How are you measuring your impact on nature?
At the recent World Economic Forum Annual Meeting, a session titled “Putting a Price on Nature” piqued our interest as it’s an area of growth for us at Frontier Economics.
More and more clients, and projects, are centred around the economics of natural capital and biodiversity. Below, we highlight key points, and provide further insights on this important topic:
Quantifying nature’s contribution to our economic wellbeing
While the first principles of accounting were developed in 1494, finance has only really learnt to rigorously quantify risk in the last 50 years or so. Only after advances in science provided the necessary mathematical and computational capacity.
In the same vein, better ecological science detailing the relationships between nature and the economy is now providing the foundations for new tools. To equip us to incorporate nature into financial decision making.
At the macro-economic level, the panel discussed a selection of major economies experimenting with the development of a new measure called ‘Gross Ecosystem Product (GEP)’. GEP measures the total value of final ecosystem goods and services supplied by nature to us.
Incorporating the value of nature into decision making
Scientific research has become more focused on human activity’s impacts to, and dependencies on, nature, as climate change and economic activity place increasingly un-ignorable pressures on the environment.
A headline from the influential 2021 Dasgupta Review is that while produced capital per person has more than doubled in the last three decades, natural capital per person has declined by nearly 40%. This reflects what one panellist called a “fatal flaw” of capitalism:
Nature is invisible in most decision making.
Against this, economists are being asked to think about how to make nature visible to investors, consumers, and other decision makers.
But sending sufficient economic signals to protect and regenerate nature might not require a valuation of nature in all its economic, social, cultural and ethical dimensions, at least at first.
Instead, the immediate task might be to use ecosystem services valuation techniques. As a tool to align the incentives to regenerate nature up and down the value chain, and across national borders.
A starting point: agriculture and food system value chains
A key place to start is global agriculture. Panellists shared that 85% of the threats to nature come from global food systems.
While science has demonstrated that regenerative agriculture can both improve agricultural productivity and environmental outcomes, the economics tends to require landholders to capitalise on the related climate and nature premiums – or, in other words, money needs to move up the value chain to the farm gate where the investment in regeneration occurs.
Regenerative agricultural practices represent a big opportunity for farmers – especially in Australasia - to continue to improve productivity, protect country, and grow and diversify their incomes.
Most encouragingly, panellists suggested that:
We can afford to make this change.
It’s about structuring markets and incentives across the value chain to create the right conditions for rational, sustainable investment.
A final note on nature and culture
The panel noted that Indigenous people protect 80% of global biodiversity. Sharing the idea that the intrinsic value of nature is invaluable:
There’s no cost that can be assigned to it, to say, "let’s negotiate".
From this perspective, you can’t put a price on the destruction of our most precious resources, and instead we should align ourselves to create a new system to preserve its wellbeing for all.
At Frontier Economics we’ve worked on projects to consider not only the physical impacts of nature destruction but the social, cultural and ethical implications – especially on indigenous communities.
It’s an area of growing importance to corporates and governments, and we’re excited to be supporting and informing society through economics.
