The Price of Nature
Natural resources are often seen as free inputs that any company may use to produce an output. The exploitation cost alone is how firms assess a natural asset’s monetary value. In this way, natural resources tend to be seen as infinite: There is no clear sense of how overexploitation can destroy surrounding ecosystems.
Today, many firms want to avoid harming the environment, but they lack the motivation to follow through. After all, there is very little empirical connection between corporate social performance (CSP) and corporate financial performance (CFP). Researchers have also found that while the economic benefits of an unpolluted environment and stable climate would be enjoyed by all, the negative costs of pollution and emissions — climate change or other ecological damage — have not affected individual firms.
Companies therefore have little incentive to take positive action. Which may explain why, in the face of the current environmental crisis, many haven’t: Environmental policies are often expensive and their benefits on the other side not always easy to quantify.
So to avoid a tragedy of the commons, we need to develop a formal method to price nature assets based on their role in their ecosystems and their utilitarian value in the medium and long term. Including the toll a company exacts from nature in its valuation economically incentivizes that firm to find more responsible ways to produce.
Pricing Ecosystem Services
Nature pricing means assigning a monetary value to a specific environmental service. For example, researchers have worked to quantify the cost of deforestation in coastal zones where trees help prevent flooding and other environmental hazards. Others have investigated the dollar value in benefits the pangolin brings to its ecosystem to help fight wildlife trafficking. In these ways, researchers have sought to put a price tag on each output companies extract from nature and thus supply them with financial justification to take a more positive course.
Edward B. Barbier investigated how to reshape economic models to account for nature’s contribution to human prosperity and survival. He wanted to include a valuation framework that costs in the regulating, provisioning, and supporting services nature provides us.
Economists, ecologists, and other scientists have made substantial progress on this front in recent years and have assessed the welfare contribution of important ecosystem services by applying environmental valuation methods.
But all these efforts suffer from a lack of data. This is one reason why the UK Department for Environment, Food, and Rural Affairs (DEFRA) maintains an Ecosystem Services Valuation Database (ESVD) that gathers nature assets valuation-related material. This project offers greater visibility into the models used and allows for better understanding and further analysis.
Ecosystem Services as a Function of Environmental Services (Biome), in US Dollars per Hectare per Year
Among the early takeaways of these explorations is that waste treatment, tourism, and protection from extreme events are nature’s most lucrative contributions to human life in terms of their value in US dollars.
At the very least, this should incentivize better protection of our marine and wetland environments. These play crucial roles in our wastewater treatment systems and are worth, in this scope, more than $150k per hectare, per year.
To be sure, ecosystem services are not strictly comparable: Waste treatment and protection against environmental hazards are regulating services, while tourism is a cultural one. Their pricing methodologies thus vary greatly.
But what about climate change-related ecosystem services? How does nature protect us from global warming and how would we price these services?
Climate Change and Ecosystem Conservation
Climate change results from the combination of two main elements. The Earth’s natural warming process is driven by greenhouse gases that prevent some of the sun’s radiation from leaving the atmosphere and thus keep the temperature warm enough to sustain life. The difference between the radiation that stays in the atmosphere and what is released is called radiative forcing.
Carbon Recapture by Country, in US Dollars
|Brazil||$3.75 billion||Paraguay||$45.8 million|
|China||$1.17 million||South Africa||$7 million|
|Costa Rica||0||Thailand||$704 million|
|Kenya||$2.1 million||United Kingdom||$8.91 billion|
|India||$2.45 million||United States||$6.35 billion|
Source: ESVD data
Human activities increase the concentration of greenhouse gases in the atmosphere. At a certain point, too much radiation is trapped, increasing the radiative forcing and exacerbating climate change.
Carbon dioxide contributes to this radiative forcing. Thus ecosystems that can recapture carbon are essential to mitigating climate change. According to a carbon-emissions-based valuation method, for example, Brazil’s Amazonian rainforest represents about 16% of the total value of ecosystem services involved in carbon recapture.
Brazil: Main Ecosystem Services
Protect the Rainforest, Fight Climate Change
Conservation of the rainforest means protecting or reproducing the tropical forest identically. Randomly planting trees without practicing bio-mimetism is not enough to ensure the longevity of the ecosystem and, therefore, not enough to replicate the rainforest’s strengths at carbon recapture.
