Building Capacity to Advance Ecosystem Valuation and Economic Development
Good management of resources critically depends on our ability to measure and value these resources. Both organizations and capital markets depend on information about the value of those resources in making capital allocation decisions. But in this decision making process we have missed one important resource: nature. According to estimates, $125-$145 trillion is missing from our collective balance sheets. That’s the estimated value of the chemical, biological and physical processes, or “ecosystem services” delivered by Earth to its inhabitants annually. This is by no means trivial as it represents more than 50% of the total assets of all publicly listed companies. Because of that blind spot it is now estimated that the unpriced externalities of business practices in land use, water consumption, GHG emissions, air, land and water pollution, and waste generate costs to society of some $4.7 trillion per year. Lacking the means to measure the value of ecosystem services, corporations and society have treated them as free inputs. It’s easy to see how and why they could be mismanaged.
Indicators that they have been mismanaged are manifold, but few are as alarming as the stunning loss of Earth’s biodiversity and degradation of ecosystems over the past forty years. During that time, global populations of freshwater species have declined by a staggering 81%. On average, populations of vertebrate species have fallen by 58%. Any organization faced with similar balance sheet adjustments would closely reexamine its management and accounting practices. The rate and magnitude at which Earth’s assets are being depleted impair the ability of ecosystems to function properly to such an extent that leading scientists now “question the ability of ecosystems to support human societies." Business cannot succeed in societies that fail.
These stunning numbers carry an important lesson: the environmental costs of private sector business activity are simply too large to counter with investments by philanthropy, development institutions, and even government spending. We cannot expect to slow the decline of ecosystems without involving the private sector in the solution. The importance of private sector in achieving desired environmental outcomes was most visibly recognized recently with the Sustainable Development Goals (SDGs). This is a fundamental departure from their precursors the Millennium Development Goals, in the development of which the private sector was absent.
There is growing dynamism in a movement to internalize environmental externalities in public and private investment decisions and measures of economic performance. Capital markets are beginning to incorporate information on ecosystems into economic measures and governments are increasingly accounting for natural capital as a vital part of the productive base of their economies. For example:
- Institutional investors increasingly recognize that environmental factors are material to investment risk and long-term financial value.
- Banks and insurance companies are expanding green accounting, investment and risk transfer related to ecosystem assets and risks.
- Corporations are working within their supply chains to better understand and account for their impacts and dependency on nature.
- Securities regulators and stocks exchanges increasingly mandate the disclosure of corporate environmental information.
- Governments and development finance institutions are incorporating ecosystem accounting into measures of economic performance beyond GDP, reforming policies governing financial markets, and deploying public finance to leverage green private sector investment.
The Rockefeller Foundation formally launched Revalue Ecosystems in 2013. The grants in RF’s Revalue Ecosystem portfolio aim to advance environmental-aligned investment in public and private markets. The grantees serve different functions and operate in different segments of the value chain. The Exhibit below provides a visual on how the different grantees fit into the landscape.
The Natural Capital Project, deeply grounded in its academic roots of Stanford University and University of Minnesota, uses rigorous environmental science to create practical tools for private sector, public sector, and investment organizations to make better decisions. Both the Natural Capital Coalition and the Sustainability Accounting Standards Board focus on the role of accounting for natural capital in organizations. While the Natural Capital Coalition concentrates on enabling leaders of companies to measure natural capital and integrate these measurements in their operating and strategic decision making, the Sustainability Accounting Standards Board (SASB) focuses on developing industry-specific standards for reliable and comparable disclosure to investors of the financially material environmental, social and governance metrics, to meet investor demand for such information.
Through its grant, and as a subset of its larger mission, the Principles for Responsible Investment (PRI) is working to empower mediators of the capital market flows from investors to public and private sector organizations – credit rating agencies – to take into account natural capital in credit ratings and to enable broader financing of environmentally-aligned investing.
Grants to CERES and Climate Bonds Initiative help mobilize investors on climate and water, empowering allocation of capital and improving its alignment with environmental development. CERES is working with equity and fixed income investors to develop a practical tool that enables investors to take into account water risks and opportunities in making decisions. The Climate Bonds Initiative is developing The Climate Bonds Standard and Certification Scheme, which is designed as an easy-to-use tool for investors that assists them in prioritizing investments that truly contribute to addressing climate change.
None of these organizations alone can solve the problems The Foundation seeks to address through Revalue Ecosystems, but their collective work is forming new systems and infrastructure needed – by corporations and the societies they serve – to evolve and even thrive in a world of finite resources, strained by global megatrends.
The potential to internalize environmental externalities and restore the ability of Earth’s ecosystems to support us is inherent in the markets. The Rockefeller Foundation Revalue Ecosystems grantees are developing better tools for measuring, harnessing, accounting for and investing in natural capital. We look forward to sharing their success stories with you over the coming months.
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This article is co-authored with Sakis Kotsantonis, Managing Partner, KKS Advisors and Katie Schmitz Eulitt, Strategic Advisor, Stakeholder Outreach, SASB
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8 年George, your article reflects that in significant ways the valuation of ecosystem services has evolved considerably in the last 30 years. Great to see, thank you for posting. Back in the day, I studied Norgaard and Daly, and conducted my own research in tropical forest valuation to provide economic rationals for conservation. Here's the challenge I ran into. I found approaches to valuation to be rife with bias. As Luis notes above, valuation of ecosystem services as a driver for policy and business decisions is a heavy lift. It smacks right into short-termism, itself the result of humans being driven by largely unexamined excessive material wants and survival needs (depending on where you live). And there's perhaps an even deeper challenge, at our current level of development: ecosystems just don't matter to us. Be this an aesthetic gap, an empathy gap, or a self-destructive behavioral gap, it's still a gap. A very big gap. And into that gap, that way of cognizing the human experience, struts mathematical economics, itself wrought from many of the same biases. I'm not critiquing your work. I've just found it important to be awake to how our economic arguments drive the emergence of a Land Ethic (see Leopold) so that we not be apologists for the enormously destructive momentum of the dominant species. I suppose the real epistemological challenge is our dominance. Namely, that economics, particularly in it's mathematical formulation, dresses up human social convention as scientifically derived fact. It's an environmental perspective, but it's not ecological. That's ok, unless what we make the intellectually dishonest leap of believing our analyses are inherently holistic and that we are, in fact, codifying an ecological, or intra-species accounting of human affairs.
Climate Investment Funds
8 年The challenge of recognising social and environmental value in public procurement was highlighted in a recent study on the skills needed to support green supply chain management in the South African public sector. Great insights in this article.