One way in which it could do so is described in the Natural Capital Declaration (NCD). Presented to the world communty at Rio+20, it invites private and public sector actors to work together "to create the conditions necessary to maintain and enhance Natural Capital as a critical economic, ecological, and social asset." It suggests that, at present, financial institutions do not sufficiently "understand, account for and therefore value, the risks and opportunities related to Natural Capital." Members of the financial sector, it says, are key stakeholders in future discussions about valuing and protecting Natural Capital.The Natural Capital Declaration is well meaning. There is a much to be said in its favour. Business and finance should certainly integrate, value and account for their impacts on nature in order to be truly accountable to stakeholders and the wider society in which they participate. Finance and business interests need to do more to understand their direct and indirect impacts on the natural environment, incorporate these into decision-making, and work together to develop integrated reporting of their sustainability performance, on which they should be judged.
A new language for a new agenda?
The NCD marks a new phase in the dialogue taking place at the interface of environmental concern and practical economics. The 2005 Millennium Ecosystem Assessment (MA) offered a useful vehicle to convey the world of business and finance into the environmental debate. By adopting the new vocabulary of ecosystem services and natural capital environmentalists hope to engage policy makers and practitioners on their terms, in language they understand, as they search for common ground upon which their cause can find some much-needed grip.
So the concept of natural capital, beloved by environmental economists, is finding its way into the practice of finance and investment. Is this a good thing? I would argue not. The language of ecosystem services and natural capital seeks to establish a new business-led agenda for protecting the natural world. But it risks alienating at the same time those who prefer to speak in their native tongue. Although the NCD doesn't assume valuation must mean monetary valuation and market solutions, it certainly point us in that direction. Do we really want to go there?
The NCD supports the work of The Economics of Ecosystems and Biodiversity (TEEB) project. The latter originally set out its stall to develop monetary or economic valuation (EV) as a practical tool for decision-makers at all levels. It acknowledges the limitations and difficulties EV faces in capturing all of the values society places on nature. Interestingly, the TEEB for Business report has surprisingly little to say about EV and much to say about other tools for managing risks and opportunities related to biodiversity and ecosystem services (BES). Improving environmental management and performance does not require us to place a price on environmental effects. Biophysical measurements and indicators still have an important role to play in environmental accounting. A sustainable business is not inevitably one that measures everything in dollars and cents. In fact, doing so may deceive us into thinking trade-offs exist where really they do not.
To be fair to the authors of the NCD, they are not suggesting that placing a monetary figure on the environmental impacts of business decisions is the only way to insure they are taken into account. But by couching the environmental aspects of business and finance in terms familiar to the accountant and economist, it does restrict the meaning of "value" to something commensurate with other balance sheet items. In so doing it fosters a commercial attitude towards nature commodified as a business risk or opportunity.
An ecosystem services and natural capital view of the natural world perceives nature as a flow of benefits and ignores other sources of value. It regards nature as a resource and a means to a human end. It acknowledges the values human beings may bestow or confer on the less tangible cultural or spiritual "services" provided. But it refuses to locate objective value in nature itself. It both risks displacing civic virtue and denies the environmental ethic that motivates many to care for the natural world.
It is vital that environmentalists successfully engage with the world of business, finance and economic policy. We must be prepared to work upstream and tackle the ultimate causes of environmental degradation. But at its root, the ecological crisis is a moral or spiritual crisis. A BES or natural capital approach denies us the richer ethical framework necessary to make proper judgements over competing values and priorities. Pragmatic it may be but should environmentalists really be jumping so enthusiastically on the natural capital bandwagon? An incomplete theory of value
By referring only to the stock and flow of benefits provided to society by nature we commit ourselves to a particular notion of value. This purely economistic approach views value in instrumental and strictly anthropocentric terms and denies or downgrades other dimensions of nature's value such as its intrinsic or inherent worth; or its existence or preservation value. While a total economic value (TEV) approach to economic valuation recognises non-use values (including existence, option or bequeath values), it can only accomodate these in welfare maximising utilitarian terms which aggregate individual preferences revealed by a willingness-to-pay (WTP).
Many economists are well aware that people don't attach meaning and value to nature in the same way they do to a second hand car. For some this is a technical problem to be solved by better survey techniques and more sophisticated econometrics. For others it reflects a fundamental flaw. Secondly, in reality nature embodies a plurality of possibly incommensurable values which cannot be collapsed on to a single measuring rod - money.
Back in the real world, people express attachments, affiliations, meanings and significance to the natural world in a variety of ways. Those values cannot be quite so easily revealed or stated by observing real markets or creating pretend ones. Finally, by reducing nature and the environment to a commodity for which a price tag should be attached we set the stage for market-based mechanisms to arbitrate on how and where the environment is protected as cost-effectively as possible. We are clearing a path for the further advance of markets across the social landscape. Is this really what the environmental movement wants to see?The authors of the TEEB Foundations recognised the ethical limitations of EV (Chapter 4) and proposed a framework in which the economic value attached to nature could be assessed separately from socio-cultural values that may require different approaches. Assuming environmental values can be separated out in this way (which they can't), TEEB is not terribly interested in the latter and has ruled them out-of-scope.
So we are faced with the prospect of adopting Natural Capital as a banner for environmental responsibility and developing EV toolkits for implementing it, as the WBCSD has already done, by disenfranchising those that adhere to "non-economic" values. This seems to be completely at odds with mainstream Corporate Social Responsibility with its emphasis on stakeholder engagement and legitimation. Finance and business it seems is preparing to say, in effect, if society can't express the meaning and value it places on its shared natural heritage in monetary terms we're not interested in what it thinks about it. This sounds like a formula for silencing stakeholders rather than engaging with them.
