Natural Capital Accounting

The Challenge

GDP looks at only one part of economic performance – income – but says nothing about wealth and assets that underlie this income. For example, when a country exploits its minerals, it is actually depleting wealth. The same holds true for over‐exploiting fisheries or degrading water resources. These declining assets are invisible in GDP and so, are not measured.

Wealth accounting, including natural capital accounting, is needed to sustain growth. Long‐term development is a process of accumulation and sound management of a portfolio of assets—manufactured capital, natural capital, and human and social capital. As Nobel Laureate Joseph Stiglitz has noted, a private company is judged by both its income and balance sheet, but most countries only compile an income statement (GDP) and know very little about the national balance sheet.

The other major limitation of GDP is the poor representation of natural capital. The full contribution of natural capital like forests, wetlands, and agricultural land does not show up. Forestry is an example ‐ timber resources are counted in national accounts but the other services of forests, like carbon sequestration and air filtration are ignored. So, GDP can give misleading signals about the economic performance and well‐being of a country.

As a result, ecosystems are deteriorating worldwide, and with them, the capacity to support human wellbeing and sustainable economic growth. Natural capital is a critical asset, especially for developing countries whereit makes up a significant share (36%) of total wealth.

The concept of accounting for natural capital has been around for more than 30 years. To date, however, progress in moving beyond conceptual thinking towards practical implementation of natural capital valuation has been slow. Barriers to implementation include (i) the lack of internationally‐agreed methodologies for ecosystem valuation, (ii) a lack of uptake of natural capital accounting by policy makers, especially finance ministers (iii) capacity limitations in many developing countries and (iv) lack of leadership in moving “beyond GDP”.

The Future We Want

Our goal is a world where valuing the environment leads to better decisions for development. We believe valuing the environment and incorporating natural capital into national accounts can support better decisions. Wealth accounting (including natural capital accounting) can provide detailed statistics for better management of the economy, like accounts for the sectoral inputs of water and energy, and outputs of pollution that are neededto model green growth scenarios. Land and water accounts can help countries interested in increasing hydro‐power capacity to assess the value of competing land uses and the optimal way to meet this goal.

Natural capital accounts can help countries rich in biodiversity design a management strategy that maximizes the contribution to economic growth while balancing tradeoffs among ecotourism, agriculture, subsistence livelihoods and other ecosystem services like flood protection and groundwater recharge.

Natural capital accounting straddles all three pillars of sustainable development and can move the world beyond a GDP matrix to focus on all assets that a country needs for long‐term growth and well‐being. A major step towards achieving this vision came with the adoption by the UN Statistical Commission of the System for Environmental and Economic Accounts (SEEA) in 2012. This provides an internationally‐agreed method to account for material natural resources like minerals, timber and fisheries.

Now, many countries want to take natural capital accounting beyond the SEEA‐approved material resources like timber to include ecosystem services and other natural resources that are not traded or marketed, and so are harder to measure. That includes the ‘regulating’ services of ecosystems like forests for pollination and wetlands for reducing the impacts of floods.

How to Get There

The World Bank Group leads a partnership to advance Natural Capital Accounting internationally. The Wealth Accounting and the Valuation of Ecosystem Services (WAVES) partnership aims to promote sustainable development by ensuring that natural resources are mainstreamed into development planning and national economic accounts. WAVES has the following objectives:

  • Help countries adopt and implement accounts that are relevant for policies and compile a body of experience
  • Develop an ecosystem accounting methodology
  • Establish a global platform for training and knowledge sharing
  • Build international consensus around natural capital accounting

Since WAVES was launched at the 2010 Convention on Biological Diversity meeting in Nagoya, Japan, Botswana, Colombia, Costa Rica, Madagascar, and the Philippines have embarked on programs for natural capital accounting endorsed at the highest level of their governments, with extensive technical support from WAVES. These countries have established national steering committees, carried out extensive stakeholder consultations, identified policy priorities and designed work plans for implementation. The countries’ work plans include compiling accounts for natural resources like timber, water, and minerals, following the SEEA Central Framework, as well as experimental accounts for ecosystems like watersheds and mangroves.

WAVES is also providing technical support for work on natural capital accounting in Himachal Pradesh (India) and Guatemala, Indonesia and Rwanda have recently joined the partnership as core implementing partners. 

WAVES has established a Policy and Technical Experts Committee to help develop and test methodologies for ecosystem accounting—working closely with partners from UN agencies, national government agencies, academic institutions and NGOS.

Since Rio+20, 69 countries have supported a communiqué that calls on governments, the UN system, international financial institutions and other international organizations to strengthen the implementation of natural capital accounting. In April 2013, more than 35 ministers, vice-ministers and senior officials of finance, development and environment came together for a High-level Ministerial Dialogue on NCA. They were part of a larger group of more than 60 countries, the ‘first-movers’ of NCA, who were sharing technical know-how and the set-up of institutions needed to move the agenda forward.

There is unprecedented momentum and the road ahead is challenging but the goal — better decisions for development — is an opportunity for the whole world.