Natural Capital
Table of Contents
Motivation:
Traditional economic system assigns value to goods, financial wealth, and human labour. But it treats nature as free and limitless externality. A tree when converted to timber has a price assigned to it, but there is no value assigned to a living tree. A solution to this problem is Natural Capital.
Governments make regulations that companies must be net-zero or net positive in terms of their environmental impact. That measurement is done using the idea of Natural Capital.
Definition:
Natural Capital is the global stock of natural resources. It encompasses geology, soil, water and living beings. Such resources provide Ecosystem services which include water filtration, carbon capture and wildlife stabilization. The monetary value of those resources and services is assigned from scientific analysis.
The market then operates on standard financial model of holding an asset, the stock, that produces an yield:
- The stock is the physical natural asset itself. Examples include a standing forest, a coral reef, a wetland ecosystem, or a population of pollinating insects.
- The flow consists of the ecosystem services generated by the stock. These function as the dividends or interest paid by the asset. Examples include carbon sequestration, natural flood defense, ground water filtration, and crop pollination
If the stock is depleted or degraded, the flow of valuable services ceases. If the stock is maintained or restored, the flow of services compounds and increases over time.
A natural asset company can be established to take over conservation effort of an area. The stock of that company grows as the natural resources flourish and the services they provide increase. Investor can provide upfront capital for such conservation effort, just as an inverstment in stock of any other company.
Related terms: Natural Asset Company, Habitat Banks, Juridictional REDD+, Biodiversity Credits, Natural Capital, Carbon Credits
Source: How to Live on Earth | Feature Documentary [YT]
1. Real world examples
New York Stock Exchange (NYSE) attempted to create a asset class called Natural Asset Company in 2021 but withdrew the proposal in 2024. But the idea is being implemented in other places of the world.
Terrasos (Columbia)
Terrasos operates with local to protect and restore threatened land, and they sell the "biodiversity credits" to companies that need to offset their environmental damage as per their legal requirements. The money from that goes to the conversation efforts.
- Highlands Rewilding (Scotland, UK)
- DGB Group (Netherlands)
The Misiones Program (Agentina)
They operate at state level, and in exchange for proving they are preventing deforestation, the project issues premium carbon credits to the international market, channeling that global finance back into local communities and government protection programs.
2. Challenges
Greenwashing and the License to Pollute
A criticism is that these credits allow companies to buy cheap nature credits and declare net zero without doing actual real work to reduce their own emissions.
The counterargument is pragmatism. We don't have other mechanisms, and so while the companies figure out the transition to reduced emissions, they should be mandated to buy high quality nature credits to cover their unavoidable emissions.
The Fungibility Flaw
Biodiversity is not fungible, i.e. a corporation cannot destroy a wetland in Sweden, buy a "biodiversity credit" to protect a jungle in Peru, and claim they broke even.
Thus strict regulations usually require "like-for-like" protection. Which means a developer must protect the exact same type of ecosystem within the exact same region they are building in.
Land Grabbing and Green Colonialism
Governments and corporations could evict Indigenous peoples or local peasant farmers to build conservation areas so they can claim the credits. Or even if they include the local communities they may enforce unfair terms such that the bulk of the benefits are not passed on to the local communities.
While this used to happen in the past, modern high-integrity standards strictly enforce Free, Prior, and Informed Consent (FPIC) and mandate clear revenue sharing agreements.
Measurement Problem
Proving that an investment actually saved nature is incredibly.
- Additionality: A credit is only valid if the money caused the protection. If a landowner was never planning to cut down their forest, but a developer pays them and issues carbon credits for "saving" it, the atmosphere hasn't gained anything.
- Leakage: If you buy credits to protect Forest A from loggers, the loggers might move elsewhere and cut down Forest B. The net benefit to the planet is zero, but the credits are still sold.
- Permanence: If an investor buys credits for a restored forest, and that forest burns down in a wildfire ten years later, all the stored carbon is released back into the atmosphere. The financial transaction is permanent, but the environmental benefit was temporary.
The countermeasure for this is Juridictional REDD+ program like the Misiones project in Argentina.
- Additionality: Advances in AI, satellite imagery, and bio-acoustic monitoring mean proving a project's impact is becoming an exact data science and we no longer rely on manual, easily manipulated estimates.
- Leakage: Instead of measuring a single plot of land, the entire state or country is measured.
- Permanence: Buffer Pools are a solution, where the projects are required to put a large percentage of their generated credits into a central "buffer pool" that cannot be sold. If a protected forest burns down, credits are retired from the buffer pool to cancel out the loss.