What is natural capital investment?

Broadly defined as the commitment of current resource in expectation of future returns, investment is often understood solely as a financial term, but needn’t be.

All of us can invest on a day-to-day basis through the deliberate commitment of time, energy or financial resources, into assets, causes or relationships.

We might therefore understand natural capital investment as: “the commitment of human resource to seek to maintain or enhance the natural environment, motivated often by benefits to people and/or biodiversity.”

As interest in active restoration increases and we enter into the second year of the UN Decade of Restoration, monitoring the extent of human investment into the natural environment can help us understand reasons for changes in natural capital stocks and support learning around ‘what works’.

The national accounts

The historical roots of national accounting span back to determining the tax base of nations in the times of the Domesday Book (1085-86) and possibly earlier.

National accounting in its modern-day form was introduced from the 1920s, pioneered by Kuznets in the USA and Clark in the UK to support macroeconomic policy aimed at mobilizing economic resources following the Great Depression and leading into World War 2.

The System of National Accounts (SNA) - an internationally agreed standard set of recommendations on how to compile national accounts, was introduced by the United Nations (UN) in the 1950s to aid international comparability of statistics collected by countries on their economies.

Most countries now compile macroeconomic statistics in accordance with the UN-SNA, including for widely used headline measures such as gross domestic product (GDP).¹

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Before the 1990s, the SNA provided little guidance on how to reflect damages to the environment from economic activity or the value the environment provides to society within national accounts (LaNotte and Rhodes, 2020).

To better incorporate such considerations, the SNA has been augmented by the System of Environmental-Economic Accounts Central Framework (SEEA-CF) (O’Connor, Steurer and Tamborra, 2000), which provides guidance to:

1. Correct SNA aggregate measures such as GDP for natural resource depletion and deterioration in environmental functions as well as defensive expenditures; and

2. Expand the national accounts though satellite ‘environmental accounts’, which include:

   • Physical flow accounts – showing how the environment contributes to the economy via physical flows e.g. inputs of raw materials (as captured in material flow accounts) and flows released by the economy back into the environment, including air emissions and other residual flows e.g. solid waste;

   • Asset accounts - measuring the stock of environmental assets in physical and monetary terms. For instance, timber stock accounts showing opening and closing timber balances, or estimates of the monetary value of sub-surface mineral assets; and

   • Environmental-activity accounts - measuring how society responds to environmental issues via, for instances, taxation, or resource management expenditures otherwise encompassed in economic accounts but not separately measured.

To consider systemic changes in ecosystem condition, the SEEA-CF was added to by the SEEA-Experimental Ecosystem Accounts (SEEA-EEA) in 2013.

The SEEA-EEA provides a spatially explicit approach to quantifying change in ecosystems through Geographical Information Systems (GIS)-based mapping of ecosystem extent and condition. The significant information requirements for such measurement are increasingly being met by modelling tools such as ARIES.

Natural capital investment in the national accounting framework

The natural environment has increasingly been defined as a stock of capital², the flows of goods and services from which provide benefits to people referred to as ‘ecosystem services’.

The ecosystem service and natural capital concepts generally depicts a one-way flow of benefits from ecosystems to people. This unidirectional representation of human-environment relations that may be beneficial or enhancing in some way, is overly simplistic and in many cases, inaccurate (Comberti et al. 2015).

While it is certainly the case that human activity contributes to environmental degradation, including net of any more enhancing contributions, humans also contribute in some circumstances to improving the environment via various forms of investment.

Accounting for investment activities

Marketed activities

Marketed activities contributing to natural capital investment are, conceptually, already captured within economic accounts. As activities constituting natural capital investment do not consistently fit any single traditional sector within industry classifications used e.g. NAICS or the SIC, it it difficult to track these separately however (BenDor et al. 2015). In addition, gross fixed capital formation (a component of final demand) relates solely to built capital.

Recommendation: Though environmental protection expenditure data captured within Environmental-activity accounts gives some insight into natural capital investments, can systematise the tracking of investment as a separate industry and through expanding GFCF to include NC.

Non-market activities

The 2018 UN Handbook of National Accounting: Satellite Account on Non-profit and Related Institutions and Volunteer Work updates the 2003 Handbook on Non-profit Institutions in the System of National Accounts and builds on the International Labour Organization’s 2011 Manual on the measurement of volunteer work.

The UN handbook attempts to remedy the gap in the SNA 2008 around activities that fall outside of non-profit institutions³, including in the form of less organised and direct volunteer work.

Experimental watershed investment in the form of ‘leaky dam’ installation in a North London watershed

Valer Austin surveying gabions installed in the San Bernadino Watershed, Southern Arizona borderlands

Recommendation: Improved surveys