Nature’s Cranky Banker Has Foreclosure on Her Mind

By Ian Edwards

Injecting sustainability with some imagination, envision for just a moment a power lunch with Janet Yellen, chair of the U.S. Federal Reserve, and Mother Nature, chair of our natural capital reserve – a bank of a different sort.

Between courses, conversation might start with how the first interest rate hikes since 2006, expected from the Fed as early as this fall, might affect corporate debt holdings. It might then shift to humanity’s continuing delinquency in repaying its debt to the environment.

“I’m still waiting for the tell-tales like employment and spending that prove to me that the economy is finally healthy after the crisis,” says an imaginary Yellen over a bite of arugula.

“I only wish changes at Nature Bank warranted a scintilla of the attention you get,” says Nature Personified, sipping a fair trade coffee. “I’ve been way too easy on the deadbeat borrowers.”

Creative license aside, the state of our investment in sustainability would be far more evolved if industry was as attuned to changes in lending policy from our finite natural resources as it is in wondering aloud when the Fed will put a crimp in cheap debt. The fact that we don’t have a banking-like relationship with nature is a missing link in the sustainability debate.

In 2012, Corporate Eco Forum and the Nature Conservancy published a tally: Nature produces $72 trillion worth of goods and services for the global economy every year through its water, soils, minerals and other natural assets. The report, called Valuing Natural Capital, cites the 2012 KPMG estimate that if companies had to pay for their own environmental bills, they would lose 41 cents for every $1 in earnings. By this math, for illustration, tech giant Apple would pay nature $16.2 billion based on its 2014 net income, up from $15.2 billion a year earlier.

More recently, the World Wildlife Fund, in its April 2015 report Reviving the Oceans Economy, valued the oceans at $24 trillion.

“The oceans are our ‘natural capital’ — a global savings account from which we keep making only withdrawals,” explains Brad Ack, senior vice president for oceans at WWF “To continue this pattern leads to one place: bankruptcy. It is time for significant reinvestment and protection of this global commons.”

Regardless of whether you believe the accounting methodology or not, the numbers are big – perhaps, too big to fail. Equate sustainability with the global financial crisis, and perhaps we can innovate more effective responses to issues like climate change, biodiversity loss and resource scarcity. How might we recast sustainability as a global bailout?

If nature is like a bank, then we are borrowing without understanding the terms or planning a repayment schedule. Extend the metaphor and, in many ways, the impacts associated with our global sustainability challenge might be explained as penalties for default, or even foreclosure.

Business borrows every day, negotiating terms and payback and writing down the interest paid on that debt as a cost of doing business. How is the debt to nature different? You wouldn’t go into a relationship with a banker without an expectation of repaying a loan. You would expect penalties if you failed to live up to the contract.

Think of the impacts of sustainability, like extreme weather and rising tides, in terms of late fees. Might Super Storm Sandy have been a debt collector or repo man? By returning rent, annuities or dividends to nature, we might avoid default.

Just how we might calculate this ROI is a creative process that has yet to take place.

Reinvestment

We might look at reforestation as a way that timber companies have replenished stocks. Whether that is a form of agriculture or repayment is a matter of debate. The point is that reforestation is a cost of doing business for long-term resource maintenance.

Companies that extract non-renewable resources are, of course, not going to put them back in a kind of one-for-one model. In this case, perhaps there is a proxy: value-for-value. If a company extracts a non-renewable resource, what substitute reinvestment in nature works? Or, can a company in a degenerative (nature-busting) industry use what it would pay in its debt to nature to transition to a regenerative (nature-building) model?

Offsets

Carbon offsets offer an interesting market-based model. A payment to nature might be based on an offset formula that trades carbon-boosting behavior for an investment in projects that scrub carbon from the environment. For every $1 of degradation of nature, a $1 of restoration goes back.

Since we’re in such a nature bank deficit, maybe we slap on a payback premium (say, $1.41, to echo KPGM’s estimate, for every $1 of extraction) for the near term.

Surcharges

A price on carbon will work toward scrubbing nature of greenhouse gases – and require polluters to pay their share of negative externalities. Perhaps there is a way to extend this to a dividend or annuity paid to nature’s bank.

A revenues royalty might also be model. The organization 1 Percent for the Planet collects 1 percent of revenues from participating companies to remit funds to philanthropic causes. It’s not a big leap to see how a surcharge on corporate revenues could be used to pay nature some return for the privilege of doing business. The idea that nature extracts value out of business provides an interesting reversal of fortune – or conjures images of a shakedown from angry, impatient, threatening creditors.

Then, we need to figure out who sets the rules, handles the remittances, authenticates claims, ensures compliance, redistributes the funds, penalizes the deadbeats and forecloses. Suddenly, we’re talking about something that sounds exactly like a bank. Worthy of a debate in sustainability is whether we have been discharged from our obligation to pay nature anything and what are the consequences, as happens in regular business transactions, if we haven’t.

In the first quarter of 2015, 26 publicly-traded companies like RadioShack filed for bankruptcy, putting $34 billion in assets in question. These are companies that defaulted, unable to repay creditors like their banks the full value of what they owe. While declining oil prices are a factor, a key issue for weak companies is the stricter lending environment. Banks are in a position to expect more from their borrowers. There is no such lending environment for natural capital. If there were, maybe we would get to keep our house.

Image credit: Kevin Dooley/ Flickr

Ian Edwards is a sustainability consultant based in New York City. His previous posts include Sustainability: What’s the End Game? and Earth, Inc. in Turnaround