What is natural capital?

Natural capital includes non-renewable resource stocks, renewable natural resource flows and the ecosystems that provide humans with ecosystem services, which are all essential to human well-being and the economy. Accounting for natural capital is important to encourage policy makers and businesses to recognise nature’s contribution to human well-being, and thereby to take it into account in their decisions.

According to the analytical framework developed in the context of the EU ‘Mapping and Assessment of Ecosystems and their Services’ (MAES) initiative, natural capital includes abiotic and biotic components.

Acknowledgement of the contribution of nature to human well-being has increased significantly over the last decade. This has resulted in a policy response at the national, European and global level, including for example the EU Biodiversity Strategy, which set the goal of halting biodiversity loss by 2020, and the Aichi targets for 2020 established by the Convention on Biological Diversity (CBD), which aim to mainstream biodiversity across governments and society.

The integration of natural capital in decision-making is fundamental to ensure that economic, social and governance systems operate within planetary boundaries and is key to the success of the Sustainable Development Goals (SDGs).

Natural capital accounting at global, EU and national level

Natural Capital Accounting (NCA) is a systematised approach to measure the stock of natural resources and the flows of resources and ecosystem services that support the economy. It aims to complement the economic indicators of the System of National Accounts (SNA), such as GDP, and make the contribution of nature to human welfare visible.

NCA is carried out according to the System of Environmental Economic Accounting (SEEA), a guidance system developed by a group of experts led by the United Nations Statistical Commission (UNSC). SEEA has three components:

• The Central Framework (SEEA-CF), adopted by the UN Statistical Commission as the first international standard for environmental-economic accounting in 2012
• The Experimental Ecosystem Accounting (SEEA-EEA), offering a synthesis of current knowledge in ecosystem accounting
• The Applications and Extensions, illustrating to compilers and users of SEEA-CF based accounts how the information can be used in decision making, policy review and formulation, analysis and research.

The table below summarises the different types of accounts included in the first two.

At the global level, the Intergovernamental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) publishes assessments on the state of global biodiversity and ecosystem services, identifying policy-relevant tools and methodologies which can support a better integration of the value of nature in policy-making. In addition, the Wealth Accounting and the Valuation of Ecosystem Services (WAVES) partnership aims to mainstream natural resources into development planning and national economic accounts. The WAVES initiative supports the development of NCA in a number of countries, including Botswana, Colombia, Costa Rica, Madagascar, the Philippines, Guatemala, Indonesia and Rwanda.

The evaluation of natural capital, in addition to human capital and manufactured capital , is the basis for the Inclusive Wealth Index, which is regularly published by UN Environment, to evaluate the capacities and performance of the nations in terms of  sustainability of economy and wellbeing of their people.

At EU level, EU Regulation 691/2011 provides a legal framework for  European environmental economic accounting, following the SEEA-CF guidance. It includes accounts on economy-wide material flows, air emissions, physical energy flows, environmental goods and services, environmental taxes, and environmental protection expenditures. Other SEEA-CF environmental accounts are currently being developed in the EU, including on forests, environmental subsidies, water and ecosystems.

The European Commission, in cooperation with the European Environment Agency (EEA), is currently developing natural capital and ecosystems accounts for the EU in the context of the Knowledge Innovation Project on an Integrated system for Natural Capital and ecosystem services Accounting (KIP - INCA), following the guidance provided by SEEA-EEA. For more information see the interviews in this newsletter.

While some SEEA-CF environmental accounts are already consolidated and regularly updated in the Eurostat database, ecosystem accounting is still at an experimental stage, and its potential uses will become clearer with time.

At the national level, several countries have started to carry out natural capital and experimental ecosystem accounting and assessments. Examples include:

• Italy’s State of Natural Capital Report I and II, based on the SEEA-EEA
• The Netherlands’ Biophysical Ecosystem Service Supply and Use Accounts, based on the SEEA-EEA. They include ecosystem extent and ecosystem service accounts
• Several EU countries received grants from Eurostat to develop experimental ecosystem accounts, i.e. Bulgaria, Denmark, Finland, Croatia, the Netherlands, Italy, UK (see the last MAES report)
• Australia’s Environmental-Economic Accounts, based on the SEEA-CF
• Brazil, China, India, Mexico and South Africa are developing ecosystem accounts for specific regions, ecosystems and ecosystem services under the project Natural Capital Accounting and Valuation of Ecosystem Services (NCAVES) (2017-2020), funded by the EU
• Experimental ecosystem accounts have been developed for Uganda (land and ecosystem extent accounts, and species accounts for non-timber forest products)

Accounting for natural capital at the business level

Natural capital is often overlooked in business decisions, but an increasing number of initiatives have been developed with the aim of better accounting for natural capital in companies’ processes and supply chains. Assessing and quantifying such dependencies and the associated impacts enables businesses to make more informed decisions and reduce the pressure they place on natural assets, which in turn may generate economic benefits for their sector.

For example, the Natural Capital Coalition produced the Natural Capital Protocol, an internationally standardized decision-making framework that allows companies to identify, measure and assess their impacts and dependencies on natural capital. They can then integrate this knowledge into their decision-making processes.  

Moreover, the Business@Biodiversity Platform works on the assessment of biodiversity accounting approaches for businesses and financial institutions.

A number of new metrics to measure natural capital in the corporate context have recently been developed. Such metrics measure the impacts of companies’ processes on one or more elements of natural capital in non-monetary terms, with a focus on biodiversity. The table gives a non-exhaustive list of these metrics.

Natural capital accounting and the Sustainable Development Goals

As natural resources and ecosystem services are essential to economic prosperity and human well-being, accounting for natural capital is important to achieve all SDGs. The environment-related goals (SDGs 6 “Clean water and sanitation”, 13 “Climate action”, 14 “Life below water” and 15 “Life on land”) in particular have a direct link to the components of natural capital.

Natural capital and ecosystem accounts can help the EU and countries to monitor their progress towards achieving the SDGs, and can provide a useful contribution to policy design and implementation.

NCA is still an innovative approach which needs to be further developed to overcome methodological and data challenges. However, with time, it will increasingly support the achievement of the SDGs by providing consistent and comparable indicators to monitor trends, allow comparisons among countries and companies, develop scenarios, and unveil the links between economic, environmental and social objectives.