We need to value natural capital

We depend on nature for much of our lives and livelihoods. Human societies and economic activity depend on this natural capital — natural assets such as soil and water — more than we like to admit. According to a recent study by the World Economic Forum, $44 trillion of economic value generation — about half the world’s total GDP — depends on nature and its services and is therefore at risk as we lose nature and biodiversity.

We tend to think of the environment as a subsystem of the economy, but it is entirely the other way around. We are part of nature, not separate from it.

Living in nice houses in sophisticated cities makes it easy to forget the part that nature — from energy sources to fresh water access to construction materials — played in making those comfortable spaces. We risk losing the lives we have made if we don’t take better account of nature. We are using the earth’s natural resources as though we had 1.6 earths to use. This number is much higher, up to four earths, for the most developed markets. That is, of course, unsustainable. 

Another way to look at the state of the natural world is by assessing our planetary boundaries. The Planetary Boundaries Framework was developed in 2009 to establish the planetary limits within which humanity can continue to survive and thrive. Crossing these boundaries increases the risk of generating large, irreversible environmental changes. 

We have already crossed five of these planetary boundaries: climate change; biodiversity loss; biogeochemical (nitrogen and phosphorus cycles); land use (deforestation); and chemical pollution. Some scientists argue the boundaries for ocean acidification and freshwater have already been breached. If that is the case, of the nine planetary boundaries, only ozone depletion and atmospheric aerosols have not yet been crossed.

We as humans have historically done a poor job of putting a value on natural capital or “ecosystem services” such as a moderate climate, predictable weather, clean water, clean air, timber, fisheries, pollination and countless other systems that are the foundation for human life on earth.

Take a moment to walk through your typical day and list all of the ecosystem services you use — from clean water to bees pollinating the crops that lead to the food on your table to clean air, and so on. Now ask yourself to put a value on those services; not necessarily a dollar value, but the value you would put on them if they disappeared. Because at the rate we are going, some of them will or some of them already have.

Investors, companies, policymakers and civil society are beginning to realize the need to better value and manage these resources as we see the negative impacts that natural capital issues such as climate change, water scarcity and ocean health can have on our lives and our investments. 

We need to do a better job as financial professionals, business professionals, policymakers and society at large in understanding the key concepts of natural capital so that we can develop frameworks for properly integrating natural capital into the investment process. Efforts are already underway to set these standards, whether from the Taskforce on Nature-related Financial Disclosures or efforts in the U.S. to produce a set of Natural Capital metrics to create a natural asset balance sheet. Investors need to support these efforts and engage with these initiatives to ensure investor voices are around the table when these standards are developed. 

Finally, we must be honest with ourselves and with the limits of physics when we attempt to convince ourselves that “green growth” is a magic bullet that will eventually replace our current, more polluting growth models. Green growth faces massive physical challenges — from the limits of creating, storing and transporting alternative fuels such as hydrogen to the scarcity of metals and minerals needed to power an electric vehicle revolution.

When we do the math and come to the inevitable conclusions about the real limits to green growth, we may come to the increasingly discussed issue of degrowth. The degrowth movement advocates moving away from the “growth for growth’s sake” ethos exemplified by using GDP as a scorecard for human progress, focusing instead on human well-being and the sustainability of our economic system.

This greater emphasis on natural capital, staying within planetary boundaries, green growth and degrowth are where the conversations around finance are headed. This is where the conversation will be over the next decade. There is a lot to learn. Let’s get started.