The Mint:
Brilliant. Good day, Douglas. And thank you very much for giving us some time at The Mint to talk about your work.
Douglas Eger:
Well, very happy to be here. Thanks for inviting me.
The Mint:
Brilliant. Well, maybe I could start, Douglas, by asking you about how you got into this idea of natural asset companies and how it fits into what was the evolution of the idea?
Douglas Eger:
Sure, sure. To be honest, I think the evolution has been my entire life, I’ve always been passionate about the environment and nature, and was frustrated that we always were asking the question, what’s the value of nature against other potential uses? We didn’t seem to be solving it at scale through policy and others and maybe slowing down the rate of decline, but we just weren’t getting to the fundamental problem that nature had been left out of the mainstream of the economy.
The Mint:
What was your role in this because you were talking about we? I just wonder, would you say you’re an economist or what would you describe yourself as?
Douglas Eger:
Yeah. My entire career has been as an entrepreneur. And if there is a focus, it’s been converting an idea into a workable company project, et cetera. So in that process, I started off trying to work for conservation groups right out of college. I have a environmental management and writing degree and I couldn’t get a job as the teeth of recession. They were like, “Oh, you could maybe work for six months for free and have a stipend.” And I said, “Oh my gosh, I need something better than that.” Went on, and I started a company right out of college.
My father was instrumental in saying, “I think you really need to understand how business works because you’re often looking at industry and business as a driver of bad things. And if you could understand how finance and business could be harnessed, I think you’d find it more effective than policy.” And that stuck in the back of my head and I eventually had the resources to work on projects like this.
The Mint:
Brilliant. So this actual initiative, natural asset company, when did that start?
Douglas Eger:
I had done a very large conservation property with my wife, Upstate New York. It was both very satisfying, but also realised the limitation of conserving, this was about 7,000 acres, and yet that was a drop in the bucket. And even if I was a Ted Turner, that’s a drop in the bucket against the need of the world, right?
The Mint:
Yeah.
Douglas Eger:
So we started to work on film and television. Started off in documentaries and I wanted to do a documentary about natural capital to get people to understand what nature was providing, what services, and why that was important. Probably around 2015, 2016, as I was working on how to explain it, I realised that maybe I should try to solve the problem rather than just talk about the problem. So through many hikes up in the Sierra, I was in California at the time, came to the notion of, we fundamentally need to address externalities and create a new asset class based on nature so that we could use the capital system to generate resources in line with our environmental and social values and fix that fundamental flaw that we’d left nature largely out of the economic system.
The Mint:
I suppose some people might say, well, the problem has been finance in terms of funding destructive activities. They’re fundamentally driven obviously by accumulation of profits and so on. How can you trust them when it comes to investing and regenerating nature?
Douglas Eger:
Yeah. I don’t think it’s a matter of trust. It’s a matter of aligning interests. So, what we’ve done in our system so far is we said, we’ve given every incentive to do extractive, to do destructive things at scale. Because it efficiently produced goods and services, but it left off the table, the costs of producing those goods and services, and probably as important or more important, you couldn’t directly profit from the goods and services nature produces. And to give you an idea of the magnitude of that, it’s been estimated that nature’s goods and services, call it natural GDP, is $125 trillion. The asset that produces that is many multiples more than that. And if we look at the attempt to exclude that, the way we tried to solve it was to use taxes or regulation, now artificial or transfer markets to bring pricing back in.
We’re underfunding biodiversity by maybe six to $800 billion a year, according to the Paulson Institute, climate change maybe three to five trillion dollars a year underfunding. And if we’re truly going to move to a sustainable future circular economy, it’s always a magnitude more. So we need two things. We need price signalling, and we also need capital formed based on the underlying asset itself. So investors could make that choice, which we talk to all the time. They’re saying, “We’d love a pure play to invest in nature, to truly solve climate issues.”
So I wouldn’t want to try to trust people if their interests aren’t aligned. If there’s more value from taking a tree from the forest and turning it into lumber, then that forest producing ecosystem services, then we’re always going to fight an uphill battle. So I think we need to change fundamentally our economic system to value nature and include those social and environmental values that most people truly hold, but they don’t know how to exercise it on a day to day basis.
The Mint:
I suppose. If I remember back to my accountancy and how you value assets, it’s the net present value of future revenues that you control, you can reasonably be sure of getting hold of if you like. Obviously that’s real cash. So if you take a natural asset in that sense and say, well, what’s the stream of future revenues from that asset? When you are explaining this to potential investors, how do you describe what the future revenues are?
