Natural Environment

Putting a price on the planet: Part 1 – Accounting for natural capital

30 September 2021

Kay Pitman

World Built Environment Forum Manager, RICS

Over the last few decades, and across the world, measurable progress has been made on standards of living and human prosperity. Between 1992 and 2014, produced capital per person doubled and human capital rose by 13% ^[1]. According to the Dasgupta review, over the same period, natural capital stocks were depleted by 40%. In other words, increased human prosperity has been achieved at a ‘devastating cost to nature’. UNEP estimates that investment in nature must reach US$1.8 trillion by 2050 if we are to successfully tackle the triple planetary crises of climate change, biodiversity loss and land degradation^[2].

So, what is the route out of this problem? The Dasgupta review calls for transformative change in three areas: balancing supply and demand by conserving and restoring natural assets, bringing nature into financial and economic decision-making, and developing institutions, systems of knowledge sharing and education to underpin this change.

Natural capital and risky environmental debt

Natural capital is defined as the world’s reserve of natural assets, such as soil, air, water, and all living things. It is also defined by a series of abiotic and ecosystem services (or flows, such as climate regulation, water purification, pollination, or human wellbeing ^[3]) that underpin the economy, humanity and all life on the planet ^[4]. Continually drawing down on our natural capital, without allowing time for recovery or fostering regeneration ^[5] increases the risk of collapse at a local, regional or global ecosystems level.

As with climate change, the impacts of this drawdown are distributed unevenly around the planet. For example, agriculture accounts for roughly 40% of the world’s economically active labour force, or about 1.3 billion people ^[6]. But the impacts of externalities associated with agriculture and food production disproportionately affect the poor and women in particular. ^[7]

“Continually drawing down on our natural capital, without allowing time for recovery or fostering regeneration [8] increases the risk of collapse at a local, regional or global ecosystems level.”

Nature based solutions

Nature-based solutions (NbS), if well structured, offer society the opportunity to maximise on the synergies that exist between ecosystems health, human wellbeing and economic benefits ^[9]. Although by no means a silver bullet ^[10], notable success stories are easy to find. South Korea, through its successive national forest plans, has increased its forest resources to 11 times that of 1970s levels. This has encouraged a sustained growth in biodiversity and plant species richness and the return of year-round flows of fresh water in the Yangju basin. Moreover, jobs have been created, yielding an overall net present value of over US$50 billion in environmental services. In the US, it has been estimated that Hurricane Sandy would have caused a further US$600 million in direct property damages if it wasn’t for protected coastal wetlands.

Nonetheless, public and private sector alike have been slow to adopt NbS. This is in part due to mismatch between the characteristics of NbS and the requirements needed for policy and financial decision making. NbS require longer time horizons to come to maturity and provide a diverse, but not easily quantifiable, series of co-benefits across a variety of policy goals ^[11]. This complicates the challenge of measuring their cost-effectiveness when compared to more conventional alternatives.

This is not to say that society has made no progress. As the saying goes, if you can’t measure it you can’t manage it. Despite the ‘wicked’ nature of ecosystems ^[12], great advances in the science of ecosystems services have been made over the last decade ^[13]. This has been accompanied by remarkable global efforts to study the economics of biodiversity loss ^[14], and to develop tools and methodologies to perform ecosystem accounting at country level ^[15]. There is also notable movement to help businesses to realise their exposure to natural capital risk and adjust their management, procurement, and operational practices correspondingly.

“In the US, it has been estimated that Hurricane Sandy would have caused a further US$600 million in direct property damages if it wasn’t for protected coastal wetlands.”

Global natural capital accounting initiatives

The UN System of Environmental-Economic Accounting (SEEA) ^[16], which was fully adopted in March this year, has become the accepted international standard for environmental-economic accounting. It helps to demystify the relationship between the environment and the economy ^[17] and provide consistent and comparable data at the national level. It provides guidance on accounting for the extent and condition of natural assets, the size of stocks (reductions and additions), and flows (e.g. use of ecosystems services) in both physical and monetary terms. The framework allows countries to answer questions such as ‘who benefits and who is impacted by natural resource use?’ and ‘how is the wealth of nations developing over time?’.

The UK’s natural capital accounts provide some fascinating facts and valuations. Although not a complete assessment of all stocks and flows, the value of UK natural capital was calculated at £921 billion in 2018. These accounts indicate that most provisioning services have seen year-on-year reductions. The exception is renewable energy provisioning, which has increased by 246% in the decade up to 2018. However, the accounts also highlight the considerable value that nature has contributed to the economy. Living within 500 metres of green and blue space provided around £78 billion to home values in 2016. The cooling shade of trees and water saved £248 million in air conditioning and productivity losses on hot days. Modelling indicates the removal of air pollution by vegetation in the UK avoided some 27,500 years of life lost in 2017, equivalent to £1.3 billion in health costs.

“Living within 500 metres of green and blue space provided around £78 billion to UK home values in 2016. The cooling shade of trees and water saved £248 million in air conditioning and productivity losses on hot days.”

Environmental-economic policies

There are notable national policy initiatives that seek to incorporate natural capital concepts and solutions. China’s Gross Ecosystem Product ^[18] aims to develop specific indicators to measure the total economic value of ecosystem products and services and directly integrates the SEEA. The GEP aims to address the incompatibility between conventional economic measures like GDP and sustainable development ^[19]. Through a combination of remote-sensing monitoring, surveys and statistical reports, Shenzen will become the first city to declare its GEP in 2022 ^[20].

Canada has announced the creation of the US$200 million Natural Infrastructure Fund ^[21], which is the first of its kind at federal level. The fund aims to engage NbS – and use natural and hybrid approaches to reduce reliance on built infrastructure and protect the natural environment.

As part of its Environment Bill for England, the UK government is proposing that new developments will be required to demonstrate a 10% increase in biodiversity, described as ‘biodiversity net gain’. Measured through DEFRA’s ‘Biodiversity Metric’, biodiversity will be measured pre- and post-construction through a combined assessment of the site’s distinctiveness, condition, significance, connectivity and area ^[22].

The European Commission’s ‘European Green Deal’ aims ‘to protect conserve and enhance the EU natural capital’, alongside its aims to turn the continent climate neutral by 2050 ^[23]. The UN SEEA will serve as the basis for measuring progress ^[24]. The EU has also recently published the results of its pilot study for an integrated EU system of ecosystem accounts ^[25].

In terms of government action to change market behaviour and exemplify best practice, recent calls to the G20 ^[26] have argued for natural capital assessments and valuations to be included when costing out public projects, and to be included in financial sector reporting.

“Through a combination of remote-sensing monitoring, surveys and statistical reports, Shenzen will become the first city to declare its Gross Ecosystem Product in 2022.”

Can you put a price on nature?

Without environmental-economic accounting, the implicit value given to ecosystems is often zero. The result is that investment targets market ‘visible’ assets, while natural assets are subject to substantial underinvestment. But trends in adoption of the UN SEEA at the national level are positive. Eighty-nine countries have implemented the SEEA Central Framework, 70% of which having published at least one account on a regular basis. Continued adoption is necessary if monitoring, disclosure and management of natural capital national accounts is to become standard.

References