Natural Capital in the Digital Economy: Green Squared

In the blockchain world we are all caught up with the growth of digital assets like Bitcoin and crypto. Yet the vast wealth of the world is based in the natural world.

Whereas Bitcoin has taken over a decade to climb towards its all-time market cap high of just over $1T, half of the world’s entire Gross Domestic Product relies on natural assets to the tune of $44T every single year.

Is natural capital boring and obsolete, or an under-served and under-appreciated asset class that will soon erupt in relevance, just as NFTs have?

What is Natural Capital?

Natural assets are all the assets that have their source in nature. Soil, timber, minerals, air, water, marine products, and biodiversity.

We aren’t eating, drinking, or breathing today without natural assets being involved. Some people live and breathe Bitcoin, but natural assets are the real deal.

Professor Ian Bateman, Professor of Environmental Economics, Director of the Land, Environment, Economics and Policy Institute (LEEP) and Director of the South West Partnership for Environment and Economic Prosperity (SWEEP), describes natural capital as:

“Natural capital is the relationship between environment, the economy, and people’s wellbeing.”

So, whilst natural assets are the assets that nature provides, natural capital is the value that natural assets represent to the everyday operation of human life.

How to Value Natural Capital?

And here we hit the underlying existential crisis of society, which is how to value, in human terms, something which transcends human existence, because we exist because of nature, and not nature because of us. The value of natural capital is, from one perspective, even greater than the value of life itself.

The 600+ page “The Economics of Biodiversity: The Dasgupta Review” published in February 2021 conveys the powerful message that economies, livelihoods, and wellbeing all depend on nature as our most precious asset. In fact, if nature is responsible for half of the world’s annual GDP, if nature is at risk so is the entire global economy.

Our extractive, one-sided engagement with nature endangers the prosperity of everyone including future generations.

In response to the report, Dr Akinwumi Adesina, President, African Development Bank Group stated:

“How we measure wealth determines how we seek it and what we reward.

The conventional approach of using Gross Domestic Product (GDP) to measure wealth has spurred significant growth, but at the expense of the environment and the quality of life. Nobody breathes or eats GDP.

We must change our wealth construct to take nature into account.”

Likewise, Inger Andersen, UN Under-Secretary-General and Executive Director of the UN Environment Programme, stated:

“The message from the Dasgupta Review on the Economics of Biodiversity is loud and clear: we must fix our relationship with the natural world or destroy human prosperity, well-being and our future.”

If our demands far exceed nature’s sustainable capacity to supply, one reason is that our consumption of nature has been so ubiquitous and all-pervading for generations that it has simply been too vast to attempt track.

The true value of natural capital has been left out of the economic equation for too long, leading to potentially disastrous consequences.

The wealth of the modern world has come at a cost of the natural world, and it’s now vital that we start to accurately and meaningfully measure the biggest benefactor and contributor to human prosperity - nature.

According to Dr Ken Henry, one of Australia’s most impactful and progressive economists, and a director of Accounting for Nature:

“The reason that the environment gets degraded typically is because there is no requirement that the true cost of environmental degradation is factored into commercial decision making.”

Even the most basic human rights depend on environmental rights. Without caring for the environment, no one can ensure access the abundant water, fresh food, stable climate and clean air that the world needs. “More than 800 million people—11% of the world’s population—can already feel the consequences of climate change in their daily lives, including increased frequency of natural disasters, prolonged droughts, and irregular weather patterns,” cites Global Living.

Losses due to disasters from natural and man-made hazards on average cost governments over USD 300B globally each year and 5 billion people are expected to face water insecurity by 2050.

Yet if an institution, business, or corporation tells us that they are acting to benefit nature with our dollar in hand, for example with carbon offsets, how could we as a customer trust that they are being truthful? It comes down to two critical factors - measurability, and trustworthiness of data.

Natural Capital Decision-Making Design

Considering imminent disaster, and our utter dependence on the environment to sustain life, speaking about “incentivising taking care of nature” seems a bit inadequate. And yet, from an economic design perspective, this is exactly what will need to happen, and on a grand scale, if the true value of nature is going to be factored into the natural capital equation.

The economic world is going to have to get excited by nature again; but not to extract it, to conserve it, and that’s exactly what is happening.

“I think the next year or so will see an absolute explosion in the development of financial instruments that reward farmers for soil carbon, other sorts of carbon, and also enhancement of the environmental condition,” said Dr Ken Henry, former Australian Treasurer Secretary under the Howard, Rudd, and Gillard governments.

Imagine if, just like when “crypto Twitter” goes nuts every time Bitcoin goes up, down, or scratches its nose, “nature Twitter” did the same whenever the price of soil, carbon, water, or biodiversity credits moved?

How do we make that happen?

Prices would need to be discoverable. And those prices would need to be able to be compared to the movement of prices over time (market history).

We would also need to know transaction volumes (market liquidity); how much was in the market and how much was stored “in wallets” off the market. We’d also need to know that we could trust that date, in that the ledger was secure, and immutable, hack resistant.

These features are all being built into Civic Ledger natural capital exchange marketplace.

The impact of Blockchain Technology

CEO and Co-Founder Katrina Donaghy of Civic Ledger, the creators behind the first water markets pilot on blockchain, states:

“Blockchains provide a robust and reliable audit trail. Each time an event is executed by smart contract, its related transaction is written to the ledger, and these become the state of the market. Because we don’t own the blockchain, it is an independent system of record.

The infrastructure is distributed around the world so blockchain is censorship and hack resistant. Unlike opaque and siloed markets, blockchains give people a shared view of what is going on so that no one has more power than anyone else.”

Blockchain technology represents a paradigm-shifting technology for natural markets.

Its most powerful impact will be to de-risk investment through market transparency and shift monetary capital away from manufactured production into natural world regeneration.

Currently, financial investments in the improvement of natural capital account for only about .1% of global GDP. At the same time, global governments spend around US$500 billion on activities, including subsidies and investment, which are harmful to biodiversity, and private finance provided for activities that are harmful to natural assets was more than US$2.6 trillion in 2019.

Yet, funds like HSBC Pollination Climate Asset Management are turning the tide, with the mandate to create the world’s largest dedicated natural capital asset management company, investing up to $6B over time.

“What is investable in natural capital is evolving,” says former Pollinator Founding Partner and current U.S. Treasury Climate Counsellor John Morton. “That which was not financeable five years ago is becoming investable today.”

For decades, the economic incentive to degrade the environment has been called the “Tragedy of the Commons” since Garrett Hardin, an evolutionary biologist by education, wrote a scientific paper in the peer-reviewed journal Science in 1968. It’s time to change tack and implement blockchain and open data natural asset exchanges as the “possibility of the commons.”

Right now, someone on the street might know the value of Bitcoin (to the closest $10,000), but they won’t know the price of clean air, freshwater, or soil alive with microorganisms.

As air, water and soil appear to be freely available, we don’t know the historical value of them and how precious they are, so we ignore their life-time value.

Civic Ledger will be the ledger that all civic life takes place on - the basis for how we measure and evaluate all major resource journeys across the environment and the economy. If we know the growing value of the natural assets we depend on, more will be done to treat our resources with respect. Knowledge is power, and Civic Ledger will a trusted source for the knowledge we need to conserve our world.

In June 2021, Civic Ledger was awarded as a World Economic Forum Technology Pioneer 2021 on the basis of its work building markets of tomorrow with blockchain technology. We invite impact VCs, natural asset market operators, and NGOs to connect with us and discuss ways to partner and collaborate with Civic Ledger.