What is Natural Capital? Why Overlooking the Planet’s Natural Systems could be Costing us the Earth

What is Natural Capital? Why Overlooking the Planet’s Natural Systems could be Costing us the Earth

At the start of the year I commented on the big financial trends for 2022, and the necessary steps we need to take together in what will be the decade of decarbonisation. We are seeing a turning of the tide when it comes to the global transition to a low carbon economy. But with COP27 around the corner, we need to ask ourselves if our efforts to reach a Net Zero future are enough to reverse the damage we have done to our planet.

Last week (16th August 2022) saw the US government introduce the Inflation Reduction Act, which US President Joe Biden has called the 'largest investment ever in combatting the existential crisis of climate change.' The bill aims to reduce greenhouse gas emissions by 40% compared to 2005 levels, helping fight global warming ‘by incentivising the transition to clean energy’. The bill will help insulate the economy from the swings in oil and gas prices, reducing the volatility in energy inflation.

We know we need to reverse the current trajectory of the planet, and legislations like the Inflation Reduction Act show the role that we must all play in reversing climate change, from governments to companies to individuals. But this goes beyond investing responsibly, or ensuring your pension is Net Zero aligned, because the problem stretches beyond the amount of CO2 in the atmosphere.

Last year I attended COP26, where I learned about the concept of ‘natural capital,’ which I will come onto shortly. What I found most exciting about the idea is that a reality exists where we can align to Net Zero, protect nature AND grow the economy – all be it in a less harmful way and – a win win win! With that in mind, we need to ask ourselves how we can be more progressive in using our money as a force for good. We also need to ask whether we stand a better chance at preventing the planet from warming to less than 1.5 degrees Celsius, in line with the Paris Agreement, by understanding the value of nature, and how to harness the power of natural systems as a vital asset to our economy.

In short: To save us from costing the earth, do we need to become #NaturePositive

"To restore stability to our planet, we must restore its biodiversity, the very thing that we’ve removed. It’s the only way out of this crisis we’ve created – we must rewild the world."

A quote I love from Sir David Attenborough’s ground-breaking Netflix series, A Life on Our Planet, which I recommend watching.

Could becoming #NaturePositive be the earth’s Eureka moment?

Imagine our atmosphere like your bathtub. Thanks to the way we have consumed and operated as humans over the decades, that bathtub is on the brink of overflowing with CO2. Currently we are adding a further 40 Gigatonnes to that bathtub every year, despite spending the last few decades trying to turn the tap off. The truth is rising CO2 is putting us in grave danger of flooding our home – planet earth – and yet the solution may be staring us in the face.

Instead of focusing our efforts on turning off the tap with changes such as switching to renewable energy and electric vehicles– which we should be doing. What if we considered pulling the plug on the crisis, we find ourselves in by sucking the carbon out of the atmosphere. This is carbon sequestration – which, nature is brilliant at. I'll explain more later.

“Climate change has been found to get up to eight times more coverage than biodiversity loss. Yet only by addressing both the warming climate and loss of wildlife do we stand a chance of passing on a stable planet for future generations.” – FindingNature.Org

What is Natural Capital?

Nature is valuable. The wonderful planet we live on and how nature plays a key role in the health and prosperity of the planet is something we’ve neglected for too long. As the original asset class, nature plays a vital and efficient role in maximising our economy.

Our planet provides natural capital in the form of air, land, soil, water, and all living things. This is like nature’s own service industry which keeps the planet and the people living on it, sheltered with services like weather stability, storm protection; fed and watered, with crop pollination, water purification and filtration and food protection, and with carbon capture and sequestration. This means that nature not only provides critical services, but makes biodiversity extremely valuable.

Despite nature always having been there, our capitalist system to date has not only failed to preserve nature it but destroyed it along the way, taking us to the situation we are in today. But there is another way. We know that money makes the world go round, and as we start to understand that money can be used as a force for good, how can we connect money with nature to drive a circular economy with nature at its centre? How can we capitalise on nature in a positive way that protects the future prosperity of both the planet and the people living on it? Being carbon neutral is one thing, but is being #NaturePositive the natural next step?

Natural solutions – why we need wildlife to survive:

If you study economics or work in finance, you’ll have heard the term – the multiplier effect – an equation reflecting the impact that investing has on the economy. Natural Capital, or investing in nature, is a solution-based multiplier which because of the complex intelligence and intricacies of natural systems, mean that no matter how smart or complex a business solution, these will never match the efficiency of nature itself.

