheries and pharmaceuticals, to name a few – the world of business also has significant impacts on the natural environment.

These are the so-called “externalities” of business, including greenhouse gas emissions, freshwater extraction, pollution and waste. A recent 2011 estimate of the economic size of these externalities was as high as $2.15 trillion (U.S.), or 3.5 per cent of GDP contributed by just the top 3,000 listed companies in the world. You can’t manage what you don’t measure, and at present there is very little measuring or reporting on natural capital going on in the corporate world. Guidelines and standards are urgently needed to help corporations integrate natural capital metrics into their statutory reporting process, which is at present limited to just financial accounts. “Mainstreaming” these issues can only be achieved if mainstream analysts and investors discover sustainability information as part of the annual reports they read and respond to with ratings and market actions.

Meanwhile, the UNSD has improved guidelines for reflecting natural capital in national accounts. The latest version of the internationally accepted standard for how one counts natural capital and ecosystem services, the System of Environmental-Economic Accounting (SEEA), was updated in 2012. It prescribes ways to reflect the market-priced value of nature’s goods and services in national accounts. But this is not new. What is new is that it also provides experimental accounting guidance to reflect the values of non-market goods and services, such as freshwater and nutrient cycling and pollination. It also sets out monitoring and analytical approaches that countries can follow, and suggests ways for such data to inform policy.

Can the leading nations accomplish much of this accounting advancement by 2015, when the UN’s Sustainable Development Goals will signal a new phase of sustainable development? The jury is out on this question. But if five or 10 leading nations from both developed and developing worlds can focus their collective efforts, there is no doubt that these trailblazers can be ready in time with national accounts that actually reflect development’s biggest asset: natural capital.

If they succeed by 2015, we would all have cause to celebrate the arrival of a brave new world.

Latest from Leadership

current issue