Natural Capital Is the Coming Market Disruption You Haven’t Heard About. But You Will.
The Economics of Biodiversity by Partha Dasgupta from Cambridge (the paper was commissioned by the UK government) is a report you should read.
Yes, it is 606 pages long, but the last 100 pages are footnotes, so stop making excuses. Dasgupta also provides an executive summary and a 103-page version, so pick your economics tolerance level and get to it.
Dasgupta focuses the narrative on an obvious point that is almost always taken for granted—that we exist within nature. Of course, we do, but we often don’t see it or at least don’t think about it because individually we account for an insignificant speck in the earth’s natural cycles. We exist in nature, and our economies, markets, companies, products, and service all exist in and depend on nature as well. It is natural capital to survive and thrive, and to pretend this isn’t so, or to forget that this is so, is at our peril.
The author starts with a summary of how we got here, providing a brief description of humankind’s infinitesimal time on earth in the geological scale. We meet everyone’s favorite eighteenth-century killjoy economist Thomas Malthus. Malthus felt that humankind was doomed to repeat an unending cycle of population growth followed by famine as a result of the geometric growth of human populations that land management—growing food—could not keep up with.
But human ingenuity and technology (not to mention slave labor) intervene to turn Malthusian economics on its head, triggering geometric growth in not only population but also global standards of living, which, of course, are not evenly distributed.
You can see where this is going
That geometric growth has continued, but it has come at a price. That kind of growth since the Industrial Revolution has severely taxed the biosphere—the part of earth where we live.
Dasgupta cites recent research by Mathis Wackernagel and Bert Beyers in their book Ecological Footprint (2019), which shows that humankind’s current ecological footprint is a demand that can only be met by about 1.6 earths. The good news is that number is down from 1.7 in 2019 because of Covid—so, you know, progress.
The report does not sugarcoat the current state of affairs. Dasgupta even warns against magical thinking that we can solve big problems like climate change and enjoy indefinite growth with only a small investment in clean energy in the near term (say, 2% of world GDP).
Dasgupta posits that we need to understand the limits of our biosphere and to accept that certain possibilities are bounded by the simple math of the resources we have to work with as well as the physics and chemistry of how we use them. Our ecological footprint as of late in human history has exceeded the rate at which the biosphere can regenerate (trees and fish stocks) and, in some cases, cannot regenerate (there is only so much copper in the ground).
The report suggests that perhaps we should be a bit more humble about the promises we make ourselves about how technology and ingenuity can save us. Dasgupta writes, “No amount of technological progress can make economic growth as conventionally measured an indefinite possibility. Ours is inevitably a finite economy, as is the biosphere of which we are a part.”
Dasgupta refers to the excess of impact (I) over the biosphere’s regenerative rate (G), as Impact Inequality. Over time the biosphere has shrunk while our demands on it continue to grow. According to Dasgupta—and simple arithmetic—we need to better balance the supplying power of the biosphere, which is limited, and our demands on it. The report looks to enumerate some actions and policies that could bring about this balance and convert that Impact Inequality into Impact Equality.
The report cautions that hard choices will have to be made and will need to go beyond a tax here and a policy there. Using the earth’s biosphere as if we have 1.6 planets’ worth of resources to draw from is highly unsustainable. Failing to make relatively impactful changes in the near term will only lead to the collapse of biosphere systems that, in turn, will lead to the collapse of societies and the economies and markets that we have taken for granted will always be there.
Now some more negatives
Dasgupta sees three main challenges or barriers to private investment as having a positive impact on natural capital and the biosphere:
- A profitable financial return is not always possible.
- Typical conservation and restoration projects are often too small to attract investment.
- A lack of standardized data on financial instruments contributes to a lack of proof-of-concept, making it difficult for investors to assess risk.
Don’t just complain, find solutions
According to the report, current estimates of financial investments in natural capital suggest that they are small, at only about 0.1% of global GDP (about US$78–143 billion per year). At the same time, global governments spend around US$500 billion on activities, such as subsidies and investment, that are harmful to biodiversity. Private finance has a role to play, but the ratio of private finance devoted to biodiversity ranges from about US$6.6 billion to US$13.6 billion, whereas financing for activities that are harmful to natural assets totaled about US$2.6 trillion in 2019.
It is important to realize that although finance has a role to play in addressing the challenges of increasing and protecting natural capital, that role is limited by the governmental and regulatory policies in which finance operates. Therefore, one of the main issues that finance must address is engagement with policymakers to ensure that we have data and price signals around natural capital to help us efficiently allocate capital that can increase natural capital.
According to the report, biodiversity-related taxes are infinitesimal in scope compared with subsidies and spending on activities that are harmful to the biosphere. Currently only about US$7.5 billion a year globally is focused on biodiversity-related taxes or fees. This is only about 1% of total annual revenue from environmentally relevant taxes. On the other side of this equation, when accounting for the negative externalities of fossil fuel subsidies, the cost is about US$5.2 trillion annually.
Expect to see growth in the market of payments for ecosystem services (PES) in the coming years, which currently amount to only US$36–42 billion in annual transactions and usually cover things such as carbon storage, conservation, and watershed services.
Other tools gaining popularity are biodiversity offsets, which increasingly are being written into law to mitigate or reverse the impact of projects (a construction project, for example) by offsetting the impact with a project beneficial to the biosphere.
Green bonds are already familiar to many in the financial world and, indeed, will have a role to play in earmarking funds for projects that can reverse or mitigate the impacts of biosphere depredation. See also, blue bonds for projects dealing with the ocean.
Environmental, social, and governance (ESG) integration of the biosphere in the investment process is in its early stages. ESG integration already has begun to consider how the environment affects a company. This increasingly is gaining currency in the investment world and is something we have written on a great deal in recent years. Not much scholarship or analysis, however, has been devoted to the impact a company has on the environment or biosphere. This concept of “double materiality” will only grow in importance as it becomes clear to more investors that we do not exist outside the biosphere and doing irreparable damage to our environmental systems will have deleterious long-term effects on markets and our way of life.
ESG investing is in its early stages as well, and while growing in popularity, it still lacks a definition and faces issues of green-washing. These issues will need to be resolved for natural capital–based investments as well.
Public–private partnerships and blended finance, in which governments provide grants or guarantees to cover some costs or risks, are making investors more willing to participate in this market.
Pooled funds can aggregate a number of biodiversity projects into one fund to diversify risk. This can include natural capital or biodiversity funds in the private equity market or more commercial offerings available to investors in public markets.
Watch this space
The challenges of managing and mending our biosphere can be daunting, but we should be honest with ourselves about the challenges that lie ahead. The impact of natural capital on our planet and our financial markets will only grow in the coming years. It would be nice if we had a group working to improve the tracking and reporting around natural capital. Well, we do, but we don’t have space here to announce it. We will, however, introduce this task force to you shortly.
If you have learned nothing else from reading this blog, you now know that blogs can have cliff-hangers.
Photo Credit @ Getty Images / PeopleImages
1 thought on “Natural Capital Is the Coming Market Disruption You Haven’t Heard About. But You Will.”
In 2007, I had an epiphany that I named EcoCommerce and later wrote a book by that name. My second book, Shared Governance for Sustainable Working Landscapes (2016) introduced the NCU.
In 2022, the technological architecture was finally understood. We plan on creating an EcoCommerce/NCU Platform in 2023 and are currently looking for the right group to initiate this ecosystem.
If interested, please connect.