Natural Capital: From Buzzword to Serious Action

This blog post was written by EICES adjunct Dr. Pushpam Kumar, Chief of the Ecosystem Services Economics Unit, Division of Environmental Policy Implementation (DEPI), United Nations Environment Programme (UNEP).

Dr. Pushpam Kumar

Last month, the United Environmental Assembly 2 (UNEA 2) through its universal Member States (representatives of 193 countries of the world) passed the Resolution on ‘Sustainable management of natural capital for sustainable development and poverty eradication’[1]. Prior to this, during the fifteenth session of the African Ministerial Conference on the Environment in 2015, a decision was made by the Ministers of the Environment: “Decision 15/1: Sustainably harnessing Africa’s natural capital in the context of Agenda 2030”. The Ministers agreed to implement appropriate policies and institutional measures to harness the full potential of Africa’s rich natural resource endowments, with the awareness that it would significantly contribute to achieving sustainable development resulting in poverty eradication.

At first glance, this may look like routine business especially to those working in universities, think tanks, and globally visible research centers. The term ‘Natural Capital’ is well understood and has been used for some time. For practitioners, institutionalizing and legalizing the term “Natural Capital” on global and national scales a revolutionary step towards recognizing the contribution of nature. This will undoubtedly have far reaching and positive impacts on conservation.  This agreement, reached by long, careful negotiation, has resulted in an understanding of the term Natural Capital that is comprehensive enough to foster change in all sectors of the economy driving changes in ecosystems and biodiversity. Now the expenditure on conservation will become an investment rather than a cost.

This will also facilitate the mainstreaming or integration agenda emanating from conservation and development constituencies.

Conventionally, ‘capital’ is measured wealth, considered in relation to measured income[2]. There has been a plethora of problems in measurement, aggregation and valuation of capital but economics has succeeded in overcoming them in last half century or so. “Natural Capital” is understood as assets in their role of providing inputs and services for economic consumption and production which also requires maintenance. It describes the parts of the natural environment (e.g. our stock of waters, land, biodiversity and flow of ecosystem services) that produce value to people. To understand natural capital is to understand how much the services provided by nature contribute to the economy and well-being, which in turn helps us make better decisions about the components of sustainable development.

One can easily see the impact of our actions, such as pumping carbon into space, clearing forest land, and converting wetland, on the economy and its metrics. When the UNEP with others started Inclusive Wealth Measurement, natural capital constituted the majority of it. The latest report IWR2014 has shown that the natural capital over the last 20 years is on decline in 140 countries of the world. That is not the case for other types of capital and that also brings up the issue of trade-offs, which are so critical for policy makers to understand and resolve. Net per capita inclusive wealth is the closest proxy for human wellbeing and it can’t be estimated if the measurement and valuation (not necessarily market value) are not in place. The Natural Capital approach can greatly facilitate the seventeen Sustainable Development Goals (SDGs), most of which are environmental / natural capital related.

Wider acceptance of Natural Capital is easy to see where countries and multilateral bodies are undertaking the difficult task of measuring and valuing it. The UK estimates the value for its natural capita at USD2.26Tr in 2014. The UK’s Natural Capital Committee is continuously providing the necessary guidance on how to operationalize this concept.

The ‘Natural Capital’ term is typically intertwined with valuation and accounting. While there is some clarity on accounting and the pathways to include them into existing frameworks, valuation must move with a strong purpose and rationale in place, up front.

The World Bank, in partnership with UNEP and others, has shown huge traction with policy makers on the need for Natural Capital Accounting through its Wealth Accounting and Valuation of Ecosystems Services (WAVES). The System of Economic and Environmental Accounts (SEEA) has been enabling the governments to incorporate their natural assets into the System of National Accounts (SNA). The SEEA captures the size of a country’s natural resources such as water, energy, forests, carbon sinks, biodiversity etc. and links it to the SNA. The SEEA Central Framework and the SEEA Experimental Ecosystems Accounts, which explicitly link ecosystems to economic and human activities, are recognized as core elements within the 2030 Agenda for Sustainable Development.

The Natural Capital metaphor is a great leveler where a conservation argument can be put forward effectively and convincingly to decision makers confronted with resource constraints and conflicting economic priorities.  In order to make this term clearly understood by the decision makers and conservation managers, the following steps should be taken:

1. Conceptual and methodological refinements through standardization in measurement and valuation approach;
2. Capacity development initiatives with regard to valuing and accounting for natural capital targeted at national accountants, economists, environmental statisticians and national technical staff;
3. Provision of credible tools and methodologies to be applied in valuing and accounting for natural capital;
4. Development and testing of new tools and methodologies for natural capital valuation and accounting;
5. Facilitation of increased collection and improved organization of data required for valuing and accounting for natural capital;
6. Establishment of networks among physical scientists, social scientists and policymakers to promote leadership and knowledge sharing in the implementation of natural capital valuation and accounting, along with support for existing networks;
7. Insurance of linkages among existing and future relevant initiatives at the global level with regard to natural capital  valuation and accounting;
8. Development of appropriate institutional arrangements to strengthen the implementation of natural capital valuation and accounting;
9. Effective communication and awareness-raising on the value of natural capital across all stakeholder groups to include public policy makers, politicians, government bureaucrats, members of civil society, local communities, the academic community and learners in education systems;
10. Mobilization and increased financial assistance and technical support for African countries to ensure effective implementation of natural capital valuation and accounting;
11. Piloting of natural capital valuation and accounting in the region with the clear aim of replicating experiences that are cost-effective and yield results.

[1] https://papersmart.unon.org/unea2/?q=node/120

[2] Frank Knight (1956), On the History and Method of Economics, University of Chicago Press, Chicago and London.