Nature Talk (inaugural session) – Learning about nature’s economic value

KEY TAKEAWAYS

Most of our economic activity relies on nature

Collectively, nature plays a crucial role in human economic activity. Depending on which measure you use, between 50% and 60% of human economic activity relies to some degree on nature capital, including industries such as agriculture, pharmaceuticals and building materials. It’s important we recognize and value nature capital in our economic plans, in order to avoid exhausting such essential resources.?

Nature should be viewed, and valued, as a set of capital assets

By identifying and defining different nature ecosystems as capital assets we could assign an intrinsic value to them. That should support new financial tools such as biodiversity credits, make us more judicious about ‘spending’ these ecosystems and allow us to reap quantifiable economic benefits from improving them too. A valuation system would also underpin a key concept – paying for what you use.?????

Effective nature capital solutions will require supply chain analysis

Companies should identify the geographic source of key primary goods in their supply chains, work out how to protect these areas from becoming exhausted, and ascertain which competitors and contemporaries depend on the same areas. From there, they can form mutually self-interested agreements with each other and local societies to value and protect these regional ecosystems.?

Transitioning industries to sustainability offers many opportunities

The effective accounting of nature capital will add new costs to industries and societies. However, industries that become more sustainable or circular could see new business and financial possibilities emerge. McKinsey has estimated that over USD 1trn of revenue could arise in Europe alone by 2050 by transitioning to more circular ways of doing business, such as introducing bioplastics.

Ecology should be included in economics

Introducing the study of ecology and essentiality of nature capital to our economic activity into all levels of Economics study, but particularly at the school and college level could help the next generation of budding economists and financial experts better appreciate the economic role that nature plays.?

Nature is integral to our survival, comfort and economic success. Yet the ecosystems and natural cycles that underpin life on earth go largely unrecognized in our economic understanding. Their need to be included lay at the center of our inaugural Nature Talk.

On Thursday 7th November, UBS held its first in a series of Nature Talks in Zurich, focusing on ways in which the financial markets and industry can better take account of nature. ?It was a timely event given that COP 16, the so-called Nature COP, had just taken place in Cali, Colombia, to a mixed degree of success. and COP 29, the climate-focused gathering, was about to start in Baku, Azerbaijan. I found it to be both fascinating and insightful.

Judson Berkey, the lead for advocacy and nature in UBS’s Chief Sustainability Office (CSO), began by?noting that the World Economic Forum estimates that half of the world’s GDP is moderately or highly dependent on nature, particularly in industries such as agriculture, pharmaceuticals and construction materials.

Berkey then handed the proceedings over to Sir Partha Dasgupta, an economics emeritus professor at the University of Cambridge in the UK. He is renowned for decades of work at the intersection of ecology and economics, including his seminal work The Economics of Biodiversity: The Dasgupta Review, released in 2021.

Dasgupta spent almost an hour in conversation with Lucy Thomas, head of sustainable investing for UBS Asset Management, explaining how nature isn’t getting the financial attention it deserves, and how to fix that.

Learning nature’s value

As Dasgupta explained, this lack of attention stems from the very top of the system.

“World Bank [economic] models have nothing on nature, nothing that is amalgamated with human capital to forecast future [financial] possibilities,” he told Thomas. “I think it’s a sad state of affairs.”

UBS has recognized the risks of this absence too. Our Sustainability and Impact Institute published a white paper called ‘The rise of the impact economy’ in 2023, which argued for a new economic approach that recognizes the value of contributions from the planet and people.

But Dasgupta believes this can be fixed. He told Thomas that economics and ecology share several similarities.

“Macro ecology such as fisheries and forests employ standard mathematical models … that can be easily understood by economists,” he said. “It’s simply that they don’t currently study them.”

Dasgupta believes economics studies should embrace basic valuation models for ecology from the school level upwards. That would train the next generation of economists in its value.

Measuring ecosystems

Formally introducing nature into economics would also help the financial industry and regulators to model, measure and value fundamentally scarce ecosystems.

“We should think about ecosystems as capital assets,” said Dasgupta. “They could be small, large, nested, overlapping, or a large bundle of assets. I think the way to think about it is for us to ask ourselves what we enjoy from these ecosystems; what services and goods do they provide us with?”

This would make it easier to form a common financial language about them. It should also give markets, companies and societies a way to assess nature’s variety of ecosystems as a series of capital goods and assign a cost for their use.

That said, Dasgupta noted that any valuation system would need to grapple with the interdependence of ecosystems, which is often hard to measure.

“The durables that we take from ecosystems are easier to handle as you can see what you’re taking. We face more difficulties around the more impervious processes connecting ecosystems, but these are important, If I damage my ecosystems these could well damage and permeate to yours, as my ecosystem supplies nourishment to yours.”

Inevitably, recognizing and formally assigning valuations to nature capital would come at a price – possibly in the trillions of dollars globally.

However, formally valuing nature capital could also generate new business and financial opportunities. As Berkey noted in his introduction, McKinsey has estimated that the creation of a more circular economy which recycles and uses degradable materials could offer over USD 1trn in revenue opportunities in Europe alone by 2050. It would also be likely to support the spread of new forms of financial instruments, such as biodiversity credits.

Forming such a system is essential, believes Dasgupta, to account for the huge variety of specific ecosystems that exist. As he noted, an ecosystem in one part of the world might perform a similar end function as one in a different region, but surrounding circumstances mean the two cannot be valued the same.

“There is not one cost of carbon from here to there; planting trees next to the M11 motorway in England is not the same as doing so in the Brazilian rainforest,” he offered by way of example.

Dasgupta’s ultimate argument is that today’s economics is flawed. Its purpose is to allocate finite resources to meet infinite needs yet it treats nature as a boundless asset, even as the extent of its limitations loom large.

From economic, social and financial standpoints it is wiser to recognize and preserve nature’s valuable resources while we can, rather than lament their eventual loss.