To achieve our 1.5-degree Celsius target, we need to remove and store 6.5 Gigatonnes of CO2 a year. Animals play a vital role in the carbon cycle which means that restoring and protecting wildlife equates to preserving the future of our planet and our economy – a solution multiplier.

Environmental services

The Living Planet Report tells us that the population of amphibians, birds, fish, mammals, and reptiles has seen an average drop of 68% globally since 1970. Nature is essential to our existence as humans, yet humans’ destruction of nature is having catastrophic impacts not only on wildlife populations but also on human health and all aspects of our lives.

“Nature is declining globally at rates unprecedented in millions of years. The way we produce and consume food and energy, and the blatant disregard for the environment entrenched in our current economic model, has pushed the natural world to its limits. COVID-19 is a clear manifestation of our broken relationship with nature and highlights the deep interconnection between the health of both people and the planet.”

The issue that historically we haven’t understood the value nature, which will always be more sophisticated than any man-made solution, regardless of its technological advances.

As Ralph Chami from International Monetary Fund says, ‘if nature grows, we grow.’

Take kelp forests for example, not only do they capture CO2, but they also promote biodiversity and are an effective form of flood prevention. Or seagrass, dubbed ‘the lungs of the sea’ which are one of the most valuable ecosystems on the planet thanks to its natural services like generating oxygen every day through photosynthesis, improving water clarity and quality, and buffering coastlines against storms. In fact, one hectare of seagrass (about two football fields) is estimated to be worth over $19,000 per year.

On Friday 12th August was #WorldElephantDay which reminded me that in my lifetime the number of elephants in the world has more than halved to less than 500,000. Part of the issue is that in Gabon for example, elephants are valued at $40,000 when poached for ivory. Cruelty aside, we need to protect our elephants not least because they are far more valuable alive (over $1.75 million). Dubbed the ‘gardeners of the Congo,’ the carbon capture services of Africa’s forest elephants have been valued at $150 billion per annum, by Ralph Chami, a leading green economist and Assistant Director at the International Monetary Fund. Just in existing, elephants fertilize plants, and in moving through the forest and foraging for food, elephants reduce the density of smaller trees and plants, leading to an increase in the proportion of larger trees, which leads to more carbon being stored in the forest.

Take whales as another example: Also, at risk despite being worth trillions of dollars to the economy thanks to their ecosystem services. A single humpback whale is worth $2 million, just in its ability to capture carbon and sink it to the ocean floor after its death, because whales sequester carbon like trees but on a much bigger scale. What’s more, whales also help by eating plankton and krill which they then release through faecal plumes, which bring nutrients to the surface and allow more plankton to grow. Another solution multiplier – the more whales there are, more plankton there is, the more CO2 we can sequester as plankton releasers O2 into the atmosphere.

“Valuing and investing in the protection of nature can generate a more sustainable blue-green economy, help mitigate climate change, and realign economies toward inclusive and nature-friendly economic growth.”

Ralph Chami from International Monetary Fund (enjoying tapas & talking nature with Ralph in London - May 2022)

Reversing the damage:

Whether you disagree that humans are behind the cause of climate change, what can’t be ignored is that the earth is at crisis point and as humans we have the power to change this. To quote The WWF Living Planet Report (2020), “a deep cultural and systemic shift is urgently needed, one that so far our civilisation has failed to embrace: a transition to a society and economic system that values nature.”

Governments and businesses must operate in a way that enhances the resilience of the planet, which in turn – by its very nature – means enhancing the resilience of those businesses and governments. This stretches beyond conservation: We know we need to reach Net Zero, and we now know we can’t have economic growth without a healthy planet, but do we also need to start placing tangible values on nature so that we stop destroying something so worthy to the future of businesses, communities, and people the world over.

One of natures’ many wonders is that it is designed to thrive, so it can be restored – and rapidly so with the right measures in place. We cannot afford for our global economy, and therefore financial services not to not play our role in this restoration – it is literally costing us the earth.

When it comes to reversing the damage done to our planet, and if we are to stand a chance at reaching Net Zero, there is really no substitute for natural systems. Placing a value on nature and working to restore nature not only allows our beautiful planer to thrive but is the most efficient solution for the future prosperity of the planet and the people living on it – a win win win.