We need a new market system according to Pavan Sukhdev, founder/CEO of GIST Advisory. A market that is not set on just financial success but for once focuses on the whole picture. And the former banker is getting a head start. By putting a value on impacts on natural and human capital, for example.
You are a firm believer of rethinking how business works. What exactly is the problem?
‘The problem is that we base our view of how healthy a company is on only its finances. It’s not in our current market capitalist system to look beyond the financial state of a corporation as an asset owned by shareholders. But a corporation in any shape or form has so many impacts on society. It creates social capital but it can also destroy it. It can put people out of jobs or it can put people into jobs. It can create communities. It can add education and skills to people. It can destroy natural capital, through climate change and biodiversity loss, for example. But the only impact that we measure is the financial impact on its shareholders! It’s a fundamental flaw and to me it seems out of proportion. A corporation is so much more than a money cow. And yet, we only judge these corporations by their financial status. Don’t get me wrong. I’m a banker and a scientist, so I need numbers. We can only manage what we measure. But we need to look beyond the profits and losses. We need to incorporate other, important standards to our current methods of accounting. My main goal is putting an economic value on nature and the services it provides.’
The economic invisibility of nature should end and the value of biodiversity and ecosystem services should be recognized. In what way does that help businesses to survive?
‘When you put an economic value on nature’s services, it becomes visible what the costs are of the alternatives for nature’s services. We can use nature for free, but that doesn’t mean it’s worthless. In other words: it’s got value but it has no price. The problem is that we are so hung up on pricing. We think that everything that has value has a price, and that is simply not the case. The way we can value free goods is to incorporate the costs for the alternatives. If we take into account the goods we need to purchase that are also to be gained in nature, we see the price of it. When you can’t get timber or fuel wood out of the nearby forest, you need to go to a market and purchase fuel wood. The cost of the transport and the cost of the wood is equal to the value of the free wood in the forest. If you look at this example on a bigger scale, the world, you will be shocked. The ongoing loss of forests represents a loss of utility and services to humanity of the order of two to four and half trillion dollars. That’s two to four and a half trillion dollars every year! And this loss has been going on every year for many years. This compares rather significantly with the loss of one and half to two trillion dollars, which is the system loss of financial capital as a result of what is in fact the biggest financial crisis the world has ever seen. So, if we actually acknowledge the costs of polluting and destroying nature and instead use it wisely, we would save a lot of money. And businesses too for that matter.’
But are businesses willing to look at their footprint if it means that they would have to be transparent about it? Wouldn’t it make them more vulnerable than they already are?
‘It takes a lot of vision and guts to be transparent, but there are big companies who are open about their footprint. For example: Puma. Puma has taken this to the next level. They have calculated the effects of their manufacturing and supply chain on society. They’ve incorporated the loss of forest and the impact of pollution on human health. Now that they know what their footprint is, they can do something about it. They can now demonstrate how to reduce theirs. Unfortunately, not all companies are willing to be this transparent, or can’t afford to be. It is why I think that, to be successful, countries need to also look beyond the conventional methods of accounting (i.e. gross domestic product, or GDP). One alternative method that is gaining momentum is “green accounting”, whereby countries incorporate nature’s goods and services into their national accounts. This is done by quantifying the value that ecosystems bring to their economies by accounting for its use, growth or decline. Another important tool of governments are taxes. If governments tax the ‘bads’ and do not tax the ‘goods’, companies are forced to rethink their resources and need to take a look at their footprint. On this front, Brazil and India are beginning to incorporate these methods into their governmental system along with the progressive Scandinavian countries.’
Isn’t this new economic model something that can only succeed in better financial times? Do corporations have financial space for groundbreaking changes?
‘People don’t think of change when all is well. Companies and governments are only inclined to change in crises. They are forced to think differently, to look at different ways of doing business and rethink markets and economics. I firmly believe this is the time to communicate that there is a problem with the current economic model. If we value natural capital, if we see its productive potential and we see its employment potential, we might have the solution in our hands.’
Pavan Sukhdev on the invisibility of nature in the current economy
Pavan Sukhdev, Founder-CEO of GIST Advisory talks about the current economic invisibility of nature. The fact that vital ecosystem services are not accounted for in our GDP and private profits. As a member of the advisory board of TEEB (The Economics of Ecosystems and Biodiversity), Pavan is involved in developing a system to calculate the growing cost of biodiversity loss and ecosystem degradation. This approach enables us to demonstrate and capture the values of ecosystems & biodiversity, including how to incorporate these values into decision-making.