The Nature of Profit: Integrating Nature into Financial Markets

Recently, I had the privilege of being asked to join a panel discussion hosted by the Brookings Institute.

The topic was titled, “How can markets better value nature and price the benefits of conservation?”

The panel comprised some of the world's leading thinkers on natural capital, including Pushpam Kumar, Chief Economist at the UN Environment Programme, Kelly Shue, Professor at the Yale School of Management, Doug Eger, the CEO of Intrinsic Exchange, with the group expertly chaired by Sanjay Patnaik from the Brookings Institute.

Across a fascinating 90 minutes, we talked at length about the intersection of the environment, natural assets, and financial markets.

Pushpam steered us through the technical details of applying monetary valuation principles to nature and the need to collaborate across disciplines to make a nature-based economy a reality.

We discussed and debated the benefits of incorporating the value of nature in markets and pricing the intrinsic value of nature, recognising that the failure to price so-called externalities into our current economic systems has been the cause of much of the damage we’ve done, and continue to do, to the planet.

We all recognised the many challenges remaining to be solved, and the routinely cited concerns which, in my view (and Doug’s), are largely overplayed moralistic arguments, often variations of the idea that nature is priceless so we shouldn’t put a price on its protection and restoration.?

The most impactful part of the discussion from my perspective was Kelly sharing her work with Samuel Hartzmark, which explained that the most widely used approaches to sustainable investment often have the perverse effect of pushing polluting businesses to emit more greenhouse gas emissions. If we imagine a traditional manufacturing, agricultural, or even service business that is making only marginal profits (if it’s really profitable at all), and then apply punitive environmental taxes or regulations, it is almost impossible for that business to make the investments or changes necessary to reduce their environmental impact. They’re then pushed even harder to the point where their environmental and social performance can only worsen - was that really our intention?

I spoke at length about how business, and specifically a private equity-based approach, is best placed to be the vehicle of change we need to create a nature-based economy. The public and charitable sectors do not have the culture, incentivisation, and mechanisms to be as innovative, as agile, or as driven as we need to be to overcome the many complicated technical, political, and psychological changes.

Doug was able to further explain the exciting thinking behind the concept of a natural asset company – the nearest global equivalent we’ve yet seen to the Oxygen Conservation approach, albeit directly targeting institutional and public market-level investment. Whereas we’ve been hugely fortunate to work with the Oxygen House Group to create a real asset portfolio to bring so many of these concepts to life.

I was asked to describe the advantages of direct land ownership and focused my time on the ability to deploy capital at a meaningful scale, ensure the protection of capital backed by land-based security, the freedom and agility afforded by being the underlying landowner, and also, the responsibilities and pressure of not being able to provide everything to everyone. We’ve certainly started to be seen by some in local communities as the answer to every question, even those way beyond our physical and business boundaries.

Doug began to articulate how listed natural asset companies have the ability to create a financial expression of the value of nature and how by trading these shares, investors might realise a return on their investment as the underlying environment improved. I think this is a concept many are finding difficult – in the same way that Blockbuster rejected Netflix because the infrastructure and our understanding of the use of the internet had not yet evolved to the level where they could see the future. I’m sure Doug will be proved right, but I fear not for many years.

Kelly’s analysis of unintended consequences and perverse incentivisation was again transformative to my thinking when discussing the dangers of divestment from oil and gas companies. Society is now more obsessed with virtue signalling than actually making progress – just look at our governments! Busy announcing things rather than actually doing things!

Everyone divesting from heavy industries is doing so either because they genuinely believe it’s the right thing to do or, probably most likely, to avoid judgment in the court of public opinion. And I’m incredibly guilty of the latter – I have repeatedly criticised oil and gas companies and avoided any advances from them to discuss our work, and that was wrong!

Kelly’s work has fundamentally changed my thinking.

If good people with environmentally minded intentions voluntarily step away from these discussions, then the only voices are those who want to maintain the status quo or, worse, accelerate the extraction and exploitation of the natural world. When confronted with the reality of this situation, as with so many things, it becomes blindly obvious that the conversation is never better in the absence of diverse opinions.

I’m now going to be more open to the potential of working with industries I never considered previously but will do so wearing my activist partner hat, doing my best to ensure the conversations are better and that we together choose action over public announcements.

I’d like to say a huge thank you to the Brookings Institute for the Invitation and to the other panellists for a fascinating discussion.

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