The Amazon rainforest is home to unique biomes that are threatened by industrial farming and wildlife trafficking. What these activities remove and destroy is not so easily replaced or replicated. And carbon recapture is only one of the ecosystem services the rainforest provides.
This lesson is a critical one. While efforts have to be made to calculate the prices of nature assets and integrate them into our company valuations, we need to remember that there is no way to price the irreplaceable, or to accurately value that without which humanity couldn’t survive.
Companies may treat natural resources as infinite. They aren’t. But the price of nature truly is.
Ophélia Miralles is an alliance manager at Renctas, a non-governmental organization (NGO) that works to preserve biodiversity and combat wildlife trafficking in Brazil.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images / luoman
14 thoughts on “The Price of Nature”
Pricing the nature is among the questions one can difficulty answer. However, ESG scoring of companies implied in on site activities, and impact investing may a partial one.
Very interesting article.
Very sophisticated article. Should firms price input extracting costs instead of input extracting destruction costs? Brazil holds very iconic examples on this dilema such as illegal gold mining exploring sites in amazon rainforest that can barely be recovered or even the Mariana’s dam that broke and all mining rejects where dispersed killing hundreds and also killing a very important Brazilian river called Rio Doce.
The article obliges us to make an important reflection: the environmental imbalance will take a high price from human beings. Either we make preventive investments now or we will face a very uncertain future.
Like all forms of central planning by self annointed intellectual wanna-be, this will cause unintended consequences and blow back… and frankly you will deserve every bit of it
You sound like a conspiracy theorist…do you also think Trump actually won the election?
Everything in your life revolves around nasty vindictive politics. I didn’t mention either US politician.
I simply pointed out the fact that all central planning ends in tears, and this is no exception.
A related approach is to incorporate nature. Then it can have a board to represent its interests, and btw obtain the superior rights corporations enjoy over mortal individuals.
I wonder if Nature Incorporated can launch a hostile takeover of Exxon or Amazon? Can Nature Inc charge John Kerry for property damages as he flies his private jet around? When are Leonardo DiCaprio and Greta the child going to pay for their private jet discharge?
Can Exxon launch a takeover of Nature Inc? Which corrupt politicians would collect the money paid? That’s what environmentalism is about: power and money.
Environmentalism is just a fantasy for trial lawyers and slimy politicians. Environmental activists are just naive dopes being used for profit, they aren’t smart enough to see it, or they are blinded by their quasi religion (some of both)
Doing nothing is definetly the solution! Lets just sit on the coach, eat burgers and hope for the best.
Siphoning money and resources out of a company, paying green mail to political activists and lawyers, takes resources away from customers. It takes resources away from employees — lower pay or fewer jobs. Why should a company lay off workers just to appease a bunch of holier-than-thou activists? Why wouldn’t a company shift work (and pay and taxes) to a location where politics don’t distract from serving customers?
Due to various recessions, young people who might have made a positive contribution to the world instead went to law school — and now they have to sue everything that moves to try to repay student loans. The USA already had too many lawyers before the last recession.
Allowing a pompous minority to force themselves on a populace that just wants to get by in peace is immoral and wrong.
Sitting on your hands and eating burgers is better than deliberately making things worse.
How is this related at all with the article?
It seems you think nobody actually cares about the environment and all the people who say they do are only looking for money and power. Maybe you aren’t motivated by anything else than money. And that is exactly the reason we need ideas in the spirit of what is suggested. It’s the only way to “convince” people who don’t care such as yourself to join the fight against climate change.
Doing nothing is better than siphoning off resources to pay green mail to political activists. Those resources could go toward shareholders or customers or employees — why should they be diverted to political activists?
While this is a very difficult task, it is an important one to pursue in my opinion. Any and every form of externality that we can price can be priced into the cost of production for those who impact natural resources.
Extinction is forever/ The loss of a virgin rainforest is forever. The real costs are incalculable. Biodiversity is a bank of genetic information, and forests, along with oceans, are the lungs of the planet. What BRAZIL needs to do is ask the international community to cover the costs of lost opportunities.