Contact

Menu

Article

The value of natural capital

The rising frequency and intensity of natural disasters raises the question: Is the value of natural capital sufficiently considered in economic planning today?

September 4, 2023

Holger Frey

CAIA, Senior Portfolio Manager, Credit Suisse Asset Management

On June 7, the sky over New York turned into an apocalyptic orange as the most destructive wildfire season in Canada on record burned down vast areas of forests, sending thick bands of smoke over the US and even Europe.1,2 While several cities like Chicago, Detroit, and Minneapolis saw their air quality ratings jump to the worst levels worldwide, the wildfires also released a record 160 million tons of carbon emissions into the atmosphere.3 The rising frequency and intensity of natural disasters raises the question: Is the value of natural capital sufficiently considered in economic planning today?

Natural capital is managed inefficiently 

Conventional economic models inadequately account for nature’s indispensable role in the economy – and even partly neglect the fact that the economy relies on nature. Agricultural, ecological, and economic models developed by the World Bank and the Natural Capital Project show that most countries inefficiently utilize their natural capital due to factors like misallocated subsidies, insecure property rights, and inadequate protection of critical areas. The undervaluation of natural capital and the absence of proper pricing mechanisms further exacerbate the problem. Rectifying these inefficiencies and closing the gaps hold immense potential.4 Additionally, given ecosystems function as natural carbon sinks, countries could sequester 78 billion tons of carbon – almost two years of global emissions – if they were to close efficiency gaps (see figure 1, increase CO2 storage from 429 to 507 billion tons of CO2-equivalents). This would provide crucial time for decarbonization efforts without sacrificing economic growth or food production.5 New framework developments like the United Nations “System of Environmental-Economic Accounting” (SEEA)6 are leading the way on how to recognize natural capital as an economic asset.

Fig. 1: The global efficiency frontier: What the world can achieve

Sources: World Bank Blogs (2023). Based on "The global efficiency frontier: What the world can achieve". Nature’s Frontiers, Achieving Sustainability, Efficiency, and Prosperity with Natural Capital. Published on June 27, 2023, link, retrieved on July 24, 2023

What is natural capital?

Natural capital refers to the stock of natural resources and ecosystems and can be broken down into three main categories: 1) Renewable resources that can replenish themselves naturally, such as forests, fisheries, and clean water sources; 2) non-renewable or finite resources, such as fossil fuels (coal, oil, and natural gas) and minerals; and 3) ecosystem services, which are benefits provided by ecosystems, such as air and water purification, climate regulation, pollination, soil fertility, and flood control. The concept of natural capital recognizes the value of nature beyond its intrinsic worth and emphasizes the interdependence between the environment, society, and economic prosperity.

The economic value of nature

With approximately USD 44 trillion in economic value generation – more than half of the world’s gross domestic product (GDP) – in some way dependent on nature, the importance of nature for doing business is far higher than often assumed. More precisely, 15% of global GDP (USD 13 trillion) would be highly affected by a loss of natural service, while moderately dependent industries generate 37% (USD 31 trillion) of global GDP. At the top of this list sit the construction (USD 4 trillion), agriculture (USD 2.5 trillion), and food and beverage (USD 1.4 trillion) sectors.7

The rising price tag of natural disasters

Dealing with the rising number of natural disasters is becoming ever more costly. The records of insured losses caused by natural catastrophes show an upward trend for the last decades with an annual average growth of 5%–7%.9 The total economic loss from natural disasters worldwide stood at USD 275 billion in 2022, of which 45%, or USD 125 billion, was insured (see figure 2).10

Fig. 2: Growth in global natural catastrophe insured losses (2022 prices)

Sources: Credit Suisse; Swiss Re Institute. Based on: Swiss Re Institute (2023): In 5 charts: continued high losses from natural catastrophes in 2022; published on March 29, 2023; link; retrieved on July 24, 2023

The direct cost of dealing with natural disasters is rising in many areas, visible e.g in the annual federal fire suppression spend in the US, which is growing 8% per year since the 1980s.11 However, the real damage could conceivably be much greater as lost business, lost tax revenues, and prolonged depreciation of property values are not sufficiently accounted for.12 Greenhouse gases (GHG) released into the atmosphere are also not included in current numbers. The release of stored carbon from burning trees exacerbates the already elevated carbon dioxide (CO2) levels in the atmosphere. With estimates suggesting a significant increase in wildfires in Canadian and US forests, the carbon emissions from these events are threatening global carbon budgets. Using the example of the 160 million tons of carbon released by the Canadian wildfires in June 2023, this equates to USD 4.7 billion referencing the price of California carbon credits (USD 29.30 per ton) or USD 15.8 bn referencing the European Carbon price (EUR 88.24 -equivalent to USD 98.82 - per ton).13

The multiplier effect of climate change

This year’s list of severe heatwaves and droughts, record-breaking wildfires, devastating floods, and other natural catastrophes reads like the screenplay for a science-fiction disaster movie – and the year is far from over. Looking at the example of wildfires, climate change has created favorable conditions for such events as increased dryness, or aridification, has caused the atmosphere to become “thirstier” for water, draining moisture from trees and thus making them more vulnerable to fire.

A study conducted on California’s wildfires points out the link between climate change and the increased area burned and concludes that without human-caused greenhouse gas emissions, the burned area would have been significantly smaller. These findings reinforce the urgency of addressing climate change to mitigate the devastating impact of wildfires. In fact, new research suggests that approximately 40% of the forest area burned by wildfire in the western part of the United States and southwestern Canada in the last 40 years can be attributed to carbon emissions associated with the world’s 88 largest fossil fuel producers and cement manufacturers.14

Unbox the Future

Powerful megatrends have the potential to change every facet of our daily lives. Join our award-winning investment team in their pursuit of identifying the most innovative pure-play companies that may add long-term growth potential and portfolio diversification. 

 

Technologies for a nature-positive economy

While homeowners contemplate measures on how to reduce fire risk e.g., fire-resistant materials on roofs,15 the key question is: Which products can help manage natural capital more efficiently?

Throughout history, technology has driven economic transformation, boosting productivity and growth. Technological advances expand frontiers, enabling greater production of economic and environmental services with the same resources.16 The use of technology can pave the way for a nature-positive economy in two main ways. First, it enables a significant improvement of data collection and interpretation, which is breaking into new areas with the help of artificial intelligence (AI). The immense growth of data availability enables new methods for assessing the economic and health effects of landscape changes. Initiatives like FireAId demonstrate how AI can significantly enhance wildfire prediction and prevention. Using more than 400 variables from 14 different datasets, AI-based models lead to an 80% accuracy rate in predicting wildfires 24 hours before their outbreak.17

Fig. 3: Interactive wildfire risk map: A milestone in AI wildfire prediction and prevention

For illustrative purposes only.
Source: World Economic Forum: The power of AI in wildfire prediction and prevention, 2023

Second, innovative technologies can transform the use of resources in the most relevant industries. Agriculture, retail sales and services, and the power sector contribute significantly to natural capital depletion. To mitigate this, adopting plant-based alternatives, advanced seed technology, and reducing food loss is crucial. Following regenerative agriculture practices can generate value totaling USD 65 billion annually according to McKinsey. In addition, switching to solar and wind power cuts not only the