Introduction
The intricate and vibrant tapestry of the natural world has long been the foundation of human prosperity. Its bounty sustains us, providing the air we breathe, the water we drink, and the soil that nourishes our food. Yet, our current accounting models fall short of recognising this intrinsic value, considering nature’s gifts only when traded for money. This flawed logic creates a dangerous disconnect between economic output and the true value of natural resources, leading to overexploitation and degradation of our environment.
A very intriguing article was written a day ago by a well-renowned scientist, climate activist and friend, Neal Spackman and his counterpart, Yishan Wong. Their article helps explain the flaws in our
logic regarding the comprehension of economic value and the accounting metrics we use to gauge returns. Reading their article is worth the time and effort; the link can be found here. https://www.terraformation.com/blog/bringing-gaap-down-to-earth
The Problem with Our Current Economic Model
In the present economic paradigm, natural resources are often undervalued in accounting systems until they have been transformed into commodities for trade. For instance, a forest’s worth is determined not by its ecological significance but by the price of the timber it yields. This limited perspective overlooks nature’s indispensable services, from carbon sequestration to habitat provision and water purification. How can world leaders and businesses take a different look at the natural world with a holistic view of natural resources? Having a one-dimensional outlook results in a distorted representation of wealth, which encourages unsustainable practices that deplete our natural capital without understanding how to value it in the first instance. It’s a shortsighted strategy that threatens the very foundation of our economy and survival. We must adopt a more comprehensive, forward-thinking approach to value attribution to break this cycle.
The urgency for change must be balanced to account for the gaps in general accounting practices. Recognising the value of nature before and after trade has occurred is crucial for the sustainability of our societies and economies. Integrating the true worth of our natural resources into our accounting systems is imperative, thus internalising the externalities overlooked.
A Proposed Introductory Solution
One approach that can help quantify the cost of environmental degradation and incentivise sustainable practices is the adoption of Natural Capital Accounting (NCA).
NCA is a system that assigns economic value to natural resources and ecosystem services, such as water filtration, carbon sequestration, and soil fertility. By attributing a tangible monetary value to these often overlooked services, NCA makes the cost of environmental degradation more evident.
For instance, if a company is considering logging a forest, NCA would account for the financial gain from selling timber and the loss of ecosystem services such as carbon storage, water purification, and habitat provision. This comprehensive view can reveal that the cost of logging may outweigh the profits from timber sales, thus incentivising more sustainable practices.
Furthermore, NCA can inform policy and investment decisions by highlighting the areas where sustainable management of natural resources can lead to economic benefits. It can help businesses and governments identify more sustainable practices that preserve our environment and make economic sense.
However, it’s important to note that while NCA is a valuable tool, it isn’t a silver bullet. Not all aspects of nature can be monetised; some values are subjective and culturally specific. Therefore, NCA should be supplemented with other holistic indicators and sustainability practices.
How Governments, Businesses and World Leaders Can Help
Governments and large organisations play a pivotal role in spearheading this transformation. They should lead by example, integrating ecological considerations into their decision-making processes while ratifying the adoption of Natural Capital Accounting (NCA) into the value assessment of natural resources and ecosystem services.
Such an approach would help quantify the cost of environmental degradation, incentivising sustainable practices. NCA can also guide policy and investment decisions, promoting the sustainable use of natural resources. However, it’s important to note that not all aspects of nature can be monetised, and some values are subjective and culturally specific. Therefore, NCA should be supplemented with other holistic indicators like the Genuine Progress Indicator (GPI), which includes social and environmental factors.
In addition to NCA and GPI, governments should consider adopting the principles of the circular economy. This model promotes the efficient use of resources, minimising waste and environmental impact. It encourages the reuse and recycling of materials, reducing the demand for virgin resources and promoting sustainability.
Why Governments will Need to Supplement Natural Capital Accounting
Supplementing Natural Capital Accounting (NCA) with other holistic indicators and sustainability practices is crucial for several reasons.
1. Incompleteness of NCA: While NCA is an excellent tool for assigning economic value to environmental resources, it only covers some aspects of the environment. Certain environmental benefits, such as the intrinsic value of biodiversity or the cultural significance of landscapes, are hard to quantify monetarily.
2. Variability: The value assigned to natural resources can vary greatly depending on the method used for valuation, geographical location, and cultural perceptions. Therefore, relying solely on NCA could lead to imprecise or skewed results.
3. Sustainability: NCA is mainly an economic tool and, thus, might only cover some dimensions of sustainability. For example, social factors such as equity, justice, and human rights, which are integral to sustainable development, need to be adequately addressed by NCA.
4. Prevention of Damage: While NCA can put a price on degradation, it’s always better to prevent damage rather than pay for it later. Other sustainability practices like conservation, recycling, and waste reduction can help prevent environmental degradation in the first place.
5. Policy and Decision Making: Other indicators like the Ecological Footprint, Environmental Performance Index, and the Sustainable Development Goals (SDGs) can provide a broader picture of our environmental impact and better inform policy and decision-making.
In reflection, while NCA is a valuable tool in the fight against environmental degradation, it becomes even more effective when used in conjunction with a range of other indicators and sustainability practices.
Four Ways Governments Can Supplement Natural Capital Accounting
A. Incorporating Holistic Indicators: Incorporating holistic indicators such as the Ecological Footprint, Environmental Performance Index, and the Sustainable Development Goals (SDGs) can provide a broader picture of our environmental impact. These indicators, alongside NCA, can create a comprehensive understanding of our interaction with the environment and inform policy and decision-making.
B. Adopting Sustainable Practices: Governments can promote sustainable practices like conservation, recycling, and waste reduction. These practices can help prevent environmental degradation, promote the sustainable use of resources, protect our natural capital, and support economic stability and growth.
C. Encouraging Green Investments: Governments can encourage green investments by incentivising businesses to invest in sustainable practices. Green investments can generate economic growth while preserving natural capital, creating a win-win situation for the economy and the environment.
D. Promoting Education and Awareness: Governments can play a critical role in promoting education and awareness about the value of natural capital and its sustainable use, which can foster a culture of conservation and respect for the environment.
Final Consideration
Education is crucial in fostering a deeper appreciation for the natural world. Educating the public about nature’s vital role in our survival and prosperity can cultivate a culture of respect and responsibility towards the environment. The more humans of all ages understand that everything is interconnected, the greater awareness and appreciation of the natural world will be, with care given to the management, utilisation, and economic planning centred on sustainable outcomes.
Conclusion
In closing, the current accounting models need to be revised; undervaluing the true worth of our natural resources should be a crime. To address this, we must adopt a holistic approach that recognises the value of nature before and after trade, which includes integrating Natural Capital Accounting and other comprehensive metrics into our financial systems, adopting sustainable economic models, and educating the public about the importance of environmental stewardship. Only then can we ensure a sustainable and prosperous future for all.
OceanBlocks advocates the adoption of “true accounting,” which implies a shift in financial systems to accommodate our interactions with the Earth, recognising damages inflicted by governments and corporations and reflecting these impacts in standard financial reports. It involves acknowledging the trade-offs incurred when exchanging natural capital for financial capital and appreciating ecosystems’ services to humanity.