Douglas Eger:
Yep. So the paradigm that we set up that you’ve just described, current future cash flows, that’s the way you value an equity. There are assets like gold or paintings or others that just appreciate because people buy them. We sometimes say greater fools theory, it’s a higher price, they’re binomial, but equities have been priced on current and future cash flow. That worked successfully for several 100 years, but the problem is we never had divvied up who owns natural assets and could you charge for oxygen production and genetic potential and climate stability services? So all that’s externalised from the economy. So what we said was we need to include that in a financial instrument that does two things.
One, it moves the asset from unpriced to priced. You could do that in a binomial, but these assets are fundamentally different. They produce goods and services of known value. That’s what ecosystem service values are generated off of. It’s a 20-year discipline of measuring in financial terms, each of those ecosystem services. So what we said in our model is we need a new paradigm. We need a new way of looking at this as a financial instrument that includes if there are monetized values. Under a gap or FRS, great, but we want to arm investors with another set of financial information. And that is our statements of ecological performance. And that says, what are the flows of ecosystem services?
Whether they’re monetized today, might be in the future or not, what’s that asset value worth itself that produces those goods and services, that makes life on earth possible and half of our global GDP is dependent or highly dependent on that? And if we look at it from that perspective, we should be looking at price to ecosystem services as a measure and a driver of this. It’s a much more fundamental way to look at the value of nature without having to agree on price and ownership across the world. Like we have very incrementally and not completely with carbon, for instance.
The Mint:
But I suppose one thing you said earlier was that you couldn’t really trust investors, but you had to align interests. And I suppose, what is the investor interest in what might be seen as these theoretical values, which don’t represent actually real money flows?
Douglas Eger:
Well, I’d argue that they’re most fundamental of values because if we don’t have a functioning ecosystem, we don’t have a functioning economy. We may not even survive on the planet. So what we’ve said is, and I think most people agree with this statement, that finance is an agreement to agree between a willing buyer and seller. And we’ve seen that proven with new asset classes, all the digital NFTs and all the different coin offerings, whatever the precept is between a willing buyer and seller becomes true. And what we’ve said is we can measure these values, we can measure the assets. I’ll give you a good example of the type of valuations that would take place.
Costa Rica recently did a study of their ecosystem services from all their protected areas. And the annual production of ecosystem services were about $14 billion a year. That imputed to an asset value because these are long lived assets and they go through years discounted back, and that’s a asset value of 845 billion. Now, the problem is exactly what you said. No one’s charging rents for that. And we said, think of this like a company that doesn’t pay a dividend. What are you actually buying in Berkshire Hathaway? You’re buying a share. You’re hoping the price goes up related to the production of the underlying investments that Berkshire Hathaway has made. You’re not getting a dividend. You’re not looking for a cash flow. Bob Herz, the former chair of FASB, gave me a statistic that tells you the way our markets had been moving in the equities. When FASB was formed, price to a book was about 80% of the listed value of companies on average. Today it’s 12%, it’s expected to fall under that.
So the majority of values we’re looking at are not captured in current financials. Nature needs to be included in a different way. So it’s a bit of a paradigm shift for people to say, Hey, my value is going to be the appreciation of this stock based on how much ecosystem service it produces. What’s the value of the underlying asset that appreciates over time, because nature does that, as opposed to depreciating? So we put together this framework to say, investors, if you believe that nature has value, and many have raised their hands and said, “Yes, we do.” And if you can buy off on this idea that your investment will appreciate because of increased production of ecosystem service moving from degraded to more productive land, protecting areas, making sure they’re protected for the long run, all of these different management structures, along with the inherent value that nature does appreciate, is the driver of the equity based on the underlying productivity of the asset.
Just like we do in equities today. But we have to make that shift because otherwise, we’re going to have to wait for governments around the world to agree to price on every single ecosystem service in the correct way. That causes a tax essentially on the current generators of wealth, and they don’t like it. So if you have regulation of taxes, there’s just so much you can take from that. We want a direct investment in nature to produce wealth within a natural market, but allow people to value an intact forest, an intact coral reef, whatever that people value and will find out through price discovery, just what that value is.
The Mint:
So if I understand this right, you’re saying that over the last whatever period, 10, 20 years, that the traditional relationship between investment and payment of dividends has disappeared and people are, I suppose, classically investing in companies that get bigger and bigger, the values get bigger and bigger, but they don’t pay dividends. Therefore, you get capital gains from it. In a similar way, there’s an expectation, I suppose, that ecosystem services will become more and more important going forward, presumably because they’ll become valued more as we see a lot of the worlds becoming more degraded. Then by investing in them, other people want to invest in them, you will get asset inflation effectively in a way.
