Recognising the value of natural capital

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Recognising the value of natural capital

Patrick Odier - Senior Managing Partner

Patrick Odier

Senior Managing Partner

Published Monday 2 November 2020 in Le Temps Spotlight

The COVID-19 pandemic has laid bare our reliance on nature – what we should see as natural capital – and the economic vulnerabilities associated with it. The virus was created by pathogens jumping from animals to humans, likely due to the displacement of wildlife or the destruction of their habitat. Zoonoses account for more than 70% of emerging infectious diseases and the number is growing. The current crisis is a sad reminder of our vulnerability and how human health, livestock, wildlife, food products and air pollution are all interconnected.  

The current crisis is a sad reminder of our vulnerability and how human health, livestock, wildlife, food products and air pollution are all interconnected

It’s vital that we recognise the value of natural capital and adopt appropriate business models to preserve and restore it. By ensuring that prices reflect the true value of nature, economic instruments can be used to protect it, including at investment level, and promote more sustainable models. Over 50% of the world’s gross domestic product is derived from natural capital. We have now reached a turning point in the planet’s radical transformation, with market, regulatory, consumer and technological forces questioning economic orthodoxy.

By ensuring that prices reflect the true value of nature, economic instruments can be used to protect it, including at investment level, and promote more sustainable models

On the political level, the Swiss Federal Council adopted an action plan this summer for dealing with the effects of climate change. Similar to newsflow on the coronavirus prior the outbreak of the second wave, this move by the Federal Council garnered little attention in the media. Just three days later, on 22 August, we reached Earth Overshoot day, when humanity exhausts nature’s budget for the year.

Models developed by the Federal government show the extent to which climate change is affecting the country. The action plan for the next five years is based on a pessimistic scenario where the rest of the world refuses to implement any additional climate protection measures, leading to an average warming of between 2.6°C and 4.8°C by the end of the century. 

What this means in concrete terms is that our country must prepare itself for an increase in natural hazards and biodiversity loss. Scientists estimate that by 2050, the number of hot days in Switzerland will more than double, depending on the region. Heat waves that led to the record temperatures of 2003 and 2018 could become the norm. Rainfall in the summer will decrease by a quarter, with periods of increased drought creating soil that is less able to absorb water. By contrast, heavy precipitation will become more intense all year round in the future. By the middle of the century, we can expect snow to fall less often and in smaller quantities, while the rain-snow line will rise from 400 metres to 600 metres.

…our country must prepare itself for an increase in natural hazards and biodiversity loss. Scientists estimate that by 2050, the number of hot days in Switzerland will more than double, depending on the region

All these changes will have a direct impact on our economy, bringing risks but also investment opportunities to reverse the trend. Globally, we estimate that current policies and our economic paradigm could lead to the climate damage to the tune of USD 550 trillion, more than the combined worth of all the world’s physical and financial assets today.

Our economies are not yet equipped to recognise the true impact of their own activities and investments. The inability to put a price on carbon is a glaring example of this. The absence of carbon pricing allows the economy to develop in such a way that CO2 pollution is seen simply as a regulatory issue, and prevents us from recognising that our failure to meet climate targets is already changing the biosphere today, and will continue to undermine productivity and increase physical risks.

Gross domestic product (GDP), the gold standard of economic indicators developed by Simon Kuznets in 1937, is still used as the primary benchmark for measuring a country’s economic growth. However, it is of little use when it comes to sustainability challenges because it does not capture natural capital.

All these changes will have a direct impact on our economy, bringing risks but also investment opportunities to reverse the trend

Reliance on nature ignored

Environmental resources such as water, soil, air and biodiversity are fundamental to life on earth and are vital to our development, health and well-being. While much of our economy depends directly on natural capital, many of the same industries that depend on it mismanage it, behaving as if it were a free and unlimited resource. 

Climate change alters environmental systems, which has a direct and indirect impact on human activity and infrastructure. Many of the areas affected – such as water management, soil protection, agriculture, energy, housing, tourism, human health, spatial development, food safety, etc. – fall under the remit of the Federal government. But the central government cannot deal with the consequences of climate change alone. It needs the support of the cantons, municipalities and the private sector working in collaboration. 

The transition to a carbon-neutral economy – i.e. with zero net emissions – will not happen without a complete rethink of industry, business models and their relationship with nature, as well as our regulatory system. The transformation of our economy depends on it. The public and private sectors must work together to move away from an economic model based on resource consumption towards one that is circular, efficient, inclusive and clean (CLIC™). This should cut across party politics and be based on common sense and the interests of society as a whole. Rarely before has there been so much potential as today. Let’s not let this opportunity go to waste!

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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