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Study presentation by Pavan Sukhdev

Pavan-Sukhdev-GLOBE-Summit

Biodiversity and Natural Capital

It is probably the single most important challenge of our time: how to ensure that our governments, our processes and our policy frameworks recognise and value the most important asset for sustainable development, natural capital. I welcome therefore the publication of the first GLOBE Natural Capital study and see it as very much a step in the right direction.

Put very simply, biodiversity is the living fabric of this planet. As set out in the Convention on Biological Diversity of the United Nations, "biological diversity means the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems." It provides this variability at three different layers: the ecosystem, species, and at the layer of genetic material. At each there is value created by biodiversity for humankind. However, most ecosystem services are not priced in any way. They are valuable, but there are no prices. When did a bee ever send you an invoice for the pollination services it provided in the month of May? We use nature, because she is valuable, we lose nature because she is free.

Pavan-Sukhdev-GLOBE-Summit-2One of the challenges we face is that we don't have a normal toolkit to address this problem. We don't have the ability to marketise ecosystem services because they are free services, they are public goods. Markets equilibrate demand and supply, discover prices and identify the price at which a private good can be transacted. It creates efficiency, it allocates capital, but what markets don't do is to solve social problems.

It's a small step from biodiversity to natural capital, but it's also a giant leap. What we are saying is that the living fabric of the planet, no matter whatever else it may be, is also something that has an economic value. It has a reflection in our economic calculus, even if it is not reflected in the profits of corporations or in the accounts of society. But we mustn't stop there. Human beings also value nature. For example, a tribe in a village in Himachal Pradesh considers a sacred grove sacred because their ancestors' spirits or local deities live there. That is a spiritual valuation. You don't need an economy or prices determine spiritual value. The lesson here is that you can have evaluation without economics, but you cannot have economics without evaluation.

That is part of the challenge that we face: not being able to explain to people that when we talk about valuation, it is deeper, more fundamental and broader than purely economic valuation. And yet, economic valuation, or the absence of economic valuation of ecosystem services is very often one of the many reasons why policy metrics go wrong, why trade-offs are made without considering the real value of goods and services that are being traded off. We need to ensure that these issues of value versus price, of political prices, need to be understood and recognised sensibly. This is not about putting a price on everything, it is about recognising the value of everything we receive from nature.

The Brazilian side of the Amazon Rainforest, for example, apart from its carbon store and biodiversity value, it is not widely understood as a rainfall factory. Research demonstrates that the rainforest, in creating the cloud that forms over the Andes and falls on the La Plata Basin, provides the main water source for the entire agricultural economy of Latin America. The value of this economy was recently measured as $240 billion of agricultural output. Water is clearly valuable, but what is its price? Put another way: who paid what for receiving that water? Did the governments of Uruguay, Paraguay or even the State of Mato Grosso pay Amazonas for this valuable service. The answer is no. This is why we need recognition of such assets of natural capital in national accounts, because only then will these issues come to the fore and be recognised.

Another reason we must engage in this exercise is the strong link between natural capital and poverty reduction. TEEB recently measured ecosystem services as a percentage of GDP in three countries - India (10%), Indonesia (16%) and Brazil (21%). These figures themselves do not tell you very much, however if you ask the right question you get the right answer. The right question here would be: what are ecosystem services as a percentage of the income of the rural poor household. When we ask that question and we look at the number of rural poor households - 100 million in Indonesia, 350 million in India, and 20 million tribals in Brazil - the answer is somewhat different: 47% of GDP in India, 75% in Indonesia and 89% in Brazil. What this question and its answer clearly show is that destroying an ecosystem service means denying opportunities for development. The lesson therefore is that we must not simply measure ecosystem services and compare them with GDP. If you pick the right numerator and the right denominator then you get the real choice that you are making. For example, measuring the consumption of ecosystem services by poor households and dividing it by the GDP of the poor.

When we invest in natural capital we are working towards protecting against natural hazards, adapting to climate change, increasing sustainable development, adding to human health and food security. These are the policy areas that natural capital feeds into. By capturing natural capital at the national level and national accounts we are not merely informing biodiversity policy, we are informing policies that impact poverty eradication and sustainable development. That's why natural capital accounting is absolutely vital. It's not just a matter for the environment ministries: finance ministries must also take this forward. Thankfully some progress has been made. From Rio to the creation of the UN Statistical Division and World Bank System of Environmental and Economic Accounts, to the TEEB reports, the Stiglitz Reports and GLOBE's Natural Capital Action Plan, we are now at a point where action is possible.

The 1st Natural Capital Legislation Study

coverpage-ncs-250I am delighted that so many countries have taken such a strong interest in the first GLOBE Natural Capital Legislation Study. Botswana, Columbia, Costa Rica and Philippines are already taking part in the WAVES initiative, a global partnership that aims to promote sustainable development by ensuring that the national accounts used to measure and plan for economic growth include the value of natural resources. We are thankful for the role of President Khama of Botswana, who was the host of the Gabarone Declaration, which took place as a meeting of 11 African Nations in May last year, just before Rio. In fact the Gabarone declaration was critical in ensuring that the importance of natural capital was not lost in the rhetoric that sometimes takes hold in broader international consultations. I was also delighted to see the launch of the Natural Capital Declaration at Rio+20.

