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On the Environment

Tuesday, February 28, 2012
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The Next Global Debt Crisis

By Guest Author, P.J. Simmons, Chairman, Corporate Eco Forum

Today’s global sovereign debt crisis is keeping a lot of government and business leaders up at night. But another global debt crisis is brewing that, while invisible to most CFOs and finance ministers, threatens to unleash long-term economic hardships that make today’s recessionary worries seem trivial.

I’m referring to the economic collision course we’re on because of systemic, global patterns of over-borrowing from planet’s “natural capital” and asset base—a remarkably productive network of land and water systems that annually produce a staggering $33-$72 trillion worth of “free” goods and services that we depend on for a well-functioning global economy. Because these non-man-made benefits aren’t bartered and sold in the human marketplace, their value is exceedingly hard to monetize on corporate or government financial statements. So we generally don’t. But that shortcoming in accounting doesn’t make the value of these assets—or the cost of losing them—any less real: As we’ve seen with debacles like Enron and the derivatives meltdown, our imperfect accounting practices can sometimes get it dangerously wrong.

At risk are critical life-support systems that are also the lifeblood of our global economy. These natural land and marine systems, thanks to more than four billion years of planetary R&D, far outcompete man-made technology in their capacity to churn out—at scale and affordably—vital goods and services we need for global economic stability and growth. Without charge, this living natural infrastructure works behind the scenes to purify massive amounts of precious drinking water and breathable air; generate abundant and stable supplies of raw materials and commodities integral to supply chains; replenish fertile soil and fish stocks needed to meet growing food demand; buffer people and businesses from the worst effects of floods, droughts, fires and extreme weather events; provide barriers to the spread of disease; maintain awe-inspiring destinations that fuel tourism; and house a treasure trove of biological information that propels scientific and medical breakthroughs.

In short, these assets are priceless. Literally. And that is the problem.

Having developed habits of taking “nature” for granted, we have collectively taken from it for free, drawing down Earth’s natural capital and mismanaging natural assets as if they were endlessly renewable. Yet even this planet’s remarkable natural systems—unique in the known universe and incredibly resilient—cannot sustain damage beyond certain thresholds. Eventually, they break down. Only then does the market begin to understand the full economic value of what we have lost, as what were once dismissed academically as “externalities” suddenly become real, costly burdens.

How much is our current mismanagement of natural assets costing the global economy today? The most recent U.N. estimates are around $6.6 trillion a year—the equivalent of 11% of global gross domestic product—through effects like contamination of water supplies, loss of fertile land through soil erosion and drought, and supply chain disruptions from deforestation and overfishing. The damage could skyrocket to $28 trillion by 2050 under business as usual, which would eclipse the economic damage expected from climate change. However sobering the numbers, in the abstract they are merely statistics affecting someone else and therefore still largely off of most government and business leaders’ valuation radar screens. But the costs hit home when ecosystem degradation translates into lost lives or illness, when scarcities bring supply chains to a grinding halt, when homes are destroyed or jobs lost, or when preventable damage from natural disasters overwhelms the budgets of insurers and governments.

Today’s more farsighted business leaders grasp what’s at stake. They know that investments in protecting and maintaining natural systems are mandatory to ensure continued opportunities and prosperity for businesses, communities, and even nations—not optional philanthropic acts. They understand that just as we invest in maintaining our critical human-built infrastructure, whether roads, bridges, power plants, or orbiting satellites, so too must we be vigilant in safeguarding natural infrastructure to avoid crippling costs down the road. They see the business logic in taking action today, to avert tomorrow’s balance sheet risks and even to seize new revenue opportunities as the demand for environmentally restorative solutions escalates.

Coca-Cola, for instance, is investing in preserving healthy watersheds to ensure the long-term availability of fresh water for its business and the communities in which it operates. Mars is investing tens of millions to advance sustainable cocoa farming practices to head off supply chain disruptions. Darden Restaurants (owner of Red Lobster) has made protecting healthy ocean systems a top business priority, acknowledging that “seafood sustainability is essential to the continued success of our business.” Weyerhaeuser now expressly manages forests for wood production but also for “the ecosystem services they provide.” In 2011, Puma became the first company to issue an “environmental P&L” statement, and Dow Chemical announced a $10 million collaboration with the Nature Conservancy to develop practical tools to help businesses better “assess the value of nature.”

These forward-thinking companies are among a growing list of those getting out ahead of governments in forging solutions to the accelerating “natural debt” crisis. To add to the momentum, the Corporate Eco Forum that I chair—a membership group of 80 large companies with combined revenues of over $3 trillion—announced a new initiative on the “Business Logic of Investing in Natural Infrastructure” at the Clinton Global Initiative in September. In the first half of 2012, we will work with our diverse membership to catalyze a new round of private sector-led commitments to safeguard natural assets, to be announced at the June 2012 Earth Summit, in Rio de Janeiro.

Turning around the brewing natural debt crisis will require broader participation from visionary business leaders, especially when the world’s governments are consumed by more urgent short-term economic challenges. But time and again, the private sector has shown its enormous capacity to innovate fast to solve big problems. Let’s hope this time is no exception.

A version of this article originally appeared on Forbes.com

Posted in: Innovation & Environment

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