Frequently Asked Questions
'Natural capital accounting’ is an umbrella term that describes accounting for the environment and its natural assets in a way that is analogous to how we account for what happens in the economy, using the United Nations (UN) System of National Accounts (SNA). It refers to a systematic, standardised and repeatable framework in which information on natural capital and the resulting ecosystem services it provides are recorded, whether or not those services have a market value.
Natural capital accounts present information from a variety of data sources about natural assets, their condition and the services they provide.
Natural capital accounting is not itself a decision-making tool, but it can be used to inform decision-making.
A comprehensive set of natural capital accounts can show changes in the health of our natural capital over time and be used to inform decisions on land use, human health, climate-change mitigation and adaptation. It can inform integrated economic and political decision-making, sectoral policies and responsible business strategies, as well as supporting evidence-based investment, urban planning, rural development, and health and sustainability outcomes.
Natural capital refers to the world’s stocks of natural assets, and the services that flow from them, which include geology, soil, air, water, and all living things. From this natural capital, humans derive a wide range of services, referred to as ecosystem services, that support human life and benefit human welfare. The most obvious ecosystem services include food and water, as well as plant materials used for fuel, building materials and medicines, but there are many more (*see below).
Capital has traditionally been thought of as money or any resource or asset that stores or provides value to people and the economy. Natural capital is a way of thinking about nature in much the same way as traditional capital; if we invest in it, it creates value, and if we degrade it, we reduce its value.
Natural capital accounts effectively operationalise natural capital concepts, measuring the amounts and values of natural assets and ecosystem services using the same approach and concepts as are used in corporate and national accounting. In particular, distinguishing between stocks of assets and flows of goods and services is the basis of natural capital accounting as it is in conventional business accounting.
As noted above, natural capital refers to stocks of natural assets. A stock refers to the total quantity of an asset at a given point in time such as tonnes of coal, cubic metres of timber, megalitres of water in a dam and hectares of land under native forest.
Physical flows are reflected in the movement and use of materials, water and energy through a given time period.
As in conventional accounting, natural capital accounts are built around the distinction between stocks of assets, and flows generated from those assets.
When the relevant asset is an ecosystem, extent refers to the area of an ecosystem. In turn, condition refers to the health and integrity of the ecosystem. Both are relevant when considering how to measure and describe the stock of the ecosystem asset.
The stock and flow accounts are interdependent. Stock accounts give a baseline, while flow accounts show how resources are used or replenished over time. Flow accounts detail the changes that affect stock accounts. Together, they help in making informed decisions for sustainable resource management by showing both the current state and the changes over time.
Where natural capital refers to the assets provided by nature, ecosystem services refer to the various flows of benefits that humans receive from natural ecosystems. These services are essential for our well-being, and are categorised into several main types, such as:
- Provisioning Services: These are tangible goods or resources that ecosystems provide, such as food, water, timber, and medicinal plants.
- Regulating Services: These services help maintain environmental balance. Examples of such services include climate regulation, flood control and pollination.
- Cultural Services: These are non-material benefits that enhance our quality of life. Examples include recreation and aesthetics, with parks, forests, and natural landscapes providing spaces for relaxation and enjoyment; and spiritual and cultural services, with natural areas holding cultural and spiritual value for many communities.
- Supporting Services: These services are essential for the functioning of ecosystems but are not directly consumed by humans. They include soil formation, nutrient cycling and biodiversity supporting resilience and stability.
In short, ecosystem services describe the direct and indirect benefits humans receive from the assets provided by nature.
The System of Environmental-Economic Accounting (SEEA) concentrates particularly on the direct benefits to humans received from ecosystem services, and so uses a threefold classification: (i) provisioning services, (ii) regulation and maintenance services, and (iii) cultural services. SEEA and its relationship to natural capital accounting is discussed below.
Natural capital accounting does not in the first instance seek to answer a specific policy question, although it may well be useful in providing organised information that helps when making policy or investment decisions. It can also be critical in environmental reporting and for nature related disclosures (see below).
By contrast, a cost-benefit analysis is a one-off study that aims to answer a specific question around a policy or investment decision, and in the case of environmental cost-benefit analysis, will employ different valuation metrics to environmental-economic accounting.
Natural capital accounting is described above as an umbrella term that describes accounting for the environment and its natural assets in a way that is analogous to how we account for what happens in the economy.
