Explainer

Sizing up Mother Nature

Despite government efforts to account for natural capital, we’re continuing to spend it unsustainably.

The White House has decreed that America is to get a new economic statistic. Along with GDP, inflation, employment and the other established big index numbers, the US will measure ‘natural capital’.

Initial pilot accounts will be prepared next year, but the system will be complete only after 15 years.

A statement said: “The current absence of these important economic metrics and the omission of nature from the national balance sheet leads to erosion of current and future economic opportunities. The proposed expansion of the national economic accounting system seeks to provide new information to capture links between nature and the economy.”

According to investment bank Jefferies, the administration believes “having access to organised, reliable data on natural assets and changing environmental-economic conditions provided by a benchmark data series and structure would make it easier for firms to de-risk and expand environmental reporting”.

But what, in a nutshell, is natural capital? An answer is provided by Britain’s Office for National Statistics (ONS), which has been measuring it since 2020. “Natural capital accounts estimate what nature does for us.”

Although the ONS’s efforts are a work in progress, nature does quite a lot, as it turns out. “In 2019, the stock of the aspects of UK natural capital we are currently able to value was £1.2 trillion.”

How did the ONS arrive at this figure?

By using internationally agreed standards that allow for comparisons between one country and another. The ONS employs 275 datasets from 67 providers. One example of the methodology comes with the ONS estimate of the net benefits, in terms of greenhouse gas emissions, of restoring 55% of peatlands to close to their natural condition in 2019. The figure was put at between £45 billion and £51 billion.

Another example values the contribution in 2020 of the outdoor spaces available for recreation to the nation’s health at between £6.2 billion and £8.4 billion.

Said the ONS: “GDP only tells part of the story of UK progress. We need to account not just for market output, buildings and roads, but also for our natural capital: the eco-systems, green spaces and landscape that provide us with a range of economic and non-economic benefits.”

Now the US is setting out on the same path.

In one sense, the thinking behind natural capital accounting is not new. In 1973, the British economist EF Schumacher, considered by many to be the father of the Green movement, wrote: “Fossil fuels are merely a part of the ‘natural capital’ which we steadfastly insist on treating as expendable, as if it were income…If we squander our fossil fuels, we threaten civilisation; but if we squander the capital represented by living nature around us, we threaten life itself.”

Five years earlier, US Senator Robert Kennedy famously declared that economic growth figures measured everything “except that which makes life worthwhile”.

But climate change and the parallel decline in biodiversity have supplied the impetus to shift natural capital from being a subject for philosophical musings to an indispensable tool for measuring and monitoring our relationship with nature.

Will natural capital accounts replace conventional financial statements?

No, they will co-exist. Harvard Business School, in its Impact-Weighted Accounts Project, puts it this way. “Re-imagining capitalism is an imperative. We need to create a more inclusive and sustainable form of capitalism that works for every person and the planet.”

It described impact-weighted accounts as line items on company statements such as profit and loss accounts or balance sheets that sit alongside the conventional numbers for financial health and performance and reflect “a company’s positive and negative impacts on employees, customers, the environment and the broader society”.

The Capitals Coalition, an alliance of more than 400 organisations, hopes that, within a few years, natural capital accounting will become the norm. “Our ambition,” it said, “is that by 2030 the majority of businesses, financial institutions and governments will include the value of natural capital, social capital, and human capital in their decision-making and that this will deliver a fairer, just and more sustainable world.”

It added: “Natural capital, social capital and human capital work in much the same way as traditional capital – if we invest in them they create value, and if we degrade them we limit their value.”

In the UK, a major boost to the cause of natural capital accounting came with the publication in February 2021 of the Treasury-commissioned report The Economics of Biodiversity, written by Professor Sir Partha Dasgupta of St John’s College, Cambridge. He wrote: “[E]conomic and finance ministries and international organisations today graft particular features of Nature, such as the global climate, on to their models as and when the need arises, but otherwise continue to assume the biosphere to be external to the human economy.”

He added: “In turn, the practice continues to influence our conception of economic possibilities for the future. We may have increasingly queried the absence of Nature from official conceptions of economic possibilities, but the worry has been left for Sundays. On weekdays, our thinking has remained as usual.”

