Natural resources are often seen as free inputs that any company can use to generate an output. The only cost of exploitation is how firms assess the financial value of a natural resource. Thus, natural resources are seen as infinite: there is no clear idea of how excessive exploitation can destroy the surrounding ecosystem.
Today, many organizations want to avoid harm to the environment, but lack the motivation to follow them. After all, there is very little empirical connection between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP). Researchers also found that while everyone enjoys the economic benefits of a polluted environment and a stable climate, the negative costs of pollution and emissions – climate change or other environmental damage – do not affect individual entities.
So companies get little incentive to take positive action. Which may explain why, in the face of the current environmental crisis, many have not done so: environmental policies are often expensive and on the other hand measuring their benefits is not always easy.
So in order to avoid a tragedy in the Commons, we need to create a formal method for valuing nature’s resources based on their ecosystem role and their useful value in the medium and long term. A company with tolls is economically motivated by nature in its assessment that the company finds more responsible ways of production.
Pricing of ecosystem services
Nature pricing means determining the financial value of a particular environmental service. For example, researchers have worked to measure the cost of deforestation in coastal areas where trees help prevent flooding and other environmental hazards. Pangolin has explored the value of the dollar in its ecosystem benefits to help others fight wildlife trafficking. In this way, the researchers wanted to put a price tag on each output company extracted from nature and thus provide financial reasoning for them to take a more positive path.
Edward B. Barbia explores how economic models can be reshaped for human prosperity and nature’s contribution to survival. He wanted to include an evaluation framework that spends on regulatory, provisioning and ancillary services that nature provides us.
Economists, ecologists and other scientists have made significant progress on this front in recent years and have evaluated the welfare contribution of important ecosystem services by applying environmental assessment methods.
But all these efforts are suffering from lack of data. The UK Department for Environment, Food and Rural Affairs (DEFRA) maintains an Ecosystem Services Valuation Database (ESVD) one of the reasons it collects material related to nature resource assessment. This project provides greater visibility between the models used and allows for better understanding and further analysis.
Ecosystem service as a function of environmental service (biome) in US dollars per hectare per year
Among the early aspects of this exploration are nature’s most profitable contributions to human life in terms of their value in waste treatment, tourism and protection from extreme events.
At the very least, it should encourage better protection of our marine and wetland environments. These play an important role in our wastewater treatment system and this opportunity is worth more than $ 150k per hectare.
To be sure, ecosystem services are not strictly comparable: waste treatment and protection against environmental hazards are regulating services, while tourism is a cultural one. Thus their pricing method varies greatly.
But what about climate change-related ecosystem services? How does nature protect us from global warming and how do we value this service?
Climate change and ecosystem conservation
Climate change is caused by a combination of two main components. The earth’s natural warming process is driven by greenhouse gases that block some of the sun’s radiation from leaving the atmosphere and thus keep the temperature warm enough to sustain life. The difference between the radiation in the atmosphere and what is emitted is called radiation force.
Carbon recovery by country, in US dollars
|Austria||79,000||Nepal||1 3.1 billion|
|Brazil||$ 3.75 billion||Paraguay||45.8 million|
|China||17 1.17 million||South Africa||$ 7 million|
|Costa Rica||0||Thailand||$ 704 million|
|Kenya||1 2.1 million||United Kingdom||9 8.91 billion|
|India||45 2.45 million||United States||35 6.35 billion|
|Italy||43 4.43 million|
Source: ESVD data
Human activity increases the concentration of greenhouse gases in the atmosphere. At a certain point in time, excessive radiation is trapped, forcing radiation and exacerbating climate change.
Carbon dioxide contributes to this radioactive forcing. Thus ecosystems that can recapture carbon are essential for mitigating climate change. According to the carbon-emission-based assessment method, for example, Brazil’s Amazon rainforest represents about 16% of the total value of ecosystem services involved in carbon recovery.
Brazil: Major ecosystem services
Protect the rainforest, fight climate change
Rainforest conservation means protecting or reproducing tropical forests in the same way. Planting trees randomly without practicing bio-mimicism is not enough to ensure the longevity of the ecosystem and, therefore, is not enough to replicate the energy of the rainforest during carbon recovery.
The Amazon Rain Forest is home to unique biomes that are threatened by industrial farming and wildlife trafficking. What these activities remove and destroy is not so easily replaced or replicated. And carbon recovery is one of the only ecosystem services that Rainforest provides.
This lesson is critical. While efforts need to be made to calculate the value of nature’s resources and integrate them into our company’s valuation, we must remember that there is no way to determine the irreparable value, or to properly evaluate without which humanity cannot survive.
Companies can consider natural resources as infinite. They are not. But the value of nature really is.
Ophélia is an alliance manager at Miralles Raincatus, A non-governmental organization (NGO) that works to conserve biodiversity and combat wildlife trafficking in Brazil.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
Photo Credit: © Getty Images / Luman