Toward a methodology for incorporating ecological capital into the accounts of individual entities

Abstract

Concern is increasing that degradation of land and ecosystems important to food production is occurring and that some agricultural practices are drivers of degradation. In response, governments and businesses are investing to establish collaborative and transformative initiatives to manage these threats. Global leaders are describing sustainable development goals for resources, including land and ecosystems, for the economic and social wellbeing of current and future citizens. The United Nations has invested in capacity for measurement and accounting for environmental resources in the system of national accounting used for macroeconomic analysis and planning. Responsible businesses are increasingly using sustainability reporting to communicate their past environmental performance and future commitments including estimates of their impact and dependence on a range of resources including ecosystems. Information available from business sustainability reporting does not presently meet the needs of investors and other stakeholders because it lacks standardisation of concepts and measurement methods and it is not comparable or verifiable. It also cannot be compiled into national or subnational accounts for complementary macroeconomic analysis. As a result, reliable information about the current quality and condition of our land and ecosystems and the economic implications of condition change is not available. International accounting standards used by individual entities are currently silent on the concept of ecosystems owned and controlled by individual entities as assets (separately from land) but have the potential to provide useful information about them. To address this potential, this study explores how the principles and concepts of international accounting standards and the United Nations system of environmental-economic accounting could be applied or adapted to describe an entity-level accounting framework for ecosystem assets. It focuses on livestock grazing in northern Australia as an example of a sector that owns and controls a significant proportion of Australia's land-based ecosystems and where degradation is a concern. The international accounting standards are examined to identify concepts, accounting elements and methods applicable to ecosystem assets used by livestock grazing entities. The applicability of principles and guidance provided by these and the United Nations system of environmental-economic accounting is tested against the functional and economic descriptions of rangeland ecosystems to suggest a provisional framework for ecosystem accounts for this industry. Demonstration accounts reflecting this framework are prepared using a scenario produced from industry data. The study reveals that current good practice sustainable management of rangeland ecosystems can be reflected in ecosystem accounts that are coherent with the United Nations system of environmental-economic accounting. It finds that the principles of international accounting standard fair value measurement can be applied to estimate the monetary value of ecosystems based on their income-earning potential, as a supplement to the real estate value of the property. Under the framework created by the study, changes to asset values and liabilities associated with ecosystem investment and degradation are coherent with the system of national accounts. These findings imply that entity-level environmental-economic accounts for agricultural entities can be used in the compilation of ecosystem accounts under the United Nations system of environmental-economic accounting and contribute to macroeconomic analysis and planning. They also have the potential to provide a foundation of verifiable, comparable information for businesses and other organisations in the agricultural value chain to gain visibility of the ecosystem stewardship of their suppliers and to collaborate with governments to meet the sustainable development goals.