The nature of value and the value of nature

25 September 2013 | Article

Interview with renowned environmental economist and global thought leader in sustainability, Pavan Sukhdev.

Q. There is talk of a revolution taking place in how businesses and governments account for natural capital. Is this real? Are we seeing concrete change in the way decisions are being made in relation to the environment?

I wouldn’t call it a revolution quite as yet, but it is certainly a clarion call which is loud and clear and is being heard. We have seen the vanguard moving forward with the likes of Puma, Unilever, Infosys and so many others. I am hoping that as leaders demonstrate what’s possible in terms of accounting for natural capital and presenting a more holistic view of performance, not just for shareholders but for stakeholders, it will become more of a movement.

Q. How does natural capital accounting in the private sector relate to the greening of national accounts being done by governments at the national level? What are the synergies and how can we ensure these efforts complement each other?

I think it is important for people to understand that the two are inextricably linked because when we talk about GDP as the bellwether indicator of national performance, people often forget that GDP is actually a combination of several parts including the profits of companies, salaries paid, net interest paid, and so on.

If we are going to adjust the way that we measure and report national performance and if it is no longer going to be traditional GDP, then we have to talk about adjusting the way we measure and report corporate performance because it cannot be on corporate profits alone. So when we say phrases like 'beyond GDP', which is the title of a big campaign from the European Union, we must also say 'beyond profits' because one truly links to the other.

We are already facing disastrous climate change impacts, water shortages, etc. Whatever progress is being made is surely not quick enough? What are the barriers to more widespread and rapid progress?

I think people do not understand or appreciate the urgency of these issues. When we talk about planetary boundaries, there are those that people are largely aware of relating to climate and biodiversity, but they are probably not that aware of the boundaries that we are approaching and have probably exceeded on nitrogen, coral bleaching, fisheries, and ocean acidification. These are being approached now and according to my own estimates, there are boundaries like climate for which by 2020 we need to have changed direction; changed the course of resource use and our economies.

So I think the first challenge is about educating the public about the urgency of these problems and the fact that we do not have all the time in the world to respond. Part of the problem is that by setting targets relating to 2030 and 2050 we have, especially in UN processes, given the person in the street the impression that there is time to respond when there is not. That is my first plea to everyone: stop talking about any timeline beyond 2020; whatever you can do by 2020, focus on that; what you cannot do beyond that may be just academic. The second challenge is recognizing that the private sector makes up around 70% of GDP and employment – how to ensure that it is not only contributing towards our rapid progress towards planetary boundaries but is actually an agent for change, an agent for that revolution you mentioned earlier.

Q. The World Forum on Natural Capital to be held in Edinburgh in November is targeting the private sector – are there really financial gains to be made from more careful and transparent corporate accounting of natural capital use and impacts?

The need to recognize natural capital in the reporting and performance measurement of corporations comes from two angles.

One is that whether we admit it or not, we all depend on natural capital and its flows, for example, a clement climate and relatively cheap and easy supplies of fresh water, without which we could not operate. Nature also provides many opportunities for businesses, such as agriculture. Its beauty and bounty is the source of enjoyment for millions of people, and this translates into business profits. So many businesses in leisure and ecotourism depend on what nature provides them. We need to recognize such flows and benefits more transparently then we do right now.

Following this transparency driver comes a risk driver: By ignoring the flows from nature we could be jeopardizing our own futures. If we do not fully recognize the risk of climate impacts or chemicals on bee populations we could be jeopardizing agricultural businesses, especially for fruit. Bee based pollination makes up almost 8-10% of total agricultural output globally in value terms. If we do not recognize the importance of climate change and its impacts we could be jeopardizing ocean fisheries which still provide animal protein for almost a billion people in the developing world. If we do not recognize the risk of ocean acidification we could jeopardize the entire ecotourism industry around coral reefs. So I think we need to recognize the risks as well as reflect the benefits.

We also need to understand that the unrecognized risks relate to public assets by and large, not to privately-owned assets. After all, bees do not send invoices; and trees do not charge for their monthly cleaning of air or recycling of water. Nature provides its services for free.

So we need to start reflecting the value of these services as well as the risks in some form in our financial reporting. In the financial world there is a concept called ‘value at risk’. All bankers are aware of this; they calculate value at risk as a way of limiting their total exposure and therefore keeping enough capital to back the risks they are taking. But none of them ever calculate ecological value at risk. For instance when you see the really big losses that BP made as a result of the platform disaster in the Gulf of Mexico and the cost to the environment, to society, to its own shareholders, to its reputation and so on, that was “ecological value at risk” playing out and yet it was not measured, nor managed, by anyone. So I think the time has to come to start thinking along those lines.

In 2008 Pavan Sukhdev took a sabbatical from Deutsche Bank to lead The Economics of Ecosystems and Biodiversity (TEEB) study and the Green Economy Initiative for the United Nations Environment Programme. Sukhdev is currently Founder-CEO of GIST Advisory, a consulting firm which helps governments and corporations measure, value, and manage their impacts on natural and human capital.