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If we do not curb climate change, it will push at least 132 million people into poverty over the next decade. This illustrates just how much human prosperity is linked to the well-being of our planet. When we mismanage natural assets and turn a blind eye to the longer-term impacts of our actions, our prosperity - and that of future generations - is likely to face severe consequences.
So, are we accurately valuing natural assets? When thinking about wealth, do we just think about businesses, buildings, cars, maybe oil or minerals? What about forests, mangroves, water, fish, or clean air?
In 2005, the World Bank launched a seminal publication titled “Where is the Wealth of Nations?” The report argued that measuring Gross Domestic Product (GDP) alone does not determine whether a country’s development is sustainable. In many cases, economic growth is happening at the expense of nature, and therefore at the expense of future prosperity. To understand the sustainability of growth, we must look at the value of all the assets that generate income and ultimately well-being: this is called wealth accounting. Think about it as the balance sheet for a country. GDP and wealth accounting are complementary indicators for measuring economic performance and provide a fuller picture when evaluated together.
Sixteen years later, we have launched “The Changing Wealth of Nations 2021” (CWON 2021), the fourth volume in the series and the world’s most comprehensive accounts to date of the wealth of nations, covering 146 countries from 1995 to 2018. CWON 2021 looks at four main types of assets: renewable and nonrenewable assets provided by nature (natural capital), assets created by people (produced capital), the wealth embedded in people themselves (human capital), and net foreign assets.
The research in CWON 2021 shows us that we can no longer grow our economies by depleting and degrading wealth provided by nature. In some countries where GDP growth is achieved by consuming or degrading natural resources, for example by over-fishing or soil-degradation, total wealth is declining. Put another way, countries that have seen declining total wealth per capita were often those that were also degrading their renewable natural assets. If this trend continues, current and future generations will suffer the consequences of a much degraded world.
While global wealth is increasing, inequality between countries persists and low-income countries are falling further behind in terms of their share of global wealth. Renewable natural capital is particularly important for low-income countries, forming 23 percent of their total wealth. This means careful management of renewable natural assets is even more critical to meet sustainable development goals and ensure the well-being of the most vulnerable people.
Historically, assets like fossil-fuels have been over-valued by ignoring their polluting and climate warming impacts, while assets that contribute to climate mitigation like forests and mangroves are undervalued and hence degraded or depleted. Governments can put in place policy incentives to reflect the true sustainable value of wealth.
Let’s take the example of mangroves; the shrubs and small trees that grow in salty, coastal waters. The value of mangroves grew 2.5 times between 1995 and 2008. This is because the coastal areas that they help protect have increased in value and, at the same time, have become more prone to flood risks. Global mangrove wealth is now valued at over $547 billion. As climate change is likely to increase the frequency and intensity of coastal storms, the value of mangroves will continue to increase. Policies to rehabilitate and expand coverage of mangroves can create and protect even more wealth, as the value of the assets they protect increases.
Renewable energy, including from water, wind, and sunlight represents another potentially large but still unaccounted for source of wealth. Experimental calculations show that the value of hydropower assets already matches the value of fossil fuel assets in some countries. Better energy and climate policies can quickly unlock significant wealth from solar and wind energy, especially if electricity markets retire existing fossil fuel power plants when they are not competitive.
As the world moves towards much-needed decarbonization, countries whose wealth is heavily dependent on fossil fuels face risks. CWON 2021 simulations show that the low-carbon transition could reduce the value of fossil fuel assets by up to $6.2 trillion between 2018 and 2050, and this would be unevenly distributed between countries and fuels, and largely depends on international policy pathways. Some lower-income countries, including fragile and conflict-affected countries that have few assets other than fossil fuels will require technological and financial cooperation to build and diversify their sources of wealth, and develop the necessary systems to navigate the low-carbon transition.
Global wealth has never been greater, but the risks it faces have also never been greater.
Policymakers can take measures, including through policy and pricing, to accurately reflect the value of assets and drive economic growth that is sustainable and resilient to future risks. Governments are not the only actors. Individuals, companies, and investors are all managers of assets, and the choices they make will have a significant impact on the future of our planet and the prosperity of future generations.
Although we have come a long way in measuring wealth, much work remains to be done. Renewable energy, water and carbon capture services by ecosystems represent other assets critical to sustainability and wellbeing that are yet to be included in the wealth accounts. Wealth accounts can only measure what markets value. Natural assets, which do not have defined owners and readily observable market prices often escape such valuation. New global challenges require new concepts, data, and tools in economics, so it will be important to continue expanding our understanding of wealth.
At the upcoming UN Climate Change Conference (COP26), and Convention on Biological Diversity Conference (COP15), nations around the world will set new targets for climate and nature. These are two important opportunities to take the lessons learned on wealth and sustainability, and use them to chart a greener, more resilient, and more inclusive development path.
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Download Report: The Changing Wealth of Nations 2021 : Managing Assets for the Future
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