Marleen De Smedt is former Adviser to the Director-General of Eurostat, Enrico Giovannini is Full Professor of Economic Statistics at the Department of Economics and Finance of the University of Rome “Tor Vergata,” and Walter J. Radermacher is Professor at the University of Rome “La Sapienza” and former Director-General of Eurostat. The authors wish to thank Paul Schreyer as well as other members of the HLEG for their comments on previous drafts of this chapter. They also thank the participants of the two HLEG workshops held in Rome, Italy, organized in collaboration with the OECD, on “Intra-generational and Inter-generational Sustainability” on September 22–23, 2014, hosted by the Einaudi Institute for Economics and Finance and the Bank of Italy and sponsored by SAS; and on “Measuring Economic, Social and Environmental Resilience” on November 25–26, 2015, hosted by the Einaudi Institute for Economics and Finance, supported by the Bank of Italy and ISTAT and sponsored by SAS. The section titled “Toward a Systems Approach to Inform Policy” largely relies on Manca, Benczur, and Giovannini (2017); therefore, the authors of this chapter are deeply grateful to Anna Manca and Peter Benczur for their contribution. The opinions expressed and arguments employed in the contributions below are those of the authors and do not necessarily reflect the official views of the OECD or of the governments of its member countries.
Introduction
Ensuring that individual and societal well-being can last over time requires preserving the resources needed by future generations. This approach (which underpins the definition of “sustainable development” provided by the 1987 Brundtland Report) implies that measures of economic and social progress must take into account changes in those resources that last over time (i.e., capital). These changes consist of depreciation, depletion, and erosion (all of which diminish capital) as well as investment, innovations, and discoveries (all of which increase capital). Without them, any account of sustainability is incomplete.
The very nature of “capital”—as a cornerstone of economic production, as an entrepreneurial code of conduct, and as a fundamental of bookkeeping and accounting—implies a close relationship between capital and sustainable development. Conceptually, capital can be broken down into economic, human, and natural capital (social capital is typically added too, but it is not discussed here, as it is addressed in Chapter 10).1 At the same time, an exclusive focus on the measurement of different types of capital—and the deeply rooted belief that, with enough effort, signals about the future can be internalized via the right valuation of capital—may divert attention from investigating the measurement of sustainability from different but complementary perspectives.
One example of these complementary perspectives is provided by the notion of “footprints,” which recognizes that the environment crosses country borders. This is why the UNECE insists that “[Sustainable Development Indicator] sets should reflect the transboundary impacts of sustainable development, by highlighting how a country in the pursuit of the well-being of its citizens may affect the well-being of citizens of other countries” (UNECE, 2014, p. 14). So pursuing sustainable development increasingly means considering not just individual countries but the entire globe. A capital approach allows for an integration of time, the “future,” but it is less useful for the accounting of place, the “elsewhere” dimension, which is equally important when it comes to monitoring the sustainability of national activities.
Another complementary perspective is to look into “systems,” their behavior over time and their inter-relationships. In this perspective, monitoring capital stocks is only part of the story: ultimately, the challenge is to manage—nationally and internationally, and over a long-time perspective—those complex and inter-dependent systems (economy, society, and nature) that shape the well-being of future generations. Such systems are complex, meaning they behave differently at different scales; they behave in nonlinear ways; they are often self-organizing; and they are characterized by uncertainties, resilience, tipping points, and irreversibility.
In a systems approach, the focus moves from measuring the stocks of assets to coming to grips with the resilience of economic, societal, and natural systems. Tackling these issues requires inter-disciplinary work, with a focus on the ability of the system to cope with risks and uncertainties in a broad and long-run perspective, and on the different ways to manage this coping ability (resilience) of systems. “Resilience” is indeed referred to in the UN’s Sustainable Development Goals (SDGs) and by the targets of its 2030 Agenda.
As this chapter will show, despite a range of national and international initiatives (see sidebar, “Monitoring Sustainable Development in Practice: Some Examples”), measuring sustainable development still faces difficulties and limitations. Good and effective communication to all stakeholders about available as well as missing information is critical, especially for making decision-making processes more effective and participatory.
This chapter is organized as follows. The first section lays out the principles of the capital and of the systems approach. The next section describes progress achieved in measuring economic, human, and natural capital since the Stiglitz, Sen, and Fitoussi (2009) report. The third section dives deeper into the systems approach, which should be taken forward to move from theoretical considerations to empirical information. The concluding section draws up a measurement agenda for the years to come.
MONITORING SUSTAINABLE DEVELOPMENT IN PRACTICE: SOME EXAMPLES
Various initiatives aimed at improving the measurement of progress and sustainable development have resulted in international agreements and standardization, such as the adoption of the 2008 System of National Accounts (SNA), the G20 Data initiative, and the adoption of the System of Economic Environmental Accounting (SEEA) in 2012. With the adoption in 2015 of the 17 Sustainable Development Goals (SDGs, United Nations, 2015a) and 169 targets, and the later agreement on a set of 232 global indicators, much headway has been made toward a common set of sustainable development indicators at the global level.
Some countries, however, have tracked sustainable development for several years, even before the adoption of the UN SDGs, either through a national set of indicators or in a supra/international context, or both. Examples of such international developments include:
• The Recommendations of the Conference of European Statisticians (CES), providing guidance on how sustainable development indicators (physical and monetary) may be harmonized and made consistent across countries and institutions (UNECE, 2014).
• In the EU context, the European Statistics Sponsorship Group on Measuring Progress, Well-Being and Sustainable Development (European Statistical System, 2011), the Sustainable Development Indicators set, the biennial monitoring reports on the EU Sustainable Development Strategy (Eurostat, 2016a), the EU Commission Communication on the next steps for a sustainable European future (European Commission, 2016a), a proposal for a new European Consensus on Development (European Commission, 2016b), and the 2016 Eurostat report on sustainability (Eurostat, 2016b).
• Various OECD analyses, tools, and approaches, including the recent assessment of OECD countries on “Measuring Distance to the SDG Targets” (OECD, 2016b).
• The World Bank’s Genuine Savings Indicator, which is directly based on the capital approach (World Bank 2006, 2011), and the UNEP reports on “Inclusive Wealth” (UNEP and UNIHDP, 2012 and 2014);
• The Sustainable Development Solutions Network (SDSN).1
At the national level, since the publication of the 1987 Brundtland Report and the recommendations of the Stiglitz, Sen, and Fitoussi (2009) report, a number of countries have started to collect data and to establish indicators on sustainable development. Among others:
• In Italy, the National Statistical Office (ISTAT) and representatives of civil society developed a multi-dimensional approach to measure “equitable and sustainable well-being” (Benessere equo e sostenibile, BES), integrating measures of economic activity (GDP) and of the social and environmental dimensions of well-being,
inequality, and economic, social, and environmental sustainability. The indicators are published on the BES website, with a detailed analysis of indicators available in the BES Reports.2 The BES system has now been incorporated in the annual cycle that drives economic and financial planning by the Government and Parliament.
• Finland has a long tradition in using indicators on sustainable development: the first set of sustainable development indicators was published in 2000 and this list—available on the Findicators website3—has been growing ever since.
• Switzerland uses a measurement framework based on a system structure to monitor sustainable development. The system (MONET)4 comprises 73 indicators. Each indicator is published on the internet and evaluated (through “traffic light” symbols) according to the observed trend. The website also includes 9 indicators related to the global dimension of sustainable development.
• The 2016–19 Federal Sustainable Development Strategy (FSDS)5 is Canada’s primary vehicle for sustainable development planning and reporting. It sets out priorities, goals, and targets, identifies actions to achieve them, and links these to 12 global SDGs, with sustainable development indicators published on different webpages.6
• In 2002, the German Federal Government adopted its “National Sustainability Strategy.” The Strategy was revised in 2016, setting out the challenges that have arisen for Germany from the 2030 Agenda. At the core of the strategy is a “sustainability management system” that defines objectives with a timeframe for fulfillment and indicators for monitoring, as well as regulations for the management and definition of institutional design. Since 2006, the Federal Statistical Office has reported on the indicators of the National Sustainability Strategy in six reports.7 The Federal Statistical Office has now been commissioned to continue its statistical monitoring based on the revised strategy.
1. http://unsdsn.org/resources/publication/type/data-monitoring-accountability.
2. www.istat.it/it/benessere-e-sostenibilità.
3. www.findikaattori.fi/en/kestavakehitys.
4. www.bfs.admin.ch/bfs/en/home/statistics/sustainable-development.html.
5. www.ec.gc.ca/dd-sd/default.asp?Lang=En&n=CD30F295-1.
6. http://www.ec.gc.ca/default.asp?lang=en&n=FD9B0E51-1.
7. The 2016 report by the Federal Statistical Office on the development of the indicators of the German sustainability strategy is available at: www.destatis.de/DE/Publikationen/Thematisch/UmweltoekonomischeGesamtrechnungen/Umweltindikatoren/IndikatorenPDF_0230001.pdf?blob=publicationFile.
Key Concepts and Approaches
The Capital Approach
Ensuring the well-being of present and future generations essentially depends on how societies choose to use their resources, i.e., their various forms of capital. These resources include physical elements, such as shelter and sub-soil assets or the quality of the natural environment, but also intangibles such as knowledge or the quality of social and institutional structures. Therefore, more than just including produced (economic) capital, the definition of capital should encompass social, human, and natural capital.
Measuring capital requires constructing and examining balance sheets for different types of capital, for each country and for the whole planet, and assessing their changes over time. This type of “capital approach” may be characterized as reflecting what, in the field of financial markets, has been described as a “micro-prudential perspective”: all forms and appearances of capital are inventoried one by one. Measuring sustainability from a capital approach focuses on the net change in the volumes of the stocks of various assets, weighted by their “shadow prices” (i.e., a monetary value reflecting the true opportunity costs of all activities, taking into account all externalities and public goods generated by them); these shadow prices will in general differ from market prices, and depend on all other types of capital, technology, and societal preferences. Shadow prices should also reflect future actions and their discounted consequences, to make net changes in overall capital a true indicator of sustainability (for a full discussion of the theoretical issues associated with the capital approach, see Fleurbaey and Blanchet, 2013).
One important implication here is that adopting such a comprehensive capital approach would require reconsidering conventional distinctions between consumption and investment activities. For example, expenditures that contribute to a society’s human and/or social capital (e.g., training of teachers) will enhance that society’s long-term sustainability, rather than simply representing final or intermediate consumption as assumed in the current System of National Accounts (SNA). Thus, measures of investment, consumption, and national wealth in a sustainability perspective would generally differ from the one used in conventional economic statistics, as, in general, we lack a good understanding of the relevant flows of investment and depreciation. These difficulties were recognized in the Stiglitz, Sen, and Fitoussi (2009) report, which recommended establishing a subdashboard to provide information about changes of those “stocks” that underpin human well-being. For economic, human, and natural capital, the progress made in developing metrics in recent years and the current challenges, as well as recommendations for the future, are described in the next two sections.
The Systems Approach
One of the lessons learned from the financial crisis was that a micro-prudential approach of supervision and regulation is, in itself, insufficient to avoid financial crisis. A macro-prudential layer is also needed, as the interactions among individual financial institutions are, from a financial sustainability perspective, as important as the conditions of a single institution. To ensure overall sustainability therefore, a “systems approach” was needed.
The same dichotomy can be applied to complex systems in general, differentiating between the behavior of single components considered in isolation, and that of the full system with all interactions. Such a systems perspective (Costanza et al., 2014) allows the identification of relevant actors who play a particular role in the system, their behavior and their interactions with the other actors; and helps to address key questions of system dynamics applied to the society, economy, and environment we live in.
While these systems are complex by themselves, their interactions with each other add to complexity. As mentioned above, besides dynamics, complex systems are often characterized by nonlinearities (which can be negative or positive), emergent properties, self-organization, tipping points, and transformation. These characteristics make the system subject to self-generated (endogenous) shocks in addition to shocks coming from outside the system (exogenous). The interactions of these characteristics help to define the degree of vulnerability of a system to risks as well as its resilience.
The key notions underpinning the systems approach could be described as follows:
• Risk is here used with a double connotation: first, to describe threats for systems (i.e., systemic risks); second, when it is possible, to quantify the probability of an unknown event. Contrary to this situation, uncertainty is used if the “unknown” cannot be quantified. For decision making and citizens’ participation in democratic societies, this distinction is critical. Individual well-being and social welfare are affected by these risks, but also depend on the availability of information about them. The availability of information—or the treatment of uncertainties—is particularly important concerning social inequalities linked to risk arising from economic activities.
• Vulnerability manifests itself in damage from a disturbance that might arise from external or internal factors. It ranges from “low” to “high,” depending on the severity of the impact of the disturbance on the system. There are different definitions for vulnerability, ranging from vulnerability within a specific context, such as in an environmental context (climate change) or in a personal context (poverty, risky behavior, sickness), to more integrated approaches relating to both physical and social systems’ susceptibility to multiple stresses generated by socio-economic and environmental changes. Complex systems
may be vulnerable to all kinds of risks inherent in everyday life that are the result of decisions, naturally occurring events, or a combination of both. In this wider context, vulnerability is of a multi-scale nature; it is not evenly distributed among social groups, spatial units, or time. Vulnerability of a system is shown by its response to disturbances, and depends on the intrinsic characteristics of the system and on the severity and time of exposure of the disturbance.
• Resilience, rooted in the Latin word resilire (which means “jump back,” “rebound”), is the capacity to recover from adversity (from temporary shocks—such as sudden flows of migration—or from continuous threats or slow-burn processes—such as the aging of societies), either returning to the original state or moving to a new steady state (from positive adaptation to transformation), often strengthened and more resourceful. Resilience, which is the centerpiece of the systems approach, can be a characteristic of a system or sub-system, or of individuals. This distinction is important because system-wide resilience is typically the result of a series of interactions among individuals and sub-systems. It thus provides us with a concept and a structure that allows us to identify components, the monitoring of which could underpin a policy framework. At the same time, resilience also makes the role of dynamics more explicit, by looking at disturbances and their short- and long-run impact.
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