Natural, Social, Financial and Economic Capital
Be local. Think Global.
A Note for the Investment Philosophy: True Economics
Economics has long been the discipline that studies how societies allocate scarce resources to meet their needs and desires. Traditionally, neoclassical economics emphasizes growth, efficiency, and market equilibrium. However, it often treats natural resources as infinite or substitutable, overlooking the critical role of natural capital in sustaining economies and societies. True economics, often referred to as ecological or environmental economics, offers a different approach—one that explicitly recognizes the intrinsic value of natural capital and its contributions to human well-being. True economics fundamentally redefines how we perceive and value resources, bridging the gap between economic development and environmental sustainability. By explicitly recognizing natural capital, internalizing externalities, and promoting policies that preserve ecosystems, it provides a robust framework for sustainable development. Supporting this approach through valuation, innovative policy instruments, and interdisciplinary research is crucial to ensuring a resilient and equitable future.
True Economics differentiates itself from Conventional Economics in several ways:
Explicit Recognition and Valuation of Natural Capital
Conventional economics tends to treat natural resources as inputs or commodities that can be substituted by man-made capital, based on the concept of diminishing returns and technological progress. In contrast, true economics acknowledges natural capital explicitly as an asset that provides essential ecosystem services—benefits humans derive from ecosystems—that are often undervalued or ignored.
Example: The valuation of ecosystem services like water filtration by wetlands or pollination by bees highlights their critical role in agriculture and urban life (Costanza et al., 1997). If these services are undervalued, policy decisions may lead to their degradation, ultimately harming economic stability.
Focus on Ecosystem Services and Externalities
Traditional economics often neglect externalities—costs or benefits not reflected in market prices. True economics aims to internalize these externalities, recognizing the environmental costs associated with economic activities.
Example: Deforestation leads to the loss of biodiversity and climate regulation services. Payment schemes for ecosystem services (PES), such as Costa Rica’s Payments for Environmental Services program, incentivize landowners to conserve forests, maintaining these benefits (Pagiola et al., 2004).
Sustainable Development and Intergenerational Equity
Conventional economic models prioritize growth, sometimes at the expense of environmental sustainability. True economics emphasizes sustainability—the idea that current consumption should not compromise the ability of future generations to meet their needs.
Example: The concept of planetary boundaries (Rockström et al., 2009) defines safe thresholds for environmental variables like biodiversity loss and nitrogen cycles, guiding sustainable practices.
Valuation of Natural Capital
True economics employs valuation techniques (e.g., contingent valuation, hedonic pricing) to quantify the benefits of ecosystems, informing policies that preserve or enhance natural assets.
Example: The valuation of Manila’s mangroves revealed their importance in reducing storm damage, guiding coastal management policies (Yap et al., 2017).
Policy and Management Frameworks
Based on these insights, true economics advocates policies such as eco-labelling, green taxes, cap-and-trade systems, and conservation incentives, designed to align economic activities with environmental preservation.
Example: The European Union Emissions Trading System (EU ETS) internalizes carbon costs, encouraging emitters to reduce greenhouse gases (European Commission, 2020).
True Economics is a perspective that promotes Natural Capital by Quantifying natural assets underscores their value, encouraging conservation over exploitation, integrating environmental costs into economic decision-making leads to sustainable policies, supporting approaches that maintain ecological integrity, such as marine protected areas or forest conservation, developing green markets and payment schemes incentivizes conservation and responsible resource use and like braided science combining ecology, economics, and social sciences to address complex environmental challenges holistically.
Some applications to date are:
Costa Rica’s Payment for Ecosystem Services (PES): A successful program that pays landowners to conserve forests, preserving biodiversity and ecosystem services (Pagiola et al., 2004).
The Natural Capital Protocol: Developed by the World Business Council for Sustainable Development, it provides corporate valuation tools for natural capital impacts and dependencies (WBCSD, 2016).
The Stern Review on the Economics of Climate Change: Demonstrated that avoiding climate change costs through mitigation is economically favourable compared to adapting to climate impacts, emphasizing the importance of valuing natural capital (Stern, 2006).
References
Costanza, R., d’Arge, R., de Groot, R., Farber, S., Grasso, M., Hannon, B., ... & Van Den Belt, M. (1997). The value of the world’s ecosystem services and natural capital.