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Balancing the books: the rising importance of natural capital accounting

In an era of converging sustainability crises, there is need to find ways where can begin working with nature rather than against it. One crucial change underpinning this transition is the rethinking of accounting practices. These practices were initially conceived upon the premise that natural resources were abundant and freely available. As a result, companies have since overlooked the interdependence between natural assets and their activities. The absence of natural capital from company balance sheets has led to the undermining of the environment and ecosystems. Borne off a need to address this issue, natural capital accounting (NCA) offers a solution to the way company balance sheets work. Since its inception, NCA has begun to transform the way we understand and manage our natural resources. This blog post will provide an overview of this approach and its relevance in today’s economy. Through the lens of case studies from around the world, it will explore what is already being done, the relevance of NCA to the blue economy and what gaps still need to be addressed to maximise its potential.


The emergence of natural capital 


Natural capital refers to the stock of renewable and non-renewable natural resources whose combined effect yields a flow of benefits (e.g., clean water, breathable air, and a liveable climate). Humans are dependent upon these benefits for prosperity, security and well-being. The concept was first referred to in 1973 by the economist E.F Schumacher in ‘Small is Beautiful’. In his book, Schumacher described the stock of renewable and non-renewable resources such as plants, animals, air, water, soils and minerals. Since then, there has been growing interest surrounding the practical applications of natural capital within government, business, civil society and academic communities.


“The fact that the natural resources of our land - our permanent capital - are being converted into…wealth at a faster rate than our wealth is being replaced…that is the unbalanced budget that is most serious.” - Franklin D. Roosevelt (1937)


Understanding NCA - what's so important?


NCA (also known as environmental economic accounting (EEA)) involves the quantification of the economic value of natural assets and the ecosystem services they provide (e.g., clean air, water purification, and pollination). It acknowledges the intrinsic value of these assets, which traditional economic metrics often overlook. In doing so, it promotes the sustainable use of earth’s resources and helps foster a greater appreciation of the economic benefits provided by healthy ecosystems. The critical insights offered by NCA enable stakeholders to better understand the trade-offs and impacts of different development scenarios and policies on the environment. In doing so, it motivates action which balances the interests of economic growth and environmental sustainability.


The global standard underpinning NCA is the System of Environmental-Economic Accounting (SEEA). SEEA was developed following the 1992 Rio de Janeiro Earth Summit, which identified a need for countries to integrate environmental and economic information in order to facilitate the transition to a more sustainable economy. The SEEA offers a structured framework for accounting which measures the stocks and changes in environmental assets (e.g., minerals, timber, wate and land). Adopted by the UN in 2012, this framework enables the development of consistent and comparable environmental-economic accounts both at the national and international level. The SEEA Central Framework is complemented by the SEEA Experimental Ecosystem Accounting Framework, which covers the measurement of ecosystems services and benefits they provide. Together, these frameworks have been successfully implemented around the globe (As of 2020, 89 countries reported implementing the former, and 36, the latter).



Adapted from Australian Government (2018), Environmental Economic Accounting: a common national approach).



Case study 1 - Australia's National Environmental Economic Accounting Strategy 


The National EEA Strategy outlines a national approach to implementing EEA across Australia. Recognising the fundamental contribution the natural environment makes to the Australian way of life, it aims to address existing information gaps and provide environmental and economic data for decision-making by governments, businesses and the community. Under the National EEA Strategy, four accounts have been developed to help further understand the condition of Australia’s environment and its relationship with the economy: ocean, land, ecosystem and waste.


Example – Australia’s Ocean Accounts


Through the organisation of data, Australia’s ocean accounts help describe the ocean’s complex environment and economic systems. This process covers information on biodiversity, carbon, coral reefs, tourism, and resource management. Account outputs are used to inform decisions about the way in which Australia manages its oceans. Furthermore, it helps stakeholders in both the private and public sector to better understand how their decisions will impact ocean health in the long term.

The National Ocean Ecosystem Account is Australia’s first national ocean account, focusing on blue carbon ecosystems (e.g., mangroves, seagrass and saltmarsh) and the benefits they offer in terms of climate mitigation and resilience. It captures information on the location of these ecosystems, their condition, the carbon they sequester and store, and the coastal protection services they provide. The figure below outlines some of the key findings from the account.



