Investing in the ecosystem

If valued properly, natural capital can maximise the benefits of economic growth and development

September 04, 2017 12:02 am | Updated 12:44 am IST

In April 2016, while inaugurating the third Asia ministerial conference on tiger conservation, Prime Minister Narendra Modi paid tribute to nature. Invoking the Buddha, he said, “The forest is a peculiar organism of unlimited kindness. It affords protection to all beings, offering shade even to the axe-man who destroys it.” He went on to emphasise the importance of reimagining the country’s natural ecosystems as its ‘natural capital’ and factoring in the economic, social, cultural and spiritual value of ecosystem services into the calculation of true economic growth and development.

Vast economic contribution

Natural resources are a critical yet often ignored part of our country’s national infrastructure. Boasting 11% of the world’s floral and faunal species, India is one of the 17 most ecologically diverse countries. Blessed with every major ecosystem, these biomes directly contribute billions of dollars to the Indian economy, annually. The financial value of India’s forests, for example, which encompass economic services such as timber and fuel wood, and ecological services such as carbon sequestration, is estimated to be $1.7 trillion.

With increasing economic activity, natural capital assets are on the decline, directly affecting the quality of life and potentially giving rise to future inefficiencies in the economy. ‘Earth Overshoot Day’, a figurative calendar date when humanity’s total annual resource consumption for the year overshoots the earth’s capacity to regenerate it, has advanced every year at an alarming rate. This year it was observed on August 2.

As we approach the limits of natural capital stocks, we need to rethink the cascading effects that this would have on the economy, the environment and society. Scientists have identified nine earth system processes to have boundaries which mark the safe zones, beyond which there is a risk of ‘irreversible and abrupt environmental change’.

Four of these boundaries have now been crossed — climate change, loss of biosphere integrity, land system change and altered biogeochemical cycles, such as phosphorus and nitrogen cycles. This means that human activity has already altered the balance of a few delicate equilibriums, the effects of which are reflected by changing weather patterns, accelerated extinction events for both flora and fauna, and global warming. This stresses the need for a comprehensive evaluation system that takes these undesirable side-effects of economic activities into account.

As the biggest contributor to the economy, business needs to consider evaluating its impacts and dependencies as it would have a direct impact on capital assets and wealth. This translates to broadening valuation and risk management to include natural capital, as it is currently not reflected in market prices. In addition to shareholder wealth, holistic development calls for maximising returns from other key areas such as physical capital, human capital, natural capital and social capital.

If valued properly, natural capital has the potential to optimise resources and thus maximise the net benefits of economic growth and development. There is often a chance of ignoring or undervaluing natural capital, effectively leading to projects with far higher negative externalities compared to the benefits. It is necessary that we are cognisant of the limitations of natural capital and its role as a primary support system for the economy.

Valuing natural capital would require internalising externalities and taking into account the myriad economic and ecological products and services that natural ecosystems make possible. Undertaking natural capital valuation can offer businesses a number of opportunities.

Risk mitigation

Natural capital risk is one of many risks that an organisation faces, and a thorough natural capital assessment can help integrate this risk into risk management committee deliberations, legal and reputational risk framework. Projects can be reassessed on the basis of their vulnerability to impacts and dependencies associated with the value chain. Companies can consider environmental stress tests for issues such as natural disasters, air pollution, resource scarcity and climate.

Natural capital thinking can also create opportunities to innovate and adopt newer, more efficient technologies. One Californian fashion company demonstrated this by developing a unique waterless ozone technology to address water shortage challenges during a four-year-long drought. The company was able to reduce its water use and water bills by 50%, saving at least $1,300 per month.

While findings from externality assessments are restricted to internal business decision-making, going forward, externality valuation can also contribute towards enhancing organisational transparency by informing stakeholders about the potential future risk to business and preparing proactive responses to these risks.

Unlike the economic value of goods and services, the intangible nature of natural assets is mostly invisible and hence remains unaccounted for. While it may be difficult to put a price tag on nature, unchecked exploitation of scarce natural resources and an inadequate response to India’s unique climate challenges can be a very costly mistake. Making natural capital thinking the norm requires a strong policy push and the adoption of valuation frameworks such as the Natural Capital Coalition’s Natural Capital Protocol. Integrating natural capital assessment and valuation into our economic system is critical to usher in a truly sustainable future for India.

Rana Kapoor is MD and CEO, YES Bank and Chairman, YES Global Institute

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