Why We’re Examining the Link Between Natural Capital & Productivity

Sustainable Prosperity and partners have brought together a group of experts to explore the links between natural capital and productivity. Today, we’ve launched a special project website where we’ll post our findings as they develop.

So, why a project about the links between natural capital and productivity? To answer that one question, let’s look at three questions:

1. Why should we care about natural capital?
2. Why is productivity important?
3. What are the links between natural capital and productivity?

Why should we care about natural capital?

In this project, we use a pretty general (and well accepted) definition of natural capital. The Wealth Accounting and the Valuation of Ecosystem Services Project defines natural capital this way: “Natural capital includes, first of all, the resources that we easily recognize and measure such as minerals and energy, forest timber, agricultural land, fisheries and water. It also includes ecosystems producing services that are often ‘invisible’ to most people such as air and water filtration, flood protection, carbon storage, pollination for crops, and habitat for fisheries and wildlife.”

Natural capital is important for economic and wellbeing reasons – it provides inputs to our economy, it provides habitat for species, it provides the right climate for us to live and thrive in, we enjoy access to nature for recreation and spiritual purposes, and really, we wouldn’t be here without it.

While important to everyone, natural capital is particularly important to Canadians.

The Inclusive Wealth Project is an initiative that measures various forms of capital (i.e., wealth) in different countries. The graph below shows that Canadians derive a large share of our wealth from natural capital – larger than most countries.

The definition of natural capital used in these graphs is much more narrow than the WAVES’ definition above. If more aspects of natural capital were to be included, the dark green bars would be even larger.

Managing natural capital well is also important – particularly because natural capital and economic activity are linked, as the diagram below shows. Good management requires understanding natural capital’s importance, measuring and valuing it as best we can, incorporating those values into our decision-making, and generally trying not to degrade it or draw it down at rates that are either unsustainable or don’t maximize value.

Given that natural capital is important, the next question is – why is productivity important?

A large part of the answer comes from the diagram above – natural capital and economic activity are highly linked. When it comes to the economy, economic performance is measured by a number of different metrics, one of which is productivity. Productivity growth (and there are different forms of productivity – see the full report for more details) is a key economic indicator, like GDP growth, that economists and policy makers pay a lot of attention to.

Productivity can be measured to indicate a firm’s, sector’s or nation’s economic strength. It measures how much output we create with the inputs we use – in essence, productivity tells us how much we’re creating with the things we’re using. It’s generally measured in dollar values. What really matters is how fast productivity is growing – in a sense, productivity growth helps us know if we are increasing how much we’re creating with the inputs we have.

Just as most of us feel good after a productive day, our economy and the individual sectors and firms in it perform well when they have high – and increasing – levels of productivity. Productivity can be linked to competitiveness, innovation and standard of living.

So, productivity is an important concept and decision makers pay close attention to it. But how do natural capital and productivity link?

They’re linked in a lot of ways. Recall the arrow diagram, above. It illustrates how our economy is linked to our environment, and vice versa. There are a number of angles we can look at that shed light on these links between economy productivity and natural capital, such as:

• How productively we use natural capital to create goods and services – getting the most output (and the highest value output) from the natural capital and other inputs we use.
• The natural capital inputs we use (like timber or water) and how the productivity of these inputs is changing (i.e., examining partial productivity measures for natural capital).
• The “productivity” of nature in supplying us with ecosystem goods and services and how our pollution and/or use of natural capital can impact nature’s ability to continue to provide for us.
• How to adjust our metrics of productivity to better reflect our use of natural capital, particularly the elements of natural capital that we don’t pay for or don’t pay a full price for – like water, and the impact of our pollution on natural capital (like greenhouse gas emissions or water pollution).

  For the first part of our project, we focus mainly on the last option – looking at our metrics of productivity (and in particular, multifactor productivity) to calculate an environmentally-adjusted measure of productivity.

  We think this is important work – similar studies have found that these measures of productivity tell a different, and complementary, story about our productivity performance. Sectors, firms and countries that have taken action to best use natural capital and to reduce pollution show improved productivity performance when the environment is included in the measurement of productivity.

  Generally speaking, a better understanding of the link between productivity and natural capital can lead to better-informed public policies that reward those who improve their environmental performance while improving their economic performance.

  Our project logo, below, reflects this thinking on linkage. If you look closely, you’ll notice the two arrowheads (the green and light blue) point upwards and onwards. This design is not by chance – we believe exploring the links between productivity and natural capital has the potential to shed light on strategies that can improve Canada’s environmental and economic performance.

  And that’s definitely pointing us in the right direction.

  

  For more information on this project, or to consider joining the partnership, please contact me at mbrownlee@sustainableprosperity.ca or @MICHELLEatSP.