Natural Capital – the missing piece of the economic jigsaw

There is a growing realisation among some businesses and policy makers that economics has failed to take account of a third form of capital, natural capital, says Claire Wansbury and Rupert Haines.

Picture a large manufacturing company that has never undertaken an audit of its assets. Instinctively, that sounds like a vulnerable business, a business that is not managing its risks. Shareholders and economic advisors would surely be concerned.

Yet historically, economics has done exactly that, for ‘businesses’ at every scale from individual projects, through corporations and governments to the international community.

Economics is designed to take account of financial and material capital, including goods, machinery and labour. The added value of intellectual capital is also understood now and captured, to a degree, through systems such as patents and licences. There is a growing realisation among some businesses and policy makers that economics has failed to take account of a third form of capital, natural capital.

The benefits that people obtain from the natural environment are referred to as ecosystem services. Many ecosystem services are ‘free gifts’ that people gain from the natural environment, the ‘dividends’ of our ‘natural capital’. No price is paid by individuals or businesses using them, yet a high price can be paid by society for their loss. This form of market failure is a fundamental reason why many ecosystems continue to be degraded.

Historically, it has often not been until an ecosystem is lost or significantly degraded that the value of the service that it used to provide becomes apparent. In August 2005 Hurricane Katrina caused a storm surge that breached the system of levees that protected New Orleans, resulting in 80% of the city being submerged under water. The breaching of the levees is largely attributed to the loss of wetlands, which have historically protected the coastline by naturally buffering such storm surges.

The wetlands have been sacrificed in order to make way for development – an average of 34 square miles of South Louisiana land, mostly marsh, has disappeared each year for the past five decades, according to the U.S. Geological Survey (USGS). An explicit appreciation of natural capital through national or city accounts would help ecosystem services, such as natural hazard protection, be better appreciated and therefore better managed in order to retain these critical benefits. The destruction wreaked on New Orleans, and the financial and human cost it created, presents a compelling case.

We know the issues and the people with the skills to resolve them, and our understanding is rapidly improving. There is also a growing political will, with actions, to deliver full scale, robust natural capital accounts. At a national level this is led in the UK by the Natural Capital Committee, which answers to the Treasury, and by the World Bank on an international platform. Other initiatives are driving forward natural capital accounting at more local levels and in the corporate world.

The importance of this issue is being recognised in the UK, where the Treasury Green Book requires assessment of impacts on ecosystem services. The European Commission adopted a proposal for a new Environmental Impact Assessment (EIA) Directive in October 2012(2011/92/EU), with the amended Directive expected in 2014. One of the changes recommended in this proposal is to explicitly consider biodiversity and ecosystem services.

This would keep EIAs aligned with the work of the UN CBD and EU and UK policies on biodiversity. The Lithuanian presidency of the European Council announced on 20th December 2013 that a provisional agreement had been reached between the European Parliament, Council and Commission on the revisions to the EIA Directive.

Natural capital accounting and evaluation of impacts on ecosystem services are not solutions in themselves, but they have the potential to fundamentally change the way we think about the environment in economic and political decision making to help deliver a low risk high return future. Together they form a key step in designing a more resilient economy, and society. Now what sort of shareholder wouldn’t want to invest in that?

Co-authors Claire Wansbury, Atkins Associate Director of Ecology, and Rupert Haines, Atkins Principal Economist

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