Making Waves: Introducing Business Sustainability & Green Accounting

Now we have Waves, or Wealth Accounting and
Valuation of Ecosystem Services, which recognises the under-valuation of
ecosystem services as one of the main causes of ecosystem degradation and
biodiversity loss, introduced by Conservation International (CI). Chief
scientist at CI Dr Andrew Rosenberg feels companies can make a start by
applying green accounting principles to their own business strategies. Ultimately,
companies should realise that green accounting helps management to improve the
decision-making process, save costs and assess potential liabilities. Jessica
Cheam has the full story. Read More

Published : Sunday, July 24th, 2011

By : Jessica Cheam

The review of Singapore’s economic growth
forecast made front-page news last week. Amid concerns from the Government,
business leaders and citizens on what impact the European sovereign debt crisis
and other risks would have on the nation’s growth, jobs and pay cheques, I
found myself wondering: What does GDP really mean?

Some economists may disagree with me when I
say that the current definition of gross domestic product, or GDP, as we know
it, is deeply flawed.

But I’m not the only one who thinks so. In
fact, awareness of the shortcomings of GDP as a measure of a nation’s
well-being and an economy’s sustainability has grown steadily in recent years.

GDP measures the value of output produced
within a country in a given time period, usually a year or a quarter.

The key flaw is this: Any depreciation
included reflects only changes to man-made capital such as equipment, but does
not include growth’s negative impact on public goods such as water, forests and
clean air – that is, the environment.

The European Commission recognised this when
it launched an initiative called ‘Beyond GDP’ in 2009, which aimed to develop
indicators that are ‘as clear and appealing as GDP, but more inclusive of
environmental and social aspects of progress’.

Economic indicators such as GDP, the European
Union’s Beyond GDP website says, were ‘never designed to be comprehensive
measures of prosperity and well-being’ – yet today, we see almost all
countries, including Singapore, pursuing it as the ultimate sign of success.

Today, a combination of economic crises
(think the 2008 financial crisis, and the more recent United States and
European debt woes) and environmental disasters (flood, famine and
deforestation) has created a global momentum for a radical revision of national
accounting methods.

The World Bank accelerated this momentum
earlier this year when, working with non-profit organisations such as
Conservation International (CI), it launched Waves, or Wealth Accounting and
Valuation of Ecosystem Services, which recognises the under-valuation of
ecosystem services (such as tourism, clean air and water) as one of the main
causes of ecosystem degradation and biodiversity loss.

In an interview with The Sunday Times last
week, Dr Andrew Rosenberg, chief scientist at CI, explained how Waves seeks to
engage finance ministries and economic planning agencies across the globe in
implementing a process that values natural capital such as ecosystems in the
national income.

National income measures the monetary value
of the flow of output of goods and services produced within an economy over a
period of time.

National income accounts are crucial because
they form the primary source of information about the economy, such as GDP, and
are widely used for assessment of economic performance and policy analysis in
all countries, said Dr Rosenberg.

This is why it is important to integrate the
economic value of ecosystems into national income accounts. This helps to
address shortcomings in managing the environment and natural capital.

For example, while the income from harvesting
trees for wood is recorded as income in national accounts, the simultaneous
depletion of natural forest assets is not seen as a loss in capital.

This is despite the fact that deforestation
would lead to lower air quality, increased risk of soil erosion and flooding,
which have far-reaching consequences.

By focusing only on flows of output, GDP
provides misleading signals to policymakers. This can result in leaders making
wrong and misinformed decisions, said Dr Rosenberg. ‘That’s why we need to have
green accounting… putting a market value on things like fisheries, forests and
natural foods,’ he added. ‘One way to think about it is how much would it cost
to replace the function that this environment provides?’

Hypothetically, the argument for green
accounting is robust. However, in reality, the implementation has been
challenging.

Nanyang Technological University
environmental economics professor Euston Quah said the big question is how to
get everyone to agree on a common method of valuing natural capital.

‘There is tremendous disagreement within the
scientific, business and government communities as to how we can put monetary
valuations on the environment,’ he said. This is why, even though the subject
gained much attention when it first emerged in the 1980s, interest in it
eventually fizzled out.

But Prof Quah recognises this: The concept is
making a comeback now. ‘Across the world, we have become more environmentally
aware. There are big multilateral treaties on climate change being discussed,
and people are putting pressure on governments to factor in the cost of the
environment in the pursuit of economic growth,’ he said.

‘The world needs to sit down and convene more
meetings to discuss this, and agree on a methodology of evaluations.’

The ramifications of this overhaul of GDP and
national income are great. If the world succeeds and countries take stock of
economic growth in relation to the depletion of their natural assets, net growth
will be smaller, said Prof Quah.

‘Society will then be able to decide, is it
worth it? For example, if growing output by 10 per cent requires an 8 per cent
loss in natural capital… this would affect how governments pursue policies of
economic growth, and will also affect government spending.’

One interesting question: If all countries
had been equipped with such accounting methods, say, 50 years ago, and it had
been the standard, would it have changed the growth path of all the economies?

Take
Singapore, for example. If we had had to account for our natural capital before
our development years, would it have changed our industries or physical
landscape?

The answer depends on how much natural
resources a country has, said Prof Quah. In the case of Singapore, which has
few natural resources, stable employment and income were, rightly, big
priorities in the early development years.

Green accounting would unlikely have made a
big difference to economic decisions as land would still have to be cleared to
make way for housing and industries, he added.

What’s interesting is, as the country
develops, citizens now put a higher priority on the quality of life, and on
things such as noise and air pollution, and clean, green spaces, he observed.

For resource-rich countries, however, green
accounting becomes more important. The government needs to recognise the
trade-offs involved in pursuing certain economic policies and the extensive
impact they could have on its environment and the future cost of losing certain
resources, especially if they play a big part in generating ‘unseen’ income,
like providing regular rainfall, or tourism locations.

But if poor, developing countries wanted to
do this, they would not likely have the capacity. Rich, developed nations can
help build this capacity.

‘It is right that we should put some
resources into it to come up with a framework… the EU’s efforts in driving
‘Beyond GDP’ are encouraging,’ Prof Quah said.

Meanwhile, Dr Rosenberg feels companies can
make a start by applying green accounting principles to their own business
strategies.

‘There
will be increasing requirements for transparency and sustainability… I wouldn’t
be surprised if ultimately, stock exchanges, for example, demanded green
accounts from their listed firms,’ he said.

Ultimately, companies should realise that
green accounting helps management to improve the decision-making process, save
costs and assess potential liabilities, he said.

This can only be a good thing. And the
earlier governments start to catch on, the better.

This article originally appeared in The
Straits Times.

Source: www.eco-business.com