The System of Environmental Economic Accounting (SEEA) is an international standard for natural capital accounting. It provides a common framework for organizing and presenting statistics on the environment and its relationship with the economy. Standard economic indicators like Gross Domestic Product (GDP) provide information about the state of the economy, but they omit the crucial role of nature except to the degree some natural resources and environmental services are transacted in markets. The SEEA fills this gap by recognizing nature as an asset that must be maintained and managed, with its contributions (services) measured and considered in decision-making.
An experimental account is one where data on relevant account indicators and other variables has been compiled, transformed into the required format, and can be subject to meaningful visualisation. Experimental status allows for improvements to methods and data sources to be taken into account following input from stakeholders, with the intention of addressing issues and concerns in future updates. Experimental accounts are regarded as suitable for publication.
Experimental accounts differ from final accounts in that final account status provides confirmation to account users that the account in question will not be subject to future updating or revision.
Yes, natural capital accounting can be used for State of Environment (SoE) reporting. SoE reporting involves assessing and communicating the current state and trends of the environment, including aspects such as air quality, water quality, biodiversity, land use, and climate. NCA provides a structured framework for quantifying and valuing the contributions of ecosystems and natural resources to society, and mapping their changes over time, making it a valuable tool for SoE reporting.
NCA offers a systematic and quantifiable approach to recording the state of the environment and can help link environmental and economic considerations, supporting informed decision-making for environmental management and sustainable development.
Natural capital accounting helps businesses understand the changes to the state of nature and the value of nature, and financial disclosures helps these businesses communicate how their actions affect nature (and vice versa) and how they’re responding to these nature-related issues over time. The true value of natural capital accounting, in the context of financial disclosures, is the credibility it provides businesses when they talk about their relationship with nature as they provide decision useful information. This is pertinent in light of ongoing concerns around greenwashing and the quality of disclosures made by businesses.
Natural capital accounting provides businesses with a consistent and robust method for systematically presenting information about natural capital in a form that users of financial statements are familiar with. Such accounts help businesses understand the changes to the state of nature, identify their dependencies and impacts on nature and the range of ecosystem services their business models and supply chains rely on. It also enables businesses to identify sensitive locations within their business footprints and assist in their materiality assessments. Important aspects, such as that presented by the Task Force for Nature-related Financial Disclosures, are the need for businesses to understand the value of nature to their business performance and to have in place robust mechanisms for target-setting and performance tracking of mitigation actions. Natural capital accounting enables businesses to integrate these insights into their existing systems.
In the context of nature-related financial disclosures, natural capital accounting provides credibility and confidence it to businesses in understanding and managing the range of nature-related issues that affect them. It provides confidence to the boards of companies communicating how their actions affect nature (and vice versa) and how they’re responding to these nature-related issues over time. Location-specificity, robustness and consistency in the environmental information that underpins disclosures are important in in mitigating the risk of the perception of greenwashing, and the perceived quality of disclosures made by businesses.
No, monetary valuation can be a useful tool to articulate value in monetary terms which can be factored into government and business decisions. Valuing nature makes explicit that nature provides benefits to humanity, a reality that might otherwise be ignored if no value is presented when policy changes or development decisions are being considered.
Valuation does not equate to putting a price on nature. A price on nature requires a property right or contractual arrangement that results in transactions or investments affecting nature to be made. Market-based schemes involving credits and offsets do result in payments being made to improve environmental outcomes, but valuing nature purely for the purposes of accounting for it does not involve nature-based transactions.
Natural capital accounts are being developed in various jurisdictions in Australia and around the world. At a state level, environmental-economic accounts are being built by Western Australia, South Australia, Victoria, ACT, Queensland and NSW. There are over 90 countries developing accounts around the world, including the United Kingdom, the United States, Canada and Ireland.
- Environmental Economic Accounting – Department of Climate Change, Energy, the Environment and Water | Australia
- Environmental Economic Accounting Dashboard – Department of Climate Change, Energy, the Environment and Water | Australia
- Natural Capital Accounting – Commonwealth Scientific and Industrial Research Organisation (CSIRO) | Australia
- Enabling a Natural Capital Approach - Department for Environment, Food & Rural Affairs | United Kingdom
- Natural capital and ecosystem services - European Environment Agency
- Accounting for natural capital: building the numbers to track and sustain the nation’s natural resources - United States Geological Survey
- System of Environmental-Economic Accounting - United Nations
- The Capitals Approach - Capitals Coalition
- Natural Capital Accounting - Wealth Accounting and the Valuation of Ecosystem Services (WAVES)
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