Natural Capital and Ecosystem Services Valuation

Biodiversity generates considerable value through the provision of goods such as food, water, and materials, and services such as climate regulation, pollination, disaster protection, and nutrient cycling. The Millennium Ecosystem Assessment and TEEB were significant steps toward making the “value” of nature more visible and measurable.

Other related efforts to provide frameworks and approaches for internalizing environmental externalities into economic and development decision-making include the United Nations System of Environmental-Economic Accounting (SEEA), World Bank’s Wealth Accounting and Valuation of Ecosystem Services initiative, the Inclusive Wealth Index, and the Natural Capital Coalition’s Natural Capital Protocol. As part of this evolution of thinking about nature’s contributions to societies, economies, and sustainable development, the term “natural capital” was coined to define the stock of renewable and non-renewable resources, including biodiversity (e.g. plants, animals, air, water, soils, and minerals), that combine to yield a flow of benefits (ecosystem goods and services) to people.

Although a number of approaches are currently being used to recognize, demonstrate, and capture the value of biodiversity and ecosystem services, a mismatch remains between valuation and development policy and financing. Valuation is not leading to the development of policy reforms needed to mitigate the drivers of biodiversity loss and encourage sustainable development through the better management of biodiversity and natural capital, nor is it triggering changes in the use and scale of public and private finance flows on the scale necessary to address threats. Policy and finance reforms must accompany valuation so that the finance and development decisions that impact natural ecosystems and biodiversity include incentives and price signals that result in more cost effective and sustainable biodiversity management.

GEF supports natural capital assessments: spatial assessments of stocks of natural capital and/or delivery of ecosystem services, which are often accompanied by assessments of change under different scenarios with decision-makers and stakeholders. The data from such assessments can serve as an input to the construction of national accounts that reflect these values. Both natural capital assessments and accounts are required to advance policy dialogue and to aid in decision-making, including the allocation of financing for management of natural capital and biodiversity. They are interlinked, and each have their own advantages and disadvantages.

When designed and implemented appropriately, natural capital assessments have proven effective in informing regional, national, or sectoral plans as well as finance and policy mechanisms. GEF projects design and link the natural capital assessment and accounting exercises to respond to specific target decisions or policy questions to help ensure their practical relevance as well as the institutionalization and use of natural capital accounting for the medium- and long-term.

GEF projects seek to build the capacity of countries to identify, measure, and value natural capital, including biodiversity, and to integrate the understanding of this value into decision making and policy instruments to: 1) mitigate or eliminate harmful incentives leading to the degradation of natural capital assets or to identify positive financial and other policy incentives for the maintenance or enhancement of these assets; and 2) enhance financing for sustainable management and restoration of natural capital, including through affecting public and private financial flows. This may include expanding the use of green finance mechanisms and solutions, as appropriate (e.g., green bonds, blue bonds, etc.). The GEF seeks to support natural capital assessments and accounting that can inform decisions about the use of green finance mechanisms to sustain and restore natural capital that would include financial products and services provided by the banking sector.

In Thailand, the Integration of Natural Capital Accounting in public and private sector policy and decision-making for sustainable landscapes project is focusing on three sectors: tourism, agriculture/rice, and water services. Thailand’s tourism industry plays a key role in the national economy, contributing 44% of GDP and providing an important source of foreign exchange revenue. Tourism is a prime beneficiary of cultural services provided by ecosystems (e.g. recreation, scenic and spiritual values of the land and waters) but also provisioning services due to the dependency and high water use of the hotel and tourism sector. However, the rapid and often uncontrolled growth of tourism has led to severe impacts on biodiversity and ecosystems, particularly in coastal tourist destinations.

The Objective of the project is “To alleviate threats to biodiversity, ecosystem services, and to support low carbon growth in critical production landscapes in Thailand, by integrating values of forests and other natural capital into policies and operations of key economic sectors.” In close collaboration with project partners, the project aims to work towards the development and application of innovative policies and tools to support mainstreaming of market and non-market values of natural capital, their biodiversity, as well as their ecosystem services in key economic sectors, including agriculture, water services and tourism. The project targets public policy (sectoral and economic development) as well as the role and responsibilities of the private sector and financial institutions.

In GEF-7, natural capital and ecosystem accounting projects will undertake a four-phase process:

1) baseline diagnosis of institutional capacity to undertake natural capital assessment and accounting (legal, policy, planning and institutional framework to identify gaps, data, governance and capacity needs);

2) review of expenditures on natural capital management, assessment of finance needs for natural capital management and of appropriate finance solutions;

3) implementation of natural capital assessments and accounting; and

4) incorporation of natural capital into policy, planning, and decision-making.

When appropriate, GEF will work with countries already engaged in relevant initiatives conducted under the auspices of the World Bank, UNDP, the Natural Capital Project, UNEP, etc. and will complement these efforts.

In addition, GEF support will help address some of the key challenges to the establishment of green finance mechanisms, such as informing the design of government policies that provide incentives to generate positive externalities through green investments (beneficial to natural capital) while creating appropriate disincentives for the production of negative externalities from environmentally damaging investments. The program will be implemented within a global context where businesses are increasingly recognizing that by including natural capital considerations in their decisions, they can create greater value for themselves and protect the natural capital that is material to their economic interests. For example, many corporations and other organizations around the world are now using the Natural Capital Protocol as a standardized framework to help incorporate the assessment and valuation of natural capital in decision-making. The protocol was developed by the Natural Capital Coalition and now includes a supplement geared towards the finance sector to guide development of policies that encourage green investment.