Douglas Eger:
Yeah. I wouldn’t say necessarily inflation. I mean, there is a scarcity theory. I don’t think that works as well for nature. If you are valuing nature and scarcity, you would say that one elephant was more valuable than a healthy herd of 70, and we know that’s not true. Or a single acre of rainforest is more valuable than a functioning larger ecosystem. We need to flip that a little bit and say, this asset is productive. We can measure it in financial terms and apply that to a framework that investors are used to.
And so, as we’ve gone out to investors from, be it family offices, DFIs, sovereign wealth funds, funds that are dedicated for ESG or sustainability, and very interestingly, those that have no mandate in that direction, they’re saying, “We’re looking for an investment directly in the things that will derive climate change to a solution, to protect biodiversity, to change agriculture from extractive to regenerative.” We present this exact framework, and they say, “We understand the logic.” Is everyone going to jump in and do that day one? Probably not. Not everyone jumped into digital assets in the beginning, right? And that’s a much less tangible value. That’s an algorithm and a computer as opposed to that which makes life on earth possible and enjoyable. I think we have a better value equation.
The Mint:
But I suppose digital economics has been around the ability to make money through advertising and through selling information about consumers, all that stuff. Do you think people or also your investors are going to say, well, let’s see what real revenues we can get. I mean, if you could get revenues…
Douglas Eger:
Sure. There’s optionality within this. When I was talking about digital assets, I wasn’t talking about Google and Facebook.
The Mint:
All right.
Douglas Eger:
I was talking about buying a Bitcoin or an Ethereum. We’re looking at that market is now what, over three trillion dollars of asset value based on computer algorithms and scarcity of mining. It’s a much less tangible asset and less vital. So what we’re looking at here is, we know how to measure nature’s value. I think the optionality that we can look at is, one day, just like the carbon market, we’ll price in all 38 major ecosystem services. That’s one future.
The other is, that won’t come about and people will be comfortable with the flexibility of financial instruments to capture that value through an equity structure in a natural asset company. Because we just don’t have time for the world to agree. I don’t think we’re getting there with climate. We’re certainly not getting there with biodiversity. And if we’re going to get to a resilient, fairer, less bubble prone economy, we’re really going to have to employ the capital markets. The thing that got us in trouble is the only engine strong enough to get us out of trouble, the way we see it.
The Mint:
So money will be invested and this money will be used to restore ecologies, to protect them and so on. And that is an ongoing, there will have to be an ongoing flow of money in if you like, won’t there?
Douglas Eger:
Yeah. If you think about as, you raise money around a protected area for a government. So governments that have been good stewards, they have primary forest or good coral reefs, they’re not being rewarded for that today. We’re providing the ability of that asset to be turned into financial capital. So it’s actually, we’ve talked natural capital, but it’s actually natural assets. We wish it was financial capital and natural capital. In that process, there’s money. That can be invested in, let’s say an endowment, so that park or that protected area, that bio corridor is forever managed. That’s one aspect of it.
If there’s more money based on green wealth and there’s significant green wealth out there, it could be invested more traditionally in sustainable development. So regenerative agriculture, things that would give a return. And then we can look at a future that’s bifurcated, where eventually, we’ve priced in the value of nature, we’ve started to address externalities by looking at the true cost and the relative values of land use. Right now you can’t really look at a forest for its production of ecosystem service. You can only look at it for, can I cut it down and develop it? Can I make timber? Can I get mineral extraction from it? That makes a false economy because it’s missing major elements. And that’s why we have the problems that we do.
The Mint:
I suppose, if there is a drive to obviously gain revenue, there’s a question of, if you control something, there is the potential obviously to get people to pay for things that they probably haven’t paid for. Take the value of oxygen. Obviously people get it free at the moment. Except if you live in a city where it’s really, really polluted and you have to pay money to get oxygen chance to be able to breathe. On the faces, that doesn’t seem like a good outcome. Does it? And presumably, at the moment you’re focusing on Costa Rica, is that right?
Douglas Eger:
That’s one, and we’re working in a number of countries.
The Mint:
Mainly developing countries?
Douglas Eger:
No, we have projects here in the US, looking at projects in Europe, and certainly the global south is a priority because a lot of biodiversity is stored there and it’s still intact. So we need to preserve what we have and make sure that the stewards of it, the local populations, the communities benefit from conservation. We’ve written into the rules of a natural asset company that you must share the benefits with the local community. I think one of the drawbacks in the minds of a lot of folks of conservation is it locks that asset away. We can no longer use it. We need to align the interest and livelihoods with functioning ecosystems, as opposed to just extractive alternatives.
