Juan Camilo
Masters of Environmental Management Graduate, Duke University
For years, we have been developing the tools for Natural Capital Accounting (NCA), which translates into using an accounting framework to provide a systematic way to measure and report on stocks and flows of natural resources (SEEA) and ecosystem services. We use NCA along with the concept of “wealth” to properly connect sustainability with economic development. However, in practice, there is still work to be done towards natural capital and wealth investments. Before we can start “financing the gap," we must achieve consistency in our wealth estimates, increase and encourage the development of country-level wealth accounts, and change current paradigms of sustainable development. Failure to do this can stagnate progress in achieving measurable sustainable outcomes.
As the world moves toward an era of sustainable development, having a full picture of how to leverage past economic production into sustainable economies is crucial. Currently, how we consider economic, social, and environmental factors in finance, such as green accounting (Muralikrishna and Manickam 113), how we increase financial flow for sustainable development (green finance), and how we reinvest in the future all have less to do with markets and requires a pragmatic approach to transition from financing consumption to financing generation of wealth, the last, being a crucial call to action for sustainable development raised by Dr Matthew Agarwala during the release of The Changing Wealth of Nations 2024. What does this mean with the current state of art for NCA, and how is it different from increasing wealth attained by income?
There are two internationally recognized ways of measuring economic development: income and wealth. Under the concept of wealth, the measured capital is the stock embodying future opportunities, which is, in turn, a function of net investment. Unlike income, which also accounts for depreciation, wealth captures volume changes in our natural resources that can occur through natural disasters, stock discovery (World Bank 28), and more.
The Sustainability Spectrum
Economic substitutability of assets is a crucial concept for sustainable development and wealth generation, as it helps determine how assets are included in wealth accounts and keep track of economic gains to avoid double counting.
Sustainability should not be treated as a target or end but rather as a spectrum of measurement and operation between two ends, known as weak and strong sustainability."
Juan Camilo
Masters of Environmental Management Graduate, Duke University
Put simply, weak sustainability considers endless substitution or innovation, while strong sustainability would not allow for substitution, requiring that future generations have the same physical amount of resources to achieve a sustainable welfare level relative to their predecessors (World Bank 28). Weak sustainability can be achieved by reinvesting resource rents and capital formation into social, economic, and environmental activities. Under the same example, strong sustainability would be achieved by investing in renewing the stock of the mineral to the same level before its use—an impossible for many non-renewable assets. As Fenichel and Onder mention in the “2024 Changing Wealth of Nations,” sustainable development lies in between these two definitions, where some substitution and innovation possibilities exist along with complementarity between assets.
Differentiating between borrowing and investing for consumption and increasing wealth per capita is the paradigm change that will help us navigate the spectrum of sustainability. If consumption plus gross investment is the basis for sustainable development, then it would mean that as long as an economy keeps producing—it is sustainable. The resource (or place) that allowed the production of capital may have ceased to exist, but the nation will still be developing sustainably. Increasing wealth per capita is that safeguard that allows future opportunities to be based on the physical stock of resources that enabled the creation of economic assets and not solely on financial mechanisms subject to markets.
Debt for Nature Swaps, an Enabler of Strong Sustainability?
Understanding and adopting this paradigm change to generate wealth is therefore crucial so frontiers in sustainable development, such as circular economy or providing debt relief in return. Government investments in the conservation of resources in the form of debt-for-nature swaps continue to be unveiled as solutions. On the side of renewable resources, when replacing debt for the conservation of ecosystems and natural resources (Whiting), the increase or maintenance of wealth for sustainable development is in the volume of our regenerated/conserved natural resources.
We can circle back capital that was used for consumption or invested produced capital into regenerating future opportunities of natural resources, such as regenerating a forest that was over-harvested for timber. This is, of course, a general overview, and the magnitudes and proportions of investments still need to be properly assessed. Furthermore, debt-for-nature swaps need to be scaled to generate wealth and be a sustainable development solution (Whiting). Under the rationale of increasing wealth, debt-for-nature swaps can be a game changer in giving green finance increased financing pathways by expanding the portfolio of assets to invest in to capture those included in wealth and NCA. It can also alleviate poverty and improve the livelihoods of rural communities. It has the potential to challenge the status quo of poverty under the idea of income to wealth.
