Although humanity places a huge intrinsic value on nature, collectively humanity has not always been very good at protecting it. Putting a price on nature could be one way to solve this problem, especially in the case of deforestation.
A recent report by S&P Global Ratings points out that measures to account for natural capital could encourage more forest-friendly farming practices, which in turn could contribute to the global fight against climate change.
The rationale for this approach is that it allows nature to be included in the appreciation of wealth. While gross domestic product is a key measure of short-term macroeconomic activity, it is not a comprehensive indicator of the value of an economy’s assets.
For example, GDP may capture the economic output generated by nature’s deforestation and livestock production, but it does not take into account the depletion of natural assets required to generate that productivity. This is especially important considering that global economic output is 15 times higher than in the 1950s, when the assets that support that production quickly depleted.
The rationale for expanding the wealth assessment to include all stocks of capital, including stocks of produced (machinery and buildings), human (knowledge and skills) and natural (plants, animals and non-living items) capital such as minerals) is that it provides a more holistic picture of prosperity. And for this very reason, ensuring the sustainable use of natural resources and preserving nature should be a major concern for all policy makers and investors.
As the environmental and societal impact of biodiversity loss becomes more apparent, it makes sense to apply a monetary value to this loss. This approach is very similar to carbon pricing, which seeks to internalize the impact of carbon dioxide emissions to encourage better management of resources. To demonstrate the pricing measures of natural capital accounting in practice, beef produced in the Brazilian Amazon was used as a case study in the report.
Brazil is the second largest beef producer in the world behind the United States. Between 1991 and 2005, it is estimated that around 80 percent of deforestation in Brazil was linked to the expansion of pastures for beef production.
The Amazon contains around 40% of the world’s remaining rainforest, but deforestation peaked in ten years between August 2020 and July 2021. This rate of deforestation is of great concern given the vital role that the rainforest plays in regulation of the global climate.
According to the study, the hypothetical cost of nature loss for Amazonian-sourced beef was $ 4 billion in 2020 alone, or 12% of the income of Brazilian beef processors for the same year. In other words, for every $ 100 of beef related products sold in Brazil, there is potentially an additional untaxed cost of $ 12.
Current financial accounting standards do not recognize this as a charge; therefore, it is not factored into the final cost of the product. Assessing the potential cost of loss of nature when one hectare of Amazonia is deforested, and then using that assessment to more accurately assess the externalized cost of loss of nature could be the first step to incentivize more forest-friendly farming practices. .
More comprehensive supply chain oversight by beef processors and more stringent regulations could offer even greater protection to Brazil’s rainforests.
The sad reality is that the hypothetical cost used in the example of Brazilian beef is not borne by the sector, but rather by society through the loss of ecosystem services. It may also be a conservative estimate given the Amazon’s disproportionate role in regulating the global climate and its potential to trigger a cascade of climate tipping points.
While assigning a value to a standing forest is not without challenges, and the practice of natural capital accounting can certainly be improved upon, it serves to highlight some important points – the most relevant of which is the cost required to replicate. the services of nature in monetary terms. .
Giving nature an economic value should help society better understand the cost of deforestation. Likewise, the principles of natural capital accounting could be applied to other industries that are also heavily dependent on nature – fishing, for example.
This would serve to further strengthen how this accounting approach could be a useful tool in highlighting the loss of nature in multiple nature dependent supply chains. In addition, it will help investors to more accurately assess their exposure to nature-related risks. Further improvements to natural capital accounting, such as detailed assessments of deforestation rates and comprehensive assessments of ecosystem services, would be a laudable next step.
It also allows companies to better understand how they might be exposed to environmental, social and governance issues along their value chain so that they can eliminate or minimize future exposure and remedy damage to the industry. affected ecosystem.
Posted: Dec 9, 2021, 9:00 AM