Almost Ideal Indicator Ready To Measure Sustainability

by Robert Smith

Robert Smith is an Associate with International Institute of Sustainability Development assisting with its work in measurement and knowledge management. He is the project lead for Canada’s first Comprehensive Wealth Report due this September.

When it comes to measuring sustainability, there’s an almost ideal indicator that we’ve always dreamed of compiling. It goes by the not very glamorous name of “aggregate real per capita produced, natural, human and social capital” – but let’s just call it the Comprehensive Wealth Index (CWI).

CWI – near-perfection in action

Work by prominent economists has shown that the CWI is a near-perfect measure of sustainability. If its value is rising over time, development is very likely sustainable. Well-being will almost certainly rise over time when the CWI is rising. Conversely, a declining CWI means development is certainly unsustainable. You can count on well-being falling at some point in the future when the CWI is in decline. (It’s worth noting that this cannot be said of GDP. A rising GDP is no guarantee of sustainability and a GDP heading downward is not necessarily a signal of unsustainability.)

The reason the CWI is such a powerful tool for measuring sustainability is, well, its comprehensiveness. By combining all forms of capital into a single figure, the CWI offers the potential to capture everything that underpins well-being in just one indicator.

But it’s not just the CWI’s comprehensiveness that makes it so powerful, it’s also that it focuses squarely on measuring the basis for well-being — assets. Assets are what we use to produce the goods and services that give us well-being. And because the CWI is comprehensive, it includes assets that yield non-market goods and services (like the enjoyment of nature) as well as market goods and services (like food and clothing).

So why aren’t we already using the CWI?

The problem with the CWI – until now – was that it was a really nice idea but not much more. Actually compiling the indicator wasn’t possible because not all of the necessary data was available. The biggest missing piece was the real value of produced capital. (By “real” here, we mean “inflation-adjusted.” “Constant dollar” is another term used to describe real measures.)

For the longest time, Statistics Canada (StatsCan) didn’t measure produced capital in real terms. Instead, it published only nominal (“current dollar”) values. The problem with nominal values is that price inflation obscures what’s happening in the real world. Unless inflation is removed, there’s no telling whether the amount of produced capital is actually growing over time. (That’s why GDP growth is always reported by StatsCan in real terms. Growth in nominal GDP is not very interesting because much of it is simply due to inflation and not to actual growth in economic output.)

The good news is that we’ve recently discovered that StatsCan began publishing real produced capital last fall. Out of the blue, the missing piece in the CWI puzzle fell into our laps and our dream of compiling the CWI was no longer just a dream.

What’s next for the CWI?

We are now working on building the database and doing the analysis needed to knit the pieces of the CWI together. This will be the first time in Canada and perhaps the first time anywhere that such a measure will be produced.

It won’t be perfect. We can’t measure all elements of natural capital and social capital remains beyond our ability (or anyone’s for that matter) to value. Nonetheless, what we will come up with — an index of produced, human and much of natural capital — will capture a great deal of Canada’s Comprehensive Wealth. We hope to go back to the 1970s with the index, so we can say something really robust about how the country is developing and whether we’re on a sustainable path or not.

The extra work to compile and analyze the CWI and vet our findings with experts means our Comprehensive Wealth report will be delayed until mid-September. While we regret the delay, we’re excited about the potential for the CWI to substantially increase the report’s value. We believe it will help put Canada at the forefront of sustainability measurement, charting a path we hope others will follow.