In the context of the circular economy, investing in wealth generation is crucial for its success."
Juan Camilo
Masters of Environmental Management Graduate, Duke University
Circular Economy, Co-Existence of Weak and Strong Sustainability
This can be particularly true when factoring substitutability and complementarity for critical raw materials within the circular economy. Critical raw materials (CRMs) are classified as so because of supply risks unrelated to scarcity and lack of substitutes for their economic purpose (Mathieux et al.). As many of these materials are derived from non-renewable natural capital, the changes in wealth of the non-renewable resource must remain positive through each economic substitution, allowing for weak sustainability to occur. However, strong sustainability is introduced through the circular economy, as salvaging and recycling CRMs allow for the conservation of non-renewable deposits that can be used in future opportunities. These future opportunities can take the form of new technologies or discoveries of more deposits. This is only one of the many examples of the circular economy contributing to sustainable development through strong sustainability.
A Transformational Path Forward
Lastly, what is crucial is that this paradigm change occurs at the consumer level, so urban communities continue to change consumptive practices toward lifestyles that allow wealth generation and conservation globally. Environmental management is not about managing natural resources, but about societies understanding the best opportunities for their natural resources; when and how to use them. Investing in measuring and increasing wealth would yield healthy livelihoods, sustainable production and consumption, biodiversity conservation and restoration, lower greenhouse gas emissions, and realize the SDGs (Vardon et al. 25). Robust wealth accounts are needed for scaling up sustainability solutions such as circular economy and debt-for-nature swaps. I conclude that, at this early stage of a global paradigm change, supporting governments with investments for NCA and developing wealth accounts is investing in increasing wealth and is as critical as increasing current wealth (Measured globally by CWON 2024). It starts by understanding opportunities for the future.
References
- SEEA. “Natural Capital and Ecosystem Services.” System of Environmental Economic Accounting, 2024, https://seea.un.org/content/natural-capital-and-ecosystem-services-faq#What%20is%20natural%20capital%20accounting?
- Muralikrishna, Iyyanki V., and Valli Manickam. “Chapter Seven - Environmental Accounting.” Environmental Management, edited by Iyyanki V. Muralikrishna and Valli Manickam, Butterworth-Heinemann, 2017, pp. 113–34, https://doi.org/10.1016/B978-0-12-811989-1.00007-5.
- World Bank. The Changing Wealth of Nations: Revisiting the Measurement of Comprehensive Wealth. Washington, D.C.: World Bank Group, 2024. http://documents.worldbank.org/curated/en/099100824155021548/P17844617dfe6e0241ad25120b1320904c2.
- Whiting, Kate. “Climate Finance: What Are Debt-for-Nature Swaps and How Can They Help Countries?” World Economic Forum, 26 Apr. 2024, https://www.weforum.org/stories/2024/04/climate-finance-debt-nature-swap/.
- Mathieux, F., et al. Critical Raw Materials and the Circular Economy – Background Report. Scientific analysis or review, KJ-NA-28832-EN-C (print),KJ-NA-28832-EN-N (online), Publications Office of the European Union, 2017, https://doi.org/10.2760/378123 (online),10.2760/977855 (print).
- Vardon, Michael, et al. “From COVID-19 to Green Recovery with Natural Capital Accounting.” Ambio, vol. 52, no. 1, Jan. 2023, pp. 15–29, https://doi.org/10.1007/s13280-022-01757-5.
- McLaughlin, Eoin, et al. “Challenges of Wealth-Based Sustainability Metrics: A Critical Appraisal.” Ecological Economics, vol. 224, 2024, p. 108308, https://doi.org/https://doi.org/10.1016/j.ecolecon.2024.108308.
- UNEP. “Green Financing.” Green Financing, 2024, https://www.unep.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing.