 Pavan Sukhdev, leader of the Economics of Ecosystems and Biodiversity (TEEB) study |
Environmental economist puts value on ecosystem and biodiversity to prove true costs of business activities
By Kim Da-ye
Seogwipo, Jeju — The last time you heard of the word “externalities” would be during an economics class at high school. That term is likely to have never occurred to you when you buy things, make investment decisions or run your own business. One former senior banker from Deutsche Bank wants to bring that term into vogue.
Externalities are effects of economic activities on unrelated third parties. Damages to the nature are the most common externalities, and Pavan Sukhdev, an environmental economist, says that they go unnoticed because the third parties, the nature, tend to be voiceless.
Having spent nearly two decades in the financial industry, Sukhdev knows how it can be given a voice — by putting a value on the nature and at best having companies calculate externalities and disclose them in reports.
“Because there is no price on nature, people believe there is no value. Of course, there is a value and we can estimate the value. It just has not been done,” Sukhdev said in an interview with Business Focus during his visit to Jeju Island for the world’s largest conservation forum, IUCN World Conservation Congress.
Sukhdev and the United Nations-supported Economics of Ecosystems and Biodiversity study he leads, aren’t the first trying to put a value on something invisible. Carbon dioxide emission is quantified and traded in Europe as part of efforts to reduce pollution. But his job — pricing the ecosystems and biodiversity — is far more complicated.
The TEEB study tries to calculate the value of the nature across three different levels — ecosystems, species and genetics — while the impact can be measured through another three ranks — local, regional and global.
Forests, for instance, provides habitats to local residents, help boost the regional economy by offering timber and tourist attractions and purifies the air for the earth. And it has its own ecosystem that consists of species made of genes.
The methodology also varies from the abstract to the specific. In case of the specific, the value of bees can be calculated by comparing the agricultural output of the season that suffered from the lack of bee pollination and that of the season with enough bees.
A relatively abstract method is putting a price on nature by how much money people spend to travel there. A family travelling to Jeju by air spends money on hotel and lets go the opportunity costs of working and earning more money. Sukhdev says that the family would be doing so because the natural assets of Jeju are worth as much as or more than the total travelling costs.
“Unfortunately, the sea of Jeju does not send an invoice to the family, saying this is my nature’s entertainment services,” he said.
For the complexity of the project, businesses could be reluctant to embrace the idea. A sports apparel company Puma proved that is not the case.
Inspired by the TEEB study, the company decided to disclose externalities. In 2011, the company released its first “Environmental Profit and Loss Account” for the year that ended Dec. 31, 2010.
TRUCOST, a partner group of the TEEB study, analyzed the costs Puma caused to the nature across all levels. It measured the amount of emission, fresh water use and waste resulted by the firm, its suppliers and even the farmers who produce cotton and rubber and raise cattle for leather.
In that complete lifecycle analysis, Puma found that it had to pay 8 million euros to nature for services to its core operations, including the firm’s offices, warehouses and stores in 2010. Its supply chain of external partners owed an additional 137 million euros.
“The simple question I put forward was: if our planet was a business, how much would it ask to be paid for the services it provides to a company in order to operate?” Puma Executive Chairman Jochen Zeitz wrote in the report.
“This economic valuation of Puma’s environmental impact does not affect our net earnings, but provides us with a wake-up call and the urgent need to act upon it.”
The TEEB formed a business coalition, encouraging businesses to join the initiative. It is currently backed by the British and Singaporean governments. Sukhdev said that Korean business associations join the coalition, which should be funded by the Korean government.
Corporate 2020
While leading the TEEB study, Sukhdev embarked on another campaign titled Corporate 2020 that calls for companies to operate in new ways in a new regulatory landscape. He interviewed various business leaders including Rob Walton, chairman of Wal-Mart and Adam Werbach, CEO of advertisement agency Saatchi & Saatchi and wrote a book about the campaign with the same name, which was launched last week in Jeju.
He demands four major changes to the ways companies operate. The first is disclosing externalities like Puma did.
Another is the overhaul of taxation. Sukhdev said that individuals’ hard work or income is heavily taxed compared to resource extraction. He provides Norway as a good example as the Scandinavian country imposes a 79 percent tax on oil companies.
He once interviewed Erik Solheim, Norway’s former minister of environment, who said that companies have been complaining over the hefty taxes and threatening to leave in the last 20 years, but they haven’t.
“You should tax goods, rather than the good,” Sukhdev said.
The third change he demands is regulation on advertisements, which he says prey on human insecurity, convert them into wants and turn them to needs and demand. They may boost production and hike the GDP, but unnecessary demands means more resources are being wasted, the economist argues.
Sukhdev said that harm from smoking was found in the 1920s but it took nearly 50 years to regulate tobacco companies’ advertisements.
His last demand is limiting leverage taken by financial companies. For a former director at an aggressive investment bank, that may come as a surprise.
“In markets, you will be punished for misallocating financial capital. What if you misallocate natural capital? There is no central bank to give fiscal stimulus,” Sukhdev says.
Many businessmen who consider them as capitalists may frown at Sukhdev’s demands, saying they are based on left-wing environmentalism that can kill companies’ profits. The economist, however, firmly says, “I am a capitalist.”
And he defines what kind of capitalist he is. He calls himself a “third-dimensional capitalist.” He says capital comes in all forms of wealth — financial, human, social and natural. But because only financial capital is quantified and has its markets, people tend to neglect the rest.
“Development has to be holistic with focus on creating more wealth for people — all assets across the entire classes of capital. How would you consider it development when you have increased financial capital for some and destroyed natural capital for everyone?” he said.
