Traditional measures of economic success do not take natural assets into account and nature-related financial risks must be measured by financial institutions, a new report commissioned by the UK Treasury has said.
Biodiversity is declining faster than at any time in human history, The Economics of Biodiversity: The Dasgupta Review said. Current extinction rates, for example, are around 100 to 1,000 times higher than the baseline rate, and they are increasing.
The report recommends change is geared around three transitions. The first is to ensure our demands on nature do no exceed its supply and that we increase supply.
The second is to change our measures of economic success. Gross domestic product (GDP) is needed for short-run macroeconomic analysis and management, the report said. However, GDP does not account for the depreciation of assets, including the natural environment.
“As our primary measure of economic success, it therefore encourages us to pursue unsustainable economic growth and development. The Review demonstrates that in order to judge whether economic development is sustainable, an inclusive measure of wealth is needed. By measuring our wealth in terms of all assets, including natural assets, ‘inclusive wealth’ provides a clear and coherent measure that corresponds directly with the well-being of current and future generations.
“This approach accounts for the benefits from investing in natural assets and illuminates the trade-offs and interactions between investments in different assets. Introducing natural capital into national accounting systems would be a critical step towards making inclusive wealth our measure of progress.”
Michael Spence, Nobel Laureate and Philip H Knight Professor and Dean Emeritus, Stanford Business School, Stanford University, said: “Standard measures like GDP, growth, productivity, are flows or ratios derived from flows. As performance indicators, they are at best incomplete, akin to flying with half the instruments out of commission. A comprehensive picture of the assets on which our well-being depends is an essential guide for policy, behaviour, and education.”
The third transition is to transform our institutions and systems – in particular our finance and education systems – to enable these changes. The report said ‘financial actors’ can also help manage and mitigate the risks and uncertainty that result from acting unsustainably.
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“Businesses and financial institutions can do this by accounting for dependencies and impacts on nature in their activities; and through the measurement and disclosure, not only of climate-related financial risks but nature-related financial risks too.”
Mark Carney, UN Special Envoy for Climate Action and Finance, said: “Ecosystems that have more diverse natural assets are more productive, resilient and adaptable. Just as diversity within a financial portfolio reduces risk and uncertainty, greater biodiversity reduces risks and uncertainty within a portfolio of natural assets. As we awaken to the importance of natural capital, we need to place greater value on sustainability and biodiversity – the precondition to solving the twin crises of biodiversity and climate.”