So much for the common good
If the forgoing argument above can be summarised by asking "who's values count?", a second argument against the NCD might ask "whose risks count?". The NCD advances the principle of enlightened self-interest in purely consequentialist terms. Financial institutions, it says, do not sufficiently "understand, account for and therefore value" the risks and opportunities related to Natural Capital. It's pretty clear whose opportunities they are referring to. But are the risks those internal to the business or the risks to wider society posed by environmental considerations otherwise overlooked in business decisions?
No necessarily so. A financial institution that attempts to value the social and environmental externalities associated with a proposed investment may certainly choose to modify it decisions in the light of these. But unless a decison-maker possesses a highly sophisticated sustainability appraisal model, these externalities may not have the influence on decisions that natural capital advocates hope for. Such a model would have to correctly identify, measure and monetise all the known social and environmental effects which rebound on the internal financial merits of a proposal within the appraisal horizon. In reality, many of the environmental effects of a proposal may be subject to uncertainty and therefore feature as risk factors, the materiality and significance of which will be subject to a degree of judgement in the appraisal process.
TEEB suggests that accounting for natural capital helps to identify the trade-offs present in business decisions. Perhaps, but it doesn't necessarily resolve the conflict between competing priorities. Neither does valuing the impact on nature or quantifying the associated risks necessarily guarantee success in financial terms. The report of TEEB in Business and Enterprise acknowledges the difficulties in determining the impact of Biodiversity and Ecosystem Services (BES) risk management on the value of companies that undertake it.
Would it be more realistic to look towards environmental policy or regulation to internalise these externalities, for example by assigning property rights or adjusting internal costs through a fiscal instrument that reflects the full social or environmental damage? The NCD instead sees the role of governments to demand better disclosure by companies of their dependence and impacts. It urges them to enforce fiscal measures and incentives to encourage financial institutions to integrate, value and account for natural capital. This is to be welcomed but it is no guarantee of environmentally responsible decision-making.
What about environmental virtue?
A related problem is that the language of Natural Capital does not really lend itself to alternative appeals to environmental responsibility. It clearly wants business to "do the right thing" on behalf of nature. But it does so by appealing to the benefits it derives from nature and the associated risks to the business if it fails to do so. By restricting itself to a utilitarian, consequentialist framework it severely curtails the scope of its moral power. In describing the responsibility of business in strictly economistic terms, the natural capital approach is a retrograde step back towards business-apart-from-society. Even if businesses do account for the full costs of its business decisions, they are still business decisions. They may still be driven and guided by private, internal goals and their outcomes judged accordingly.
It seems to me that unless business genuinely views itself as a part of society with a wider remit which reflects common goals and a shared conception of the good, a truly sustainable future will remain illusive. Many of those who ply their trade as corporate social responsibility professionals do so in spite of the prevailing cultural values of the businesses they serve. I suspect most authors of sustainability reports see theirs as a higher calling to serve society at large.
These are the shared values that ought to be reflected the character and personal commitments of senior business leaders and key decision-makers. A sustainable future requires an ethic of leadership that embraces a more enlightened role for business-within-society in pursuit of the common good. It is not enough to simply reach for new tools. While an expanded toolkit will give decision-makers the opportunity to act for the common good, it doesn't ensure that they will do so. Widening the scope of reporting and disclosure will certainly help stakeholders and society hold business leaders to account. But the evidence suggests that the greatest perceived benefit to a business of its sustainability programs is its reputation, not its bottom line. That the two are linked remains an article of faith. Business leaders should do the right thing because it is the right thing. New tools help them demonstrate that they have done so.
Disengaging society
If BES and natural capital points us towards economic valuation to help society find the path to sustainability, we are placing a huge amount of faith in economic science. Viewed as social theory, that would be troubling enough. But even if we accept EV on ethical grounds, are the techniques actually up to the job? They place a high degree of confidence in our understanding of complex ecological systems. Such complexity requires sophisticated econometric models to accomodate uncertainty, interdependencies, cumulative effects, and irreversibilities - yet are highly contingent on initial conditions or assumptions. The WBCSD's Guide to Corporate Ecosystem Valuation is as premature as it is misguided.
For others, extending the reach of markets to environmental goods is the next milestone to aim for. Blinkered faith in value-neutral markets denies that there are any moral limits to markets nor any spheres of society in which they shouldn't tread. A purely economic approach to valuing nature, as advanced by TEEB and to which the NCD aligns itself, squeezes out the possibility of alternative civic institutions and, arguably, a more democratic approach to resolving environmental dilemmas. Theirs is a world in which natural values are revealed rather than formed. They are pre-existant in economic man's preferences, waiting to be discovered, rather than emerging from social processes of argument, learning and judgement.
It is true that deliberative processes or multi-criteria analysis (MCA) offer an alternative value-articulating institution to economic valuation. But accepting that natural values are multi-dimensional or socially constructed also allows them to remain "out there" where they belong in the civic square, rather than as objects to be studied in the economists' private laboratories. Such an approach engages with society to discern the value it places on nature impacted by business decisions.
The TEEB Business report suggests that management of BES risks requires detailed analysis and broad stakeholder engagement. Its authors suggest that EV may help clarify the values at stake and raise awareness of potential risks, but notes that EV methods have not been adapted to business needs. Even if they had, it is not at all clear how business can really do both. Can business adopt an EV approach whilst also engaging with stakeholders without running into a conflict over whose values count?