We’re working with a native corporation. They’re the stewards of 1.7 million acres in the United States and they’re looking for an alternative to extractives. There could be timber, there could be gold, there could be other minerals. And they go, “That’s not really in keeping with what our culture is and our heritage.” If we could get value for the land and the services it’s providing to the world through this financial instrument, we’re in. That’s what we’re doing with carbon right now. We’re just trying to make it a natural market that doesn’t require sovereigns to come in and price set. So that we can work more naturally, create new capital based on nature, as opposed to just transferring from one agent in the economy to the other, which has its limitations.
The Mint:
I just wonder, going back to your point at the beginning that you’re looking to align interests, I suppose I find it difficult to see that your investors won’t require some perspective. Because presumably, to do various things like provide benefits locally, to work collaboratively, to avoid negativity, et cetera, requires some level of caring, I guess, that is not normally associated with a standard investor.
Douglas Eger:
What we’re looking at, and this is what I mean by aligning of interest, if the measurement of the company’s performance is that that asset produces or is restored and it creates more economic opportunity, then we’ve aligned the interest, not to the extractive side or the traditional development and traditional cashflow mentality, we’re saying nature has value. It’s producing goods and services that are consumed around the world. We know that. So it’s in the interest.
You think about a company being formed. And if the stakeholders are the local population, whether it be from a government or direct ownership, either on public or private lands, and we say the equity can be owned by this group, then when we produce more ecosystem services, the investors see their value of their shares go up. The local community says, “I’ve created wealth based on that forest, that grassland, that Marine environment being natural and productive, I now see my interests on the local level aligned with a healthy ecosystem.” Be that agricultural lands or natural lands, and the investors are also aligning their interest because their return, that appreciation of their capital stock is based on how nature is performing, how healthy it is as opposed to what I’m pulling from it.
The Mint:
I wonder if this sounds to me almost more like an art market or something like that, where that somehow in a way nature becomes [inaudible] beauty or the people say, “I want to invest in something that is beautiful.” Do your investors, would your investors, I suppose, value that relationship and knowing exactly what it looks like and all that sort of thing and maybe put something on their wall, how would they get that?
Douglas Eger:
I think you’re looking at like NFTs or digital assets that are similar. It differs from the art market in the sense that art, yes, moves from unpriced to priced when you sell it in a transaction. But this is a productive asset that produces goods and services. So taking your analogy, if you’re painting produced food, fresh water, if it produced genetic potential, flood risk reduction, climate stability, all of those things, then I would say, yes, that’s a good analogy.
Nature is much more than just an asset that’s non-productive. That’s why it can benefit from active management. And it’s a different asset than those binaries, gold, paintings, residential real estate that you own that you’re not renting out. There’s a use value, but you’re waiting for the appreciation. If we look at all investments, what drives an investor is they think that investment will appreciate. They’ll make money. And if we can show how this is driven forward, and they’re real metrics that are based on real science and real economic value, then I think we have a very good way to align the interest and produce for investors, what they’re looking for, a return on investment. And get around some of the problems that we’ve had where philanthropy’s not enough. We can’t fill the hole with philanthropy and just good intentions.
The Mint:
I suppose it comes down to the fact. I suppose the value of thing is what people perceive it to be valued. It is about perceptions, isn’t it? I was thinking actually, art, people would argue, feeds the soul. It’s central to culture, our identity and all sorts of things, isn’t it? And I suppose nature as well, a lot of people approach their relationship with nature from an aesthetic viewpoint as well. Don’t they?
Douglas Eger:
Yeah. I would say spiritual, cultural, and aesthetic. If you look when you do an ecosystem service valuation, those are values that are included. We can say that if you own property that overlooks a natural area, your values are higher. If you’re in New York city, apartments that have a view of central park have a higher value. Why? Because we appreciate those things. So if we start to accumulate those values and in a systematic way report how they’re growing or shrinking, depending on how management goes forward, we’re doing that. You said something very important and it’s very true, because I think sometimes we get locked into finance as if it were biology, chemistry, or physics. It’s natural law, it’s a social invention. It is something that between willing buyers and sellers and by social agreement, the underlying becomes true.
So if there is a subset of the world, and I think this is a growing subset, that believes nature is valuable and we have to fix these problems and they can invest directly in it and they see that price appreciation, then we open the door to that future where we’ve now incorporated the value of nature through the ingenuity of a financial instrument, which people have been innovating for a long, long time. This is just a natural evolutionary step of trying to include nature’s value, in this case, through natural market function.
The Mint:
Brilliant. Well, thank you very much, Douglas. That is fascinating. Not really expected that take on things and I will certainly reflect on it. And it’ll be fascinating to see how your project proceeds.
Douglas Eger:
Great. Well, I appreciate having the time to speak with you and enjoy the questions.
The Mint:
Thank you.