In other words, there is still plenty of philosophical musing in place of practical action.

Is there any scepticism about natural capital accounting?

Yes, not everyone is signed up to the cause of natural capital accounting. Back in August 2017, John Curnow, Chief Economist at the Department for the Environment, Food and Rural Affairs, commented on a UK government blog: “People can feel sceptical of economists using these approaches when considering environmental decisions – how can we place a value on clean air, a beautiful landscape, or fresh water – our natural capital? In fact, isn’t attributing such values wrong?”

He added that valuing environmental goods is “tricky”; “We have markets that can give us the value of a car or a house, but there are no markets that give us the value of the environment.”

In May 2021, volume 104 of Elsevier’s Land Use Policy journal carried an article “Understanding conflicting views in conservation: An analysis of England”.

It stated: “The role of capitalism in conservation, especially the concept of ‘natural capital’ attracts controversy. Proponents of natural capital argue it increases understanding of the environment’s value, reducing the likelihood that nature will be ignored.

“Critics fear quantification of the environment oversimplifies ecosystems and undermines nature’s inherent, unmeasurable value that cannot be converted into other forms of capital. This forms part of wider concerns over the role of capitalism in ‘new conservation’.”

But despite some misgivings, natural capital accounting is very definitely here to stay. In July, an assessment report on the valuation of nature from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services noted that economic and political decisions have traditionally given priority to market-based uses of nature, such as intensive food production. It added: “Although often privileged in policymaking, these market values do not adequately reflect how changes in nature affect people’s quality of life.

“Furthermore, policymaking overlooks the many non-market values associated with nature’s contribution to people, such as climate regulation and cultural identity.”

Professor Unai Pascual, Co-chair on the assessment, said that with more than 50 valuation methods and approaches, “there is no shortage of ways and tools to make visible the values of nature”.

What should happen now?

Simon Zadek, Executive Director of NatureFinance, a non-profit organisation that works “to align global finance with nature positive outcomes”, said that, going forward, it is vital to see nature-related issues in the round. “Think about biodiversity as involving an essentially dynamic relationship, you have to look at the complexity of the whole biodiversity system.”

People need also, he said, to consider the most useful ways in which nature metrics can be used.

To this end, NatureFinance is planning a number of workstreams, including ones covering the integration of nature-related risks in finance, the greening of sovereign debt, food and finance, nature markets and “nature crimes”.

In Britain, the ONS has set itself two key challenges for the immediate future. “We will undertake the preparatory work needed to produce estimates of some of the economic impacts of climate change in 2024, towards capturing all such costs in the natural capital accounts.”

In addition, it will adapt the UK’s natural capital accounts for inclusion in extended national accounts, with estimates of degradation of assets where possible.

The United States, as mentioned, has begun its 15-year journey to natural capital accounting, and in July the European Commission proposed a new regulation covering environmental economic accounts. It said of such accounts: “They measure the contribution of the environment to the economy and the impact of the economy on the environment in a consistent and compatible way with macroeconomic statistics.”

It is almost certain that natural capital accounting will be further refined as time goes on, prompted by fears that this capital is still being over exploited and undervalued. As the World Bank warned in a paper on the subject: “Despite a global expansion in total wealth per capita between 1995 and 2018, many countries are on an unsustainable development path because their natural, human, or produced capital is being run down in favour of short-term boosts in income or consumption.

“In countries where today’s GDP is achieved by consuming or degrading assets over time, for example by overfishing or soil degradation, total wealth is declining. This can happen even as GDP rises, but it undermines future prosperity.”

Investors too are realising that they are working under false assumptions if they do not properly factor natural capital costs into their investment decisions. Many are beginning to adjust their approaches ahead of the signing of the Global Biodiversity Framework, which is expected to require alignment of finance flows with biodiversity protection, and the release of a risk management and reporting framework by the Taskforce on Nature-related Financial Disclosures.

“Nature is the secret sauce of every investment ever made. It is extraordinary that most investors do not understand, measure or manage that dependency let alone invest in the underlying nature assets,” said Zadek at NatureFinance.

“Systematic natural capital accounting will correct this fundamental market failure.”

 

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