For all the current discussion about critical infrastructure, the world’s most critical form of infrastructure is nature. Few statements underscore this more clearly than the warning issued in 2015 by the UN’s Food and Agriculture Organization (FAO).
In view of the degradation of arable land, only 60 more harvests could be expected – “Then, it’s over!”, the FAO stated at the time.
To address this significant challenge to global prosperity, the Montreal Agreement on the protection of biodiversity, concluded last December, is a useful first step. However, the key question is how to move from lofty intentions toward executing a robust economic and political agenda for the protection of our ecosystems.
Given that nature’s fragility is a direct business risk, many large companies have discovered that access to - and de-risking from - nature may soon be the most potent value drivers. They are now actively searching for ways to invest in the vitality of ecosystems.
Covering all sorts of businesses
This new mindset extends beyond corporations engaged in agricultural supply chains. It has also taken hold among companies with system-level views that span across many sectors – in particular, banks, portfolio managers and insurers.
The involvement of the private sector is a key part of the solution. With companies having an immediate self-interest, the focus has shifted towards how to properly structure markets to facilitate the preservation and enhancement of natural capital.
The development of such markets is critical for two reasons. First, while the Montreal Agreement is expected to mobilize funding of $200 billion per year by 2030, actual annual funding needs are about $600 billion higher.
Second, the voluntary carbon credit market, focused on CO2 emissions, is too small and eventually limited in its design and scope, since it does not sufficiently protect ecosystems and biodiversity.
Importance of market infrastructure
What are the core elements of properly constructed marketplaces that can funnel private capital into preserving and enhancing natural capital? So that the intentions expressed by the Montreal Agreement will have actual on-the-ground impact.
A pivotal requirement is the ability to accurately measure the state of natural capital. While we have long quantified primary goods produced on the land, such as timber or wheat, we have fallen short on measuring less tangible assets such as the state of biodiversity, air, water and soil health.
Without the ability to quantify these additional elements of natural capital, we will have a hard time future-proofing the global economy. With natural infrastructure unmonitored and largely unmanaged, massive liabilities will build up on food, energy, mining, construction, infrastructure companies and eventually financial corporations.
To protect against those risks, a multitude of technological advances have become available. These include a revolution in computer visualization that allows to integrate multiple data layers from ever-improving satellite data, metagenomics testing, fauna-acoustics, ground sensors and ground imagery.
Making it into balance-sheets
Properly aligned, they allow us to measure the degree of preservation and enhancement of natural capital ever more precisely. In addition, machine learning will accelerate our ability to understand bio-complexity while lowering monitoring costs.
On this basis, a company’s water, soil, biodiversity and carbon impact and exposure will soon be reflected in its sustainability report as well as on its balance-sheet where nature liabilities and assets will drive corporate value.
The accounting profession is at the cusp of determining under what circumstances natural capital investments will be reflected on corporate balance-sheets. By way of example, food companies that compensate suppliers to engage in measurable improvements of soil, water or biodiversity quality may have these payments recognized as capital investment.
Establishing markets to transact natural capital enhancement won’t be easy. After all, the existing comparable – voluntary carbon credit markets – has come under fire.
However, the recent revelations present us with an opportunity to build the nature markets we need -- reliably measured, outcome-based, translated into dependable contracts between nature stewards and companies and consistent with accounting standards.
Market participants must make sure we don’t let this crisis go to waste.
For corporate decision-makers, the path forward begins with broader acceptance of the fact that the degree of nature and biodiversity loss is the direct result of a past choice to misprice nature. We would be well advised to turn this past misjudgment into an investment opportunity that can safeguard global prosperity.