Colombia has been there from the beginning, a country where the idea of green accounting, green national accounts, has been discussed for a number of years. I'm delighted to see that the GLOBE study highlights their preparedness for integrating natural capital into the national accounts. Columbia, as well as Costa Rica, do already have Payment for Ecosystem Service (PES) schemes. PES schemes can use values for ecosystem services, which may or may not have been measured in the same way as they are for national accounting. Typically, if you wish to reward a local community for, for example, forest conservation, which helps water supply downstream, you may set the price higher. However, when you are adjusting your national accounts you may take a more conservative view and take the lowest of your range of assumptions.

Georgia is a great example of the benefits of integrating two processes: the TEEB project, which provides the values of ecosystem services, and the WAVES initiative, which takes these values and integrates them into national accounting systems. Germany, of course, has made good progress, both with TEEB and through the WAVES initiative. Peru is at the forefront in Latin America and is looking at introducing environmental accounts, which means it will be well poised to move forward to national natural capital accounting. Similarly the Philippines. Many won't be aware but the Philippines was one of the first countries, together with the Netherlands, to experiment with the idea of satellite environmental accounts to the national accounts as far back as 20 years ago. Finally, the United Kingdom, which has published a National Ecosystem Assessment - similar to a TEEB study, but at a national level - and is engaging successfully with the Treasury, having established a Natural Capital Committee to look at challenges and process for integrating natural capital into national accounts. This work is setting a good example as to how the WAVES initiative can move forward.

As well as celebrating the positive progress being made by national governments, it crucial that we look to what's happening in the private sector. Approximately 60% of the global economy and around 70% of its jobs come from the private sector. Therefore, if we want a green economy there is simply no way we can do it without the private sector leading and driving us in that direction. Unfortunately however this isn't happening. We do not currently have the right operating framework for corporations to account for the invisible costs of doing business. As the process towards national natural capital accounting moves forward, governments and legislators must also encourage the private sector, including accountancy bodies and regulators, to do the same.

Business as usual creates invisible, unmeasured costs, and it is crucial that we measure and make them visible. Take cattle ranching in South America, for example. It's value in terms of turnover is scarcely $16 - 17 billion, however the costs are almost 18 times that. Similarly rice and wheat farming in South Asia. Both of these examples mean we have to look at the sustainability of the models of farming being used. This is why looking at things at the sector level, as well as at the national level, is important.

In conclusion, it would be fair to say that all 8 countries covered in the GLOBE Natural Capital Legislation Study are moving forward beyond just thinking and experimenting towards the integration of natural capital into national accounts. However, not one of the countries assessed is advancing comprehensively on all fronts, including wealth accounting, ecosystem services assessments, evaluating ecosystem services and introducing necessary legislation. Whilst it is certainly the case that the most comprehensive policies towards natural capital accounting are to be found in the developed world, the substantive progress being made in emerging economies is a good sign. Natural capital is the key development asset in these countries.

Recommendations

Based on the findings of the GLOBE study, I would like to make a number of recommendations. The first three, I think, are absolutely crucial, the others will accompany the first three.

Number one of course is that legislators around the world should develop natural capital accounting legislation as an urgent priority.

Secondly, it is important to take an integrated approach to the introduction of natural capital accounting.

Let us take, for example, the idea that many countries have engaged in sub-global assessments of the Millennium Ecosystem Assessment. Many have also produced National Biodiversity Strategies and Action Plans, as required by the Convention on Biological Diversity. These are all useful prerequisites to identifying the biodiversity and natural capital of a country. These early steps are necessary in order for a country to undertake a TEEB project, which measures the ecosystem values, in order that you can then, take on a WAVES project, which brings those values together and presents them in national accounts. Approaching this in an integrated fashion is absolutely critical.

Thirdly, the private sector has to be engaged in a parallel effort to measure dependencies and impacts on natural capital, and they must be asked to disclose them. Of course you will find these ideas in the Sustainable Development Solutions Network (SDSN), the high level panel's recent Sustainable Development Goals report, and indeed in paragraph 47 of the UN Declaration in Rio. So this recommendation is nothing new, but I think it's important that we take on these ideas and introduce them through legislation.

Our fourth recommendation is that government departments carry out inventories of whatever natural capital falls within their purview so that they can see how its management can affect policy outcomes, or how they are affecting its management.

Fifth, a position should be created within finance ministries to work with departments of the environment to evaluate natural capital in terms of departmental inventories, recognising it as part of the nation's wealth, and then regulating its proper use.

Sixth, finance ministries should develop annual natural capital accounts, together with a report on the status of biodiversity and ecosystem services, describing the physical aspects and dimensions upon which the economic aspect of natural capital is predicated.

Lastly, when governments carry out national audits they should adopt an ecosystem approach so that they can understand the value of ecosystems restored or lost as a result of departmental decisions. This would mean that when we talk about trade-offs we can talk in a sensible way and with a full understanding of the benefits and the costs.

It is absolutely critical for sustainable development, and for our survival, that governments adopt these recommendations and value and manage natural capital. It is essential for development, essential for the eradication of poverty and absolutely essential for us to have a harmonious, peaceful and safe existence in the future.