Natural capital series – Part 1: Stop abusing it and make more money at the same time
by: Assaad Razzouk, Group CEO, Sindicatum Sustainable Resources
This is the first article in a series about Natural Capital. Read the second article “Global warming: Can the accounting industry please do its job” and the third one, “Outsourcing: Doing the Math.”
According to the International Institute for Sustainable Development, Natural Capital “is the land, air, water, living organisms and all formations of the Earth’s biosphere that provide us with ecosystem goods and services imperative for survival and well-being. Furthermore, it is the basis for all human economic activity.”
It is astounding that the economic performance of nations and of corporations is judged by the (evidently imperfect) markets without any regard to their usage of our collective natural capital. As a result, some “profitable” companies and “growing” economies may in fact be monsters greedily ignoring the needs of future generations, instead of the success stories they are commonly thought to be.
It doesn’t have to be this way.
Every day, we are aiming to show that responsible businesses can in fact make more money (not less) when they correctly price natural capital into their activities, and contribute to safeguarding the interests of future generations.
Here are two examples of how we can approach natural capital, drawn from our current activities.
Most coconut growers place no value on their coco-husks and leave them behind as waste. By buying the coco-husks from growers and paying a fair price, we provide income and employment in poor communities. By productively using coco-husks, we produce coco-peat and coco-fibre, sustainable products that displace very harmful alternatives from a greenhouse gas (GHG) perspective (such as natural peat from peat bogs). We (and local communities) are making money from a starting point of zero. At the same time, we are removing waste which may generate more GHGs and, in this particular case, could also harbour pests, become a fire risk and take up valuable growing space.
Timber businesses or integrated pulp and paper manufacturers in the emerging markets generally ignore most of the waste they generate as well as their impact on the environment. Upstream, they ignore the waste from cutting the trees, the impact of cutting trees on soil erosion, water storage, biodiversity, the flood control role of land, and the water pollution associated with their activities. What’s more, no effort is generally made to enhance any of the beneficial services and other natural values of the forests (by for example storing and filtering excess water flows, or hosting non-timber forest products such as medicinal plants). Even if they wanted to preserve natural capital, they would be ill-equipped. Why? Because of their focus on their core business; because of a possible shortage of capital and/ or human resources; because of the possible lack of reputation risk as a deterrent; and because of listed businesses worry about quarterly earnings.
By approaching natural capital correctly, we take the same types of businesses (e.g. timber), examine their impact on their environment, minimize their waste, gather it and sell it in multiple forms of sustainable resources. We recycle revenues from the sale of sustainable resources to cut less trees and increase conservation areas, therefore contributing to cleaner water supply, protecting and even enhancing the future value of the forest as a source of raw materials and providing more employment to local people. We also seek to generate revenues from whichever tool is available to price natural capital in the country we are operating in, for example carbon credits, water credits markets and renewable energy credits.
What we do should make more money, not less.
From a macro-investment stance, we are not investing in India, China, Thailand, Indonesia or the Philippines because of the “potential” and “growth prospects” of these markets. In fact, because natural capital is being rapidly depleted in these countries, and because no price mechanism exists (to speak of) to force businesses to protect this natural capital by pricing clean air, clean water or biodiversity, we worry: Water scarcity is going to increase, health problems will increase, populations and energy demand will increase, but neither the land, the water supply nor clean air will increase. The economic growth could turn out to have been a bygone period of relative prosperity where past generations ignored the needs of future ones for natural capital, aided and abetted by the markets and politicians.
It is ironic that large segments of public opinion in industrialized countries are concerned about the rise of China, India and other developing Asian countries when in fact this “rise” is built on the export of water demand, air pollution and biodiversity loss there.
One of our current initiatives is investing in bagasse co-generation in India. We focussed on a sector which provides a profitable rate of return while defensively positioning us against the ongoing destruction of natural capital worldwide (India will need more energy and its demand for sugar is unlikely to abate, especially with a rising population and increasing standards of living). India’s “growth” potential doesn’t figure in our investment strategy because it doesn’t have to. If we are wrong about the systemic risks due to the destruction of nature underway worldwide, our projects (provided we execute correctly) should still realize the returns we are counting on. If however we are right that we are in the midst of an unsustainable plunder of the planet, then our projects at some point over their life will generate higher returns from the sale of clean energy, sustainable commodities and water and air credits (however the fashion of the moment refers to them) through the utilization of waste and the proper pricing of natural resources.
Pricing natural capital makes more money, not less, and stops us robbing future generations.
