The concept of natural capital represents a significant shift in economic thinking. The term was first discussed systematically by pioneering economists such as Ernst Friedrich Schumacher in his influential book Small Is Beautiful (1973), and was later further developed by Herman Daly and his colleagues within the field of Ecological Economics during the 1990s.
Natural capital is defined as the stock of all natural assets found beneath the earth’s surface, on land, and in the atmosphere, including geological resources, soils, air, water, and all living organisms. From this stock of natural capital, ecological interactions generate a continuous flow of ecosystem services. These flows provide both tangible and intangible benefits to people, ranging from raw materials that support economic production to essential life-support functions that no human-made technology can fully replace.
Natural Capital Accounting (NCA): Why Is It Important?
Natural Capital Accounting (NCA) is the systematic, statistical, and quantitative process of measuring the stock of natural assets and the flows of ecosystem services within a defined spatial and temporal boundary. The core objective of NCA is to integrate environmental and ecological information into the framework of the System of National Accounts (SNA), the internationally recognized accounting system used by countries to compile key macroeconomic indicators.
The strategic importance of implementing NCA stems from three fundamental reasons.
First, NCA helps address the inherent limitations of traditional Gross Domestic Product (GDP) as a measure of national prosperity. GDP measures the scale of market-based economic activity, but it remains an incomplete accounting framework for assessing a nation’s long-term wealth and sustainability. For example, GDP records the harvesting and sale of timber as a positive contribution to economic growth, yet it does not account for the loss of forest assets resulting from such extraction. Similarly, when an environmental disaster such as an oil spill occurs, the expenditures associated with clean-up operations and coastal restoration are counted as economic activity that increases GDP. NCA resolves this paradox by incorporating the concept of natural capital depreciation, enabling countries to recognize the real costs associated with economic growth and the depletion of natural assets.
Second, NCA provides a consistent, science-based, and internationally comparable information system for policy and decision-making. Policymakers are frequently confronted with difficult trade-offs—for example, whether to convert 1,000 hectares of mangrove forest into an industrial port complex or to conserve the area for biodiversity protection and ecotourism development. In many cases, decision-makers lack the quantitative tools needed to fully evaluate such alternatives. Because environmental values are rarely expressed in monetary terms, they are often undervalued or excluded from conventional cost-benefit analyses of infrastructure investments. NCA helps bridge this gap by translating ecological information—such as biomass, ecosystem extent, and species abundance—into economic terms, allowing nature to be considered alongside other economic sectors within a common decision-making framework.
Third, NCA is increasingly recognized as a key enabler for accessing international green finance. In today’s global governance landscape, multilateral financial institutions such as the World Bank (WB), the International Monetary Fund (IMF), and the Asian Development Bank (ADB) are placing greater emphasis on environmental, social, and governance (ESG) considerations. Countries that can demonstrate transparent and credible management of natural assets through internationally aligned accounting systems are better positioned to access concessional financing, issue green bonds, and attract sustainable investment funds. By strengthening the evidence base for environmental governance, NCA can enhance a country’s competitiveness in mobilizing resources for sustainable development.
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