09April

First Annual State of Natural Capital Report

The Natural Capital Committee published its first annual State of Natural Capital Report this week. Here the GLOBE UK Secretariat provides an overview of its findings and the key issues associatated with natural capital accounting.   

UK Nature

The Natural Capital Committee (NCC) was formally established in May 2012 to advise the Government on the state of natural capital in England. It reports directly to the Economic Affairs Cabinet Committee, which is chaired by the Chancellor of the Exchequer.

The 2011 Natural Environment White Paper defines natural capital as the stock of our physical natural assets (such as soil, forests, water and biodiversity) which provide flows of services that benefit people (such as pollinating crops, natural hazard protection, climate regulation or the health benefits of a walk in the park). In providing these services, nature can be understood as delivering natural assets and hence be seen as providing “natural capital”. Of course nature provides us with much more than capital, however 'natural capital' is a useful term to highlight the value or benefits of nature to people and the wider economy.

The proper integration of natural capital into decision making at all levels is crucial to supporting and promoting future growth. As the Committee points out, there is no inherent incompatibility between preserving and enhancing natural capital and economic growth, so long as growth is properly measured. However, natural capital is typically ignored by conventional government accounting procedures and given a default value of zero. This is despite its potential to influence economic performance by exposing a nation to a wide range of risks and opportunities.

One such risk is that an erosion of nature's capacity to deliver ecosystem products and services "acts as a break on progress and development." While the NCC concludes that it is not currently possible to identify with any certainty precisely which natural capital assets are being used unsustainably, especially given the available data and knowledge about limits and thresholds, it does highlight that the rate at which we are consuming natural assets is unprecedented.

If conventional economics were applied to such losses they would be typically estimated them at an unimpressive few percentage points of GDP. However, if the same losses were understood in terms of their impact on a government's capacity to achieve major public policy goals - job creation and economic growth, climate change mitigation and adaptation, energy security, and health and wellbeing - the need to reduce such losses becomes much starker.

Joseph Stiglitz recently pointed out that "we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw." While a conventional approach to growth may increase GDP in the short term, a failure to protect and enhance natural capital could, in actual fact, reduce a nation's wealth. The Economics of Ecosystems and Biodiversity recently estimated that the costs of cumulative losses of ecosystem services in the 50-year period to 2050 will be equivalent to 7% of GDP by 2050.

Incorporating the value of natural capital into the framework of national accounting would help governments to identify, reduce and mitigate the economic risks associated with the depletion of natural resources, as well as realising opportunities from the protection and restoration of the natural environment. The NCC's report highlights the need for such a framework to better measure and account for changes in natural capital assets and to improve valuation of those changes so they can be fed into decision-making processes.

To this end, the Committee recommends that the work led by the Office for National Statistics (ONS) to include natural capital fully in the UK's Environmental Accounts should be given the greatest possible support by Government. This is crucial because, while the technical and academic understanding of how to value the natural world continues to improve, political awareness about the importance of integrating these values into national accounting and policy making processes remains low.

In addition to developing tools that will enable policy makers to incorporate natural capital valuations into policy analysis, the NCC calls on the Government to work with leading companies, accounting bodies, land owners and managers, to develop and test guidance on best practice in corporate natural capital accounting. The report highlights how corporate natural capital accounting could help secure business operations and minimise risks to supply chains.

Such supply chain risks were highlighted in 2011 when the first Environmental Profit and Loss Account for PUMA were published. The accounts calculated that the environmental impact for the key areas of greenhouse gas emissions, water use, land use, air pollution and waste, generated through the operations and supply chain of PUMA was valued at € 145 million in 2010. The United Nations-backed Principles for Responsible Investment recently estimated that 50% of company earnings could be at risk from environmental costs – equivalent to 11% of global GDP.

Natural capital is enormously important to business and the economy, and the Committee makes a number of useful recommendations to ensure it is hard-wired in future government decision making. As the Committee concludes, "to promote sustainable growth, all forms of capital (natural, human, social and manufactured) need to be properly maintained and where appropriate, enhanced. Only in this way will future generations be able to enjoy the opportunities that we do now."

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