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March 21, 2022

UN Adopts Landmark Framework to Integrate Natural Capital in Economic Reporting

In a move that may reshape decisions and policy-making towards sustainable development, the United Nations adopted a new framework today that includes the contributions of nature when measuring economic prosperity and human well-being.
The new framework — the System of Environmental-Economic Accounting—Ecosystem Accounting (SEEA EA) — was adopted by the UN Statistical Commission and marks a major step forward that goes beyond the commonly used statistic of gross domestic product (GDP) that has dominated economic reporting since the end of World War II. This measure would ensure that natural capital—forests, wetlands, and other ecosystems—are recognized in economic reporting.
Experts emphasize that while a statistic such as GDP does a good job of showing the value of goods and services exchanged in markets, it does not reflect the dependency of the economy on nature, nor its impacts on nature, such as the deterioration of water quality or the loss of a forest.

 We will no longer be heedlessly allowing environmental destruction and degradation to be considered economic progress.”

According to a new UNEP report, “Making Peace with Nature,” the global economy has grown nearly fivefold over the last 50 years, largely due to a tripling in the extraction of natural resources and energy that has fuelled growth in production and consumption. Over the same time, the world population has increased by a factor of two, to 7.8 billion people, and though on average prosperity has also doubled, about 1.3 billion people still live in poverty and some 700 million are hungry.

The new framework can be a game-changer in decision-making. By highlighting the contribution of nature, we now have a tool that allows us to properly view and value nature. It can help us bring about a rapid and lasting shift toward sustainability for both people and the environment.” 

The adoption comes at a time when climate change continues its relentless march and the world is on track to reach new highs of warming, climbing to at least 3°C above pre-industrial levels by 2100. According to the World Meteorological Organization, 2020 was in a dead-heat to be one of the three warmest years on record, and 2011-2020 was the warmest decade on record, with the warmest six years all been since 2015. And the loss of biodiversity and ecosystem integrity, together with climate change and pollution will undermine our efforts on 80 percent of the Sustainable Development Goal targets. 

And yet countries continue to make decisions on the economy without consideration to environmental impacts. Governments are still directing more than US$5 trillion in annual subsidies to fossil fuels, non-sustainable agriculture and fishing, non-renewable energy, mining, and transportation.

The new framework recognizes that ecosystems deliver important services that generate benefits for people. In essence, they are assets to be maintained, similar to economic assets. For example, forests play a role in providing communities with clean water, serving as natural water filters with trees, plants, and other characteristics, such as soil depth, that help absorb nutrient pollution like nitrogen and phosphorous before it can flow into streams, rivers, and lakes. 

More than 34 countries are compiling ecosystem accounts on an experimental basis. With the adoption of the new accounting recommendations, many more countries are expected to begin implementing the system, though a significant number of countries will require assistance and additional resources for statistical data collection. 

FAQ

What is natural capital?

Natural capital includes all of the resources that we easily recognize and measure, like minerals, energy, timber, agricultural land, fisheries, and water. It also includes the ecosystem services that are often “invisible” to most people, such as air and water filtration, flood protection, carbon storage, pollination of crops, and habitats for wildlife. These values are not readily captured in markets, so we don’t really know how much they contribute to the economy. We often take these services for granted and don’t know what it would cost if we lost them.

Why does natural capital matter for economic growth? Isn’t GDP enough?

Gross Domestic Product (GDP) measures the value of goods and services produced over one year. This is an incomplete assessment of a country’s economic wellbeing because GDP only looks at one part of economic performance—output— but tells us nothing about income in the long term. GDP doesn’t take into account the wealth underpinning this output. For example, when a country exploits its minerals, it is actually using up its finite mineral wealth.
A full picture of a country’s wealth – obtained through a methodology called ‘wealth accounting’ – includes all assets that contribute to our economic wellbeing, from buildings and factory machines to infrastructure, human and social capital and natural capital.

Natural capital is especially important to many developing countries because it makes up a large share of their total wealth – some 36 percent – and the livelihoods of many subsistence communities depend directly on healthy ecosystems. But currently, GDP ignores natural capital. In forestry, for example, timber resources are counted, but forest carbon sequestration is not. Other services, like water regulation that benefits crop irrigation, are hidden and the value is (wrongly) attributed to agriculture in a country’s GDP.

What are natural capital accounts? How are they different from the accounts that countries keep now?

Natural Capital Accounts (NCA) are sets of unbiased data for material natural resources, such as forests, energy, and water. NCA follows an international standard approved by the United Nations Statistical Commission, called the System for Environmental-Economic Accounts (SEEA).
Countries already produce datasets based on the internally agreed System of National Accounts (SNA). These datasets describe a country’s economic performance and form the basis for calculating GDP and other well-known economic indicators, such as the balance of trade and household consumption. While national accounts are limited to the production boundary of the economy, natural capital accounts go beyond that, to account for natural goods and services that aren’t subject to market transactions and don’t necessarily have well-established market prices.
It is in the interest of all countries to move beyond traditional GDP. Incorporating natural capital into national accounts will reveal the interactions of economic activity with the environment, and support better economic decisions

How are natural capital accounts used?

Incorporating natural capital into national accounts can support inclusive development and better economic management. For example, land and water accounts can help countries interested in hydropower to assess the value of competing land uses and find the optimal solution. Ecosystem accounts can help biodiversity-rich countries manage the trade-offs between ecotourism, agriculture, subsistence livelihoods, and ecosystem services like flood protection. In this way, ecosystem accounting is a tool for maximizing economic growth while identifying who benefits and who bears the cost of ecosystem changes, helping governments gauge whether their growth is inclusive.
The concept of accounting for natural capital has existed for over 30 years, but little has been done to implement it. The challenge now is to build capacity for countries to implement it and to demonstrate its benefits to policymakers.

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