Data taken from Australian Government (2024) National Ocean Ecosystem Account 


Case study 2 - Costa Rica's National Environmental Accounts for Water, Forests and Energy 


Despite occupying 0.25% of the world’s landmass, Costa Rica contains 5% of the world’s biodiversity. The country possesses phenomenal natural wealth, as demonstrated by its natural capital value which is worth over US$9000 per person. In recognition of this, Costa Rica has implemented a number of ground breaking policies which have put nature at the forefront of development and decision-making. Through these policies, Costa Rica has transformed from being on the most deforested countries in the world to a country where more than 52% of its land mass is covered by forest. NCA has been introduced into Costa Rica to quantify the physical and economic value of the nation’s natural resources, as well as their significance in relation to national wealth. Using the SEEA Central Framework, the Central Bank of Costa Rica developed the Costa Rican Environmental Accounts for Water, Forest and Energy. These accounts help answer questions such as:


  • How much tourism revenue is generated by forests and protected areas?

  • How do local communities benefit from the protection of forests?

  • To what extent do protection policies impact the value of the local timber industry?

  • How much water do different sectors of the economy use?





What is the relevance of NCA to the blue economy? 


Having gained traction in recent years, NCA is becoming an increasingly popular tool to help guide and support the sustainable development of the blue economy. NCA is highly relevant in this context as it provides a systematic way of measuring, valuing, and managing the natural resources and ecosystem services which underpin economic activity across marine industries (e.g., fisheries, aquaculture, tourism and coastal development). The valuation of marine assets supports informed decision-making processes, preventing issues such as overexploitation and/or habitat degradation. This approach not only supports the long-term economic viability of marine industries, but it also promotes the sustainable use of ocean resources, thereby contributing to the broader goals of the blue economy.

Beyond ensuring the sustainability of marine assets, NCA may also have an application in demonstrating nature positive benefits delivered by certain marine industries. One such example is the use of NCA in the pearling industry. Farming pearl oysters, when done sustainability, can provide valuable environmental benefits. As filter feeders, pearl oysters can significantly improve the quality of water around a farm. A single adult pearl oyster can filter up to 50 gallons of water a day and in doing so, removes harmful pollutants including excess nitrogen. Pierre Fallourd (Senior Consultant, Blueshift Consulting), a 25-year veteran of the pearl industry, believes that pearls are a natural, high value commodity and the bioeconomics of their culture can have real, measurable attributes that can be accounted for. NCA can be used by pearl farmers to quantify and document the environmental benefits delivered by their operations. This presents a number of advantages for farmers including productivity gain, risk mitigation, attracting investment and providing an opportunity for participation in the nature credit market.


Barriers to the effectiveness of NCA


Despite significant progress having been made in the NCA space, there are several gaps and challenges which hinder its widespread adoption and effectiveness. These include:


Environmental volatility: the volatility of ecosystems and their susceptibility to change creates challenges for NCA by introducing significant unpredictability in the measurement and valuation of natural capital. This variability can lead to difficulties in establishing consistent and reliable data. 


Data availability and quality: a major gap in NCA is the availability and quality of data. At present, there is a significant lack of comprehensive and timely data on ecosystems and their services. This compromises the ability to accurately assess natural capital and the benefits it provides.


Integration at the national and corporate level: another significant challenge is the integration of NCA into national and corporate economic systems, especially given that it remains a voluntary and flexible process. Whilst some countries and organisations have made progress, overall uptake is currently slower than the rate needed to create meaningful impact.


Standardisation: there is a need for standardised methodologies and frameworks for NCA to ensure consistency and comparability across different nations and sectors.


Assigning a monetary value to nature: assigning a monetary value to natural capital and ecosystem services can be contentious and difficult. This can make the valuation process subjective and potentially prone to error.

 

In conclusion, the application of NCA is contributing to a broader shift in how we perceive and manage our relationship with the natural world. Through the valuation of natural capital, it helps us to better understand the implications of the decisions and choices we make. NCA has the power to facilitate informed decision-making which prioritises long-term benefits for both the environment and the economy over short-term financial gain. As highlighted in this article, there are a number of case studies illustrating the success with which NCA has been applied across the world thus far. Moving forward, there is still a long way to go before the potential of this approach can be fully realised. This requires addressing the number of existing gaps and challenges currently hindering its effectiveness. Of greatest importance will be the transition from a voluntary, flexible process to a mandatory procedure interwoven into all major decision-making processes.

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