A Case of Willful Natural Capital Blindness
The Millennium Ecosystem Assessment (MEA) concluded that a rapid and extensive decline in our ecosystems took place over the past 50 years at a rate that exceeds any other comparable time in human history. Unlike our human, physical, and knowledge capital, our natural capital generally is deteriorating with grave prospects for our wellbeing. Yet, our collective response and actions to manage the direct and indirect risks brought about by this decline are still not nearly sufficient. There is an urgency to address and mitigate the ecological, cultural, and economic loss underpinned by the increased loss of ecological services. Economic growth is not sustainable under the current conditions of massive free use of natural capital.
One primary reason for this inadequate collective response is that we still largely underestimate and not fully recognize the value of ecosystems to human welfare. Thus, the wealth they present is not captured in conventional market economics. Additionally, our governing institutions and national policies managed to externalize essential business costs by not accounting for environmental impacts of our economic growth and implicitly encouraging over-exploitation and unsustainable use of the natural capital through inappropriate taxation and subsidies at the expense of the future generations.
Participants in the market economy, such as businesses and investors, will follow the right course of action once the social construct of the economy is redefined to acknowledge and include our natural capital as part of the economy’s portfolio of assets. In its current structure, Gross Domestic Product (GDP) only looks at income, which is only one part of the economic performance. It overlooks wealth and assets that underlie this income. A decline in a significant asset such as the natural capital is unfortunately invisible in the GDP. The World Bank offered an extended understanding of the wealth of nations to include produced, natural, and human and institutional capital. It estimated that natural capital has a greater share of total wealth than of produced capital. Thus, managing natural capital is a vital part of national development strategies. This measurement is important because it accounts for essential assets, including water, air, soil, geology, and living things.
Interestingly enough, the main barriers to transforming the definition of the wealth of nations and how we manage our economy are not economic or technological. They are institutional, behavioral, and political. As countries continue to address these barriers, a growing number of corporate decision-makers are expanding the use of new methods to review ecosystem services, understand unintended consequences of their business operations, assess cumulative impacts, and decide on trade-offs. The increased attention to ecosystem services is happening in anticipation of new public policies, regulations, and political decisions that consistently incorporate ecosystem valuation. It is also happening in response to disrupted supply chains, scarcity of essential natural resources necessary for business operations, reputational risks and negative public perception, costly surge in environmental regulatory requirements in response to national development reprioritization pressures, and a significant risk posed on businesses’ license to operate. Concerns related to ecosystem services have finally made it to the list of business continuity risks.
The challenges and opportunities before corporate sustainability strategists are, therefore, complex and wide-ranging. These include managing climate change risks and the decline in ecosystem services that will cut straight through the bottom line leading to significant physical, reputational, and regulatory risks. The ability to proactively work with a wide range of internal and external stakeholders, engage with these issues, and integrate this thinking into the corporate sustainability strategy, corporate finance, supply chain management, and product life cycle assessment will be critical to developing and executing effective corporate sustainability strategy.