Can accounting standards advance the natural capital agenda?

Approaches to the measurement of natural capital are many and varied - can accounting standards be developed and can they really contribute positively to changing our behaviour?

Since its adoption as a standard in 2012, the United Nation’s System for Environmental-Economic Accounting (SEEA) has established itself as the leading framework for accounting for natural capital for governments and international organisations around the world. Many countries have embraced its potential, including the G7 countries, Australia, Brazil, China, Europe, India and South Africa. It is pertinent to consider how this momentum can be used to advance the discussion around natural capital.

The measurement of natural capital encompasses a vast array of methods and techniques. The sheer number of environmental features makes the task a challenging one requiring consideration of natural resources, energy, emissions and pollution, water, waste, land, soil, biodiversity and ecosystem services. Commonly, the complexity in each different feature has led to the development of specialised measurement techniques and distinct academic disciplines. The challenge then arises as to the way to tell a coherent, overall story about our relationship with the environment – about our impacts and dependencies on natural capital.

Meeting this challenge is precisely the motivation for the use of accounting frameworks. By their nature, accounting frameworks seek to paint a comprehensive and coherent picture of the different divisions of a company or the different industries of an economy. They do so by establishing common sets of concepts, terms and definitions that support comparing different parts of a single system, such as a company or economy. Of course, over time in the corporate and economic communities this common language (including terms such as profits, income, capital) has become refined, specialised and hard to translate, but the fundamental objective of meaningful comparison within and among different systems remains.

The significant, and widely recognised, limitation of traditional accounting systems is that the picture they paint is extremely restricted with respect to the broader social and environmental systems within which companies and economies operate. The primary purpose of natural capital accounting is thus to extend traditional accounting systems to incorporate natural capital and hence allow corporate and economic systems to be considered in a broader, increasingly realistic setting. To apply this in practice requires the integration of the array of methods and techniques developed for the different components of natural capital noted above. Accounting is thus not a replacement for such measurement but rather a tool for integrating and mainstreaming natural capital data with standard financial and economic data to support more informed decision making.

Primarily designed to support the decision making of governments, the SEEA provides a standardised set of concepts, terms and definitions to integrate environmental data with standard economic data (such as GDP) and hence standardise the discussion of natural capital in decision making. Thus, rather than seeing issues of deforestation, biodiversity loss and climate change as “environmental”, the SEEA provides a framing and an information base to support more systemic analysis of the issues in a way that recognises the inherent complexity and depth of the relationship between humans and the environment. The momentum that is building in the implementation and development of the SEEA is driven by its willingness and capacity to engage with these systemic issues.

No doubt, the SEEA does not provide a perfect representation of these systemic relationships. No single framework or perspective can. Indeed, standard corporate and economic accounting frameworks do not provide perfect representations of the corporate and economic systems that they describe. This, however, would be the wrong benchmark. The question instead is whether the information organised via natural capital accounting framework can provide a better basis for decision making and for communicating, in a standardised way, the structure and trends of our relationship with natural capital. Increasingly, companies and countries are answering yes. 

There is a range of barriers to the further advance of natural capital accounting. There is the need to advance methods and techniques on data, but of course, there will forever be a desire for more data and better measurement. There is the need for developing the information infrastructure, analytical techniques and decision-making tools that can utilise the extended information set. There is the need to develop effective presentations of the broad range of information and communicate the integrated environmental-economic picture appropriately. There is a need for heightened dialogue between natural capital accounting communities and standard setters.

Above all, however, is the need to recognise that our society has entrenched silos that divide our understanding of economic, environmental and social factors and hence impose blindfolds on our ability to see systemic connections. These silos are evident in our education system and our institutional structures and are ultimately reflected in our collective lack of urgency in the face of evident systemic environmental change. 

Natural capital accounting, using standards such as the SEEA, cannot overcome these challenges on its own. It can, however, provide a platform and common language for discussion across sectors, disciplines and countries. There is now a real opportunity to harness all of our individual understandings and perspectives, we must take it.

The World Forum on Natural Capital in Edinburgh next month represents an excellent opportunity for combined progress as it brings together experts from across disciplines and sectors. I’ll be participating in an interactive panel discussion in the “Taking Nature in Account” stream of discussions. The thrust of our discussion is that none of us can do it alone – progress towards improved understanding and awareness of natural capital requires the various initiatives across private and public sectors to work together, take advantage of their shared motivation and build a richer community of expertise in natural capital measurement. It would be great to meet you there.

 

Carl Obst is currently a Director of the Institute for the Development of Environmental-Economic Accounting and was the lead author and editor of the United Nation’s System of Environmental-Economic Accounting – the international standard for this area of work.