In the second-hand car industry, there are ‘lemons’ and there are ‘plums.’ ‘Lemon’ describes a purchase that proves to be a sour dud while plums are its complete opposite, a sweet and juicy deal. You’ll never know what you have until you take a bite – or in this case, buy the car and cross your fingers that the seller’s been honest about the car’s service and accident history.
Economist George Akerlof used this example in his seminal paper, 'The Market for Lemons: Quality Uncertainty and the Market Mechanism', to explain how the value and quality of a product is impacted when there is an information asymmetry or, 'when one party in an economic transaction has more information than the other'. Since buyers either have no idea or doubts about the car’s real history, they are usually not willing to pay more than the average price even if it’s in an excellent condition (let’s ignore the current used car market where prices have risen astronomically thanks to supply chain issues).
While this makes total sense as a consumer, you can't help but wonder: How many times have we made mistakes and ended up with failures because of misinformed business decisions? It is overwhelming to find out that $44 trillion of economic value generation or more than half of the world’s GDP is at immediate risk due to nature loss. We worry about inflation and geopolitical stability – and we should; but these temporal risks will prove only a blip in the longer term.
In countries across the world, we have depleted our biodiversity and land to extreme levels, rapidly approaching the tipping point where some effects of the crisis may be irreversible if temperatures rise by a further 1.5 degrees – predicted to be as soon as 2026. Why have we been overlooking this: is protecting our environment not worth the squeeze? Natural capital can add so much extra flavour to other ‘dishes’ – financial, human and social capital – if the value of natural capital is determined upfront.
The lemon problem
The environment has traditionally been an externality to economics. Post-World War II, the principal needs of the global economy were to recover from devastation and poverty and rebuild infrastructure, therefore nature took a back seat. Nature, the beautiful plum, has been incorrectly rated and typecast as the lemon.
Undervalued at best, our environment has sadly and typically been unvalued when it comes to investment decision-making in our economic-centric paradigm. Environmental impact assessments are only undertaken after the investment has been decided, to convince ourselves that impacts can be made acceptable.
While some up-and-coming mechanisms exist to track the environment’s degrading value at a global, national or corporate level, the cumulative impact of investment decisions on nature have not been measured.
Warranties against sour duds
One of the biggest mistakes we make is that our definition of profit does not reflect or take into account the impact and dependencies created by nature. For example, the Californian almond industry (80 per cent of the world almond production) has reported the decline in pollination services, (a $15 billion-risk to the US economy) with 30 per cent of managed colonies or 50 billion commercial bees dying each year. This affects one in every three bites of food across the US.
Without an assessment of this natural capital and its dependencies, the biodiversity risk remains a lemon. Funding pollination, instead of enhancing infrastructure, use of water or pesticides/fertilisers, would develop a new investment paradigm, creating fertile ground to bring nature into investment decision-making.
Investment in nature enhances overall enterprise value and creates more resilient investment options. Coca-Cola learned the hard way when it suffered a water shortage in India that forced it to close one of its plants in 2004. In order to avoid this from happening in the future, the company has invested $2 billion to lessen their water use and improve water quality in the communities in which they operate. But do we need to wait for things to happen to us before we make the right decisions?
Transition economies are evolving with new policies stimulating market movements. The UN SEEA guidelines and Taskforce on Nature-related Financial Disclosures (TNFD) provide rigorous economic definitions for natural assets, enabling the stock of environmental capital and flow of benefits to be measured and reported just as any other produced goods.
TNFD follows the successful TCFD (taskforce on climate-related financial disclosures) that has become part of the regulatory framework in many jurisdictions, and significantly impacted corporate behaviour across the world. Interestingly, these initiatives are largely driven by shareholder sentiment and forward-thinking boards – for instance decarbonisation, the nature-positive transition, is community driven.
As offsets for transport and water infrastructure projects rise to hundreds of millions per development and natural assets continue to be depleted, the pool to offset assets becomes smaller and more expensive without nature-positive programmes. It’s critical that investment is made in natural capital and offsets are not merely chosen as the easy way out.
Protecting the plums
Businesses can be proactive in connecting their environmental assets with benefits to create scalable approaches to natural capital investment. The World Economic Forum estimates the global nature-based economy at $10 trillion annually, with a projected 395 million new jobs by 2030. In Asia Pacific alone, the richest place on earth in endemic biodiversity, will account for 43 per cent of this business value, potentially unlocking $4.3 trillion and creating 232 million jobs. Future-proofing organisations will realise that nature is not a lemon but a plum worth investing in.
With threats to natural resources looming, companies like Mars, Unilever and Nespresso invested in the Rainforest Alliance certification to help farmers keep their land healthy and resilient, and consequently avoid any environmental impacts in their supply chain – which has proven to be a huge contribution to their businesses. For example, certified cocoa farmers were able to produce 1270 pounds of cocoa per hectare versus 736 pounds on non-certified farms.
The New South Wales Department of Planning and Environment has released a Natural Capital Statement of Intent to incorporate natural capital systems within investment decisions, and develop a pathway to encourage private and public investment in new natural markets.
The Commonwealth Bank in Australia has a sustainability loan that encourages best farming practice in far north Queensland with co-benefits to protect the Great Barrier Reef, and a pilot nutrient trading scheme is taking place to improve the health of South East Queensland waterways.
In the meantime, with the aim of stimulating investment in nature-positive business, DBS Bank, the Singapore Exchange (SGX), Standard Chartered and Temasek have created Climate Impact X (CIX) to provide high-quality carbon credits based on natural climate solutions projects. New Zealand also has its $1.2 billion ‘Jobs for Nature’ programme, which manages funding across several government agencies to benefit the environment and its people.
Not business as usual
Clearly, as nature is being depleted, governments and corporations are not asleep at the wheel – but there is still a lot to do. While the market for lemons will always apply, our goal should be to ensure it does not apply to nature for the coming generations.
Last week, my son asked my advice on his high school subject choices. He needed to decide his last subject: between a science and a business subject. Five years ago, I would have advised him to ‘stay close to the money’. But I found myself thinking that over the course of his life, the business of nature will be a higher order priority and no longer an after-the-event, fill-in expertise set.
Shining a light on natural capital addresses existing threats to our lives and economy, avoiding the death spiral and creating new value. Our children may be left with fewer natural resources yet thrive in a vibrant and different nature-based economy, which is a sweet and juicy deal.