Natural Capitalism: a viable alternative to traditional capitalism?

The past few years has seen a great outcry against the outcomes of traditional capitalism.  The widening income disparity of the rich and poor (Gini coefficient) has lead to many movements including Occupy Wall Street and even Pope Francis's official statement on global capitalism in promoting exclusion and inequality.  Beyond the impact on society, traditional capitalism has had disastrous effects on the environment and the earth's natural resources.  We have lived with traditional capitalism for centuries (since the 1700's) with a few other economic movements making a mark such as socialism, Marxism and Communism.  These economic ideologies with the exception of capitalism has ended mass hunger and destitution in many countries but is however not sustainable as can be seen in the old USSR, parts of Eastern Europe, Asia and South America to name just a few and still leads to exploitation of natural resources.

With this in mind, what new economic theory can be implemented which benefits the environment and society?  There was recently a very valid and thought provoking article on the RMI website: Fixing the Broken Compass: Finding our way to natural capitalism.  How to incorporate the protection of natural resources into current capitalism thinking is not working, therefore a total overhaul of the system is required. Starting with the basic fundamental concept of the economy: supply and demand meaning that what is scarce carries much more value.  Thus, people are no longer scarce but nature is....a major shift from nature being abundant and people scarce.

With this mind a logical response would be to build pricing signals into the market to reflect the shifts of scarcity.  Amory Lovins who co-authored the article on the concept of 'Natural Capitalism' in the Harvard Business Review, included a road map for solving environmental problems while also generating profit for businesses.

1. Carbon pricing and Cap & Trade

This is the easy and fast way to mobilize the market to take up the climate change challenge.  A big driver is the Carbon Disclosure Project which partners with market forces to motivate companies to disclose the impact they have on the environment and to take action to reduce this impact.  The amount of data the CDP has is staggering and they use this information to give insights to business strategy, investment and policy decisions.  Lately, more and more organizations are placing an internal price on carbon to guide decisions on future investments on assets.  Allocating financial value to carbon emissions is gaining momentum and will become the norm fairly soon.

2. Mitigating risk

Acknowledging the investment risks in established and emergent energy assets is an incentive to shift the focus from traditional to natural capitalism.  Thus an investment in clean energy projects instead of a coal fired power station is more stable in terms of returns and not prone to volatility in fuel prices.  In 30 years a coal fired power station will be facing policy changes and punitive carbon pricing which makes it a very unattractive asset in a portfolio.  And where will Medupi and Kusile be in the next 30 years?  And of course the implementation of a carbon budget designed to restrict global warming to the 2 degress Celsius band, which means that up to 2 thirds of the existing fossil fuel reserves on the planet must remain untouched.  This means a massive balance sheet risk to the biggest economies and corporations in the world today.

3. Market disruption and revolution

As with any market revolution, natural capitalism will require a retooling of the economy. New technologies will break through; new businesses will prosper; new skills will be in demand; new rules will emerge; and new fortunes will be made. At the same time, however, there will be losers: certain established technologies will be rendered obsolete; some established businesses will struggle; skills from a previous industrial age may become redundant; and a certain proportion of economic value will inevitably be eroded, even as new sustainable economies emerge to fill the gap.

Successfully honouring natural capital means we will need to stop falling back to the known and the proven. This will mean unwinding the supportive policies and presumptions that have made the current carbon extraction industries and businesses some of the most financially- productive in the world. We will also need to be prepared to write-off established assets that no longer produce true value because of their environmental impact. We will have to accept that formerly great icons of success, titans of an earlier age, may tumble. Ask those who ran mainframe computer companies or former telecoms monopolists about the cost of disruption and paradigm shift.

In 2009, Royal Dutch Shell executives Gert Jan Kramer and Martin Haigh argued that new forms of energy take a very long time to become material sources of global power supply. But there are signs that this reality is changing, too. The logic of the past, where growing energy supply generally required massive capital projects with correspondingly long lead times, is being overturned.  This is also true in the information technology software industry.  Watch out the big players like SAP and Oracle....less upfront expenditure and faster implementation times are becoming the norm.

Solar panels on the roof of a family home require a much simpler capital sign-off process than coal-fired power stations or fracking wells; they are modular, and are installed “as needed” in a few weeks. More dramatically, returns on investment in energy-efficiency projects often filter through within months, rather than decades, and these projects are gaining traction everywhere from China’s commercial sector to European and U.S. real estate markets. A single LED lamp is not a revolution – but large-scale roll-out of LED lamps is.

4. The Way Forward

The concept of natural capitalism is now centre stage at the GreenBiz forum recently hosted in the US and has become the top priority of sustainability executives.  Current business models rely heavily on the availability of natural resources which are fast becoming exhausted.  Mining, energy and forestry industries are most at risk.  So our unit trusts and retirement annuities offered as products from investment and insurance houses are more and more including 'green' industries in their portfolios as the ROI carries less risk.  The firm Trucost measures the costs of lost ecosystems, air and water pollution and ill health due to the business models of current companies.  50% of companies profits would go to these costs if enforced.

It makes more and more sense to include the conservation of the planet into business models but to convince an asset manager to invest in natural capital is currently a great challenge.  You need to show them that this is not philanthropy but a viable business model.  There is definitely already an industrial upheaval happening due to the high risk of high carbon business and customers increasingly embracing a future of more environmentally and socially responsible ventures.  A framework is already emerging and sustainability executives need to follow an initiative spearheaded by the Natural Capital Coalition, which is developing guidelines it hopes will guide businesses in natural capital valuation exercises. A draft of these protocols should be available by March 2014, and the coalition is using a consultative approach with industry.

The first sector-specific guides related to these protocols will be focused on food and apparel companies, and much of the methodology should be officially available by the end of 2015.  Something South African sustainability consulting companies need to keep an eye on and consider incorporating in their toolsets for current and prospective clients.