Natural Capital and Its Implications
Worldwide, “natural capital” has emerged as an important topic of debate. At the June 2012 Rio+20 Conference it was agreed that “inclusive green growth” was the pathway to sustainable development. Countries would therefore have to decipher “inclusive green growth” and look at natural capital with a magnifying lens, give it a proper definition and build a sense of accountability around it.
The discussions at Rio+20 revolved around the need to move beyond traditional calculations of GDP, which only include economic and financial parameters, and incorporate natural capital valuations. Environmental accountability at the GDP and economic productivity level, would give impetus to take integrated approaches towards cityscape, landscape, biodiversity, wildlife and ocean conservation. At the Rio+20 conference countries also discussed setting up international sustainable development goals (SDGs) for energy, food, and water that can shift the world to a more sustainable and measured path towards a resource constrained future. These discussions have created an extraordinary opportunity for countries to look at their natural resource wealth and assets and take practical steps towards improved decision making based on the understanding of what is the true value of natural capital.
Nature supports communities and business in countless ways but so far we haven’t been able to place a value on the resources obtained from the environment like fresh water, healthy soils, stable climates, pollination, forest cover and wildlife species. For example, if a company is operating in a water-scarce region and is not sensitive to its own water consumption and making active efforts toward water usage reduction, recycling and recharging, leaves itself exposed to long term business sustainability risks, not to mention the irreversible detrimental impact to surrounding communities, wildlife and biodiversity.
In India, ground water is treated as a free resource which can be privately accessed through manual pumps and automated borehole pumps. Many industries, due to lax implementation of otherwise stringent laws, not only access free ground water but also pump out polluted or residual water directly into the surrounding ecosystem without treating it, further endangering human, animal and plant life. It is this unfettered and irresponsible consumption and disposal of natural resources that is economically risky, unsustainable and negatively perceived by indigenous communities who have been known to resist corporate expansion since it will impinge on their access to resources they have traditionally held rights towards. These issues fundamentally arise because state and central governments have not been able to accurately put a value on nature by linking it to community, biodiversity and wildlife welfare. This is the challenge ahead.
The invisible economic value of natural capital in the world is estimated to be worth around USD 13 trillion. However we are not in a position to report it accurately as there is a lack of a unified natural capital accounting system.
The topic of natural capital, although having been explored and theorized upon for some time by academics and economists, has now had a project on “The Economics of Ecosystems and Biodiversity” commissioned by G8+5 (of which India is a part). “TEEB” as it is known would help governments and corporations transition towards a green economy through a natural capital accounting framework.
I believe such a framework may have various implications. For example, if the government levies taxes on environmental impacts, how would this affect the company’s tax bill? How would costs increase as a result of accounting for natural capital? Will the cost of raw materials increase on the basis of their environmental footprint (For example, the true cost of wood may be different, if the effects of deforestation caused are taken into account? And, who would bear the increase in such costs? Therefore natural capital accounting may soon be a reality that would have its own repercussions. Some research has shown a direct and inextricable link between the Amazonian rain forest, rainfall and agricultural production in South America, therefore putting an economic value, for the first time, on the Amazonian rain forest. By putting a financial value on a rainforest, we can see the application of natural capital theory to modern day economics.
India is already in the process of fully launching its first cap and trade mechanism to curb energy consumption by Indian industry through the “perform, achieve and trade” (PAT) scheme, which is due to go live in 2014. A carbon cess of INR 50 is being levied per ton of coal produced in the country, which is similar to a carbon tax and has the potential to earn the government of India much needed tax revenue and bring down the current account deficit. Therefore greater natural capital and environmental accountability will only lead to stronger economic policy reform, something Indian industry should prepare for by improving natural resource consumption efficiency with clean technology and clean energy applications. Considering the increasing scarcity of key natural resource inputs for production, like freshwater, it is becoming increasingly important for corporations to calculate and mitigate natural resource consumption from a business sustainability perspective.
Finally financial Institutions too would also need to play an important role in this emerging scenario as a financial intermediary. It is essential to work towards demystifying and exploring innovative financial mechanisms that would help stimulate a new natural-capital-inclusive greener economy.
Namita Vikas is president and chief sustainability officer for Yes Bank Ltd.
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