Willy Diddens explains how beauty is in the eye of the investor.
On September 14, 2021, the New York Stock Exchange presented a new financial instrument that could lead to the undisputed supremacy of financial capitalism, the Natural Asset Company (NAC).
The NAC is a corporate structure designed to hold the rights to “ecosystem services” provided by natural assets, such as food, pollination, tourism, or clean water. It has been developed in collaboration with the Intrinsic Exchange Group (IEG) whose investors include the Inter-American Development Bank and the Rockefeller Foundation. It has also developed a comprehensive toolbox to ensure the transformation of natural assets, or nature as such, into financial capital (see also our interview with IEG founder Douglas R. Eger).
This financial innovation comes at a time where Environmental, Social, and Governance (ESG) factors are increasingly relevant for (institutional) investors in search of profitable and stable assets. IEG estimates the global benefits of “nature’s economy” at $512 tr annually, as compared with $125 tr of the “traditional economy”. The asset value would be $4,000 tr and $512 tr respectively.
NACs form a fundamental departure from more traditional economic approaches to ecological issues. In the Dagsputa Review or in Doughnut Economics the economy is embedded in, and interacts with, nature. But the NACs will engulf nature as a financial asset. It is no longer valued in terms of the goods and services extracted and the monetised externalities, but includes nature’s “intrinsic value”, defined as: “the umbrella for values not yet identified or quantified as well as values such as cultural, social, aesthetic, spiritual, etc.” By definition, it is a total appropriation of the natural environment in question.
NACs form a fundamental departure from more traditional economic approaches to ecological issues.
IEG foresees the application of the NAC approach to “natural areas”, “working areas” and “hybrid areas”.
Natural areas are to include land and marine ecosystems such as forests, grasslands, wetlands, coral reefs. Assigning monetary value to a vast array of “services” provided by these ecosystems should attract investments for their preservation and restoration. The services would go all the way from food, water, wood, climate mitigation, recreational and visual benefits to soil formation.
Assigning monetary value to a vast array of “services” provided by these ecosystems should attract investments for their preservation and restoration.
Working areas mainly address agricultural land and deal with the transition from traditional agricultural production to a “regenerative” one. The Earth’s soil is the most important agent when dealing with carbon dioxide emissions and storage. Present agricultural practices like tilling and the use of fertilisers and pesticides, together with deforestation and the thawing of the permafrost are the main sources for the soil to release carbon. NACs aim to redress and mitigate these developments and induce an increased carbon sequestration by the soil.
Hybrid areas integrate natural areas, working areas, and built infrastructure in a single project. The value of these hybrid areas will be determined by the synergy between the different forms of land use: agricultural, residential, parks, administrative functions, supporting infrastructure.
The way a NAC works is quite straightforward. First, you will identify and value a natural asset that the NAC will manage. Its size and demarcation should be such as to realise the intended ecosystem services or environmental goals.
Then you will address and formalise the governance issues. Negotiations between the stakeholders such as governments, investors, inhabitants and NGO’s will decide upon the management structure, property issues, voting rights and related issues. IEG suggests that for public land, concessions may be issued, like in the case of mining companies; for private land the property could be transferred.
Finally, the NAC will launch an initial public offering (IPO). An IPO allows the NAC to raise capital from public investors. It will generate the financial means to manage the natural asset and to fund projects to realise the intended ecosystem services. Through the IPO, natural capital turns into financial capital and will subsequently be valued by the price mechanism of the financial markets.
Through the IPO, natural capital turns into financial capital and will subsequently be valued by the price mechanism of the financial markets.
At the presentation of the NAC, IEG announced that interested parties have already emerged. It initiated, in partnership with the Inter-American Development Bank, talks with the Costa Rican government. The intended NAC could involve an area of land of about 400,000 hectares reaching from the Atlantic to the Pacific Ocean. It is about 8% of the surface of the country.
Why Costa Rica? The Costa Ricans have a tradition of environmental awareness and the present government is showing its commitment by co-chairing, with France, the High Ambition Coalition (HAC) for Nature and People. The UK acts as Ocean co-chair, incorporating the Global Ocean Alliance it leads into the initiative. The HAC involves more than 75 countries and aims at protecting at least 30% of the world’s land and oceans by 2030 (30×30 target). It is a popular initiative among philanthropists: nine philanthropic organisations under the leadership of Bezos’ Earth Fund have pledged $5 bn in its support. So, it is the best possible testing ground to showcase the success of a NAC.
What will be the impact of the NACs? On one hand it is an innovative instrument to overcome the problem of underfunding the possible solutions to climate change, loss of biodiversity and so on. On the other hand, by financialising nature, the rules of the game change radically, from the primacy of politics, international law and democratic debate to the rules of the financial markets.
The balance of negotiating power when setting up a NAC is heavily distorted. The (institutional) investors, banks and equity funds dispose of an enormous financial power and only one goal: to secure the profitability of the investment. The government and public entities on the other hand have to trade off a variety of goals, from national sovereignty to social and economic goals, within the constraints of limited resources and generally high public debt.
The future NACs harbour citizens of the respective countries: farmers, fishermen, indigenous people, some with formalised property rights, while others are custodians of their ancestral lands. Many of them do not practice regenerative production to be able to compete on the food markets, which are not ruled by the same high environmental standards. What will be their future? They could be subsidised to facilitate the transition. They could be bought out, be subject to legislative measures or simply be evicted if they don’t hold formal property rights.
The institutional weakness of public bodies in the face of the exuberant growth and concentration of financial capital threatens to lead to a dramatic shift of power beyond the control of democratic institutions. And this in a situation where even the beauty of nature will be a commodity.