Natural capital accounting: balancing economics and environmental conservation

August 15, 2023

To date, natural capital has been mostly excluded from decisions by organizations.  This is beginning to change, particularly as it becomes obvious how interactions with nature can affect a company’s market value.  But how can natural capital be consistently evaluated, interpreted and analyzed across different activities and industries?

In an era in which sustainable development is crucial, the concept of natural capital accounting (NCA) is gaining prominence as a powerful tool to harmonize economic growth with environmental preservation. NCA extends beyond traditional economic metrics, recognizing that the earth's natural resources are finite and must be managed judiciously to ensure the well-being of both current and future generations.

At its core, NCA involves quantifying the economic value of ecosystems, water resources, forests, minerals, and other natural assets that contribute to human well-being. Traditional economic accounting often ignores the worth of these resources, resulting in their overexploitation and depletion. NCA bridges this gap by assigning a monetary value to these resources, fostering a comprehensive understanding of their significance.

NCA enables governments, businesses, and communities to make informed decisions that balance economic growth with environmental preservation. By accounting for the services ecosystems provide, such as clean air, water purification, and climate regulation, NCA ensures that these benefits are factored into development strategies. This prevents situations where economic gains come at the expense of irreparable damage to nature.

Incorporating NCA into policies and decision-making has wide-reaching benefits. It helps policymakers assess trade-offs between economic activities and environmental protection, ensuring that growth is sustainable. Businesses can identify the risks associated with their supply chains and work towards more responsible sourcing and production methods. Communities can advocate for the preservation of natural assets that contribute to their quality of life.

For its part, the European Union has undertaken a number of measures to support NCA. In July 2022, the European Commission adopted a proposal to amend Regulation (EU) 691/2011 on European environmental economic accounts, adding ecosystem extent accounts, ecosystem services accounts and ecosystem condition accounts. In addition, the EU funded the “Transparent” project from 2020 to 2023, which brought together major professional services firms and organizations to adopt a Natural Capital Protocol. The protocol aims to support better decisions by including how we interact with nature, or more specifically natural capital, in decision making.

Despite these advances, implementing NCA comes with a number of challenges. Assigning monetary values to intangible assets can be complex, and ethical considerations arise when valuing nature purely in economic terms. However, the benefits far outweigh the challenges. NCA can catalyze innovative solutions such as payments for ecosystem services and green finance mechanisms. It can also help governments fulfill commitments to international agreements like the United Nations Sustainable Development Goals and the Paris Agreement.

Natural Capital Accounting is not a task for governments or businesses alone; it requires collaboration at all levels. Communities, civil societies, and academia play pivotal roles in advocating for the integration of NCA into policies and practices. By nurturing awareness and promoting responsible consumption, society can contribute to the preservation of the earth's natural capital.

In our view, natural capital accounting represents a paradigm shift in how we can recognize and monitor economic growth and environmental conservation. By recognizing the value of nature and integrating it into economic decision-making, we can achieve sustainable development that safeguards both prosperity and our planet's future. NCA is not just a method; it's a commitment to a better world for ourselves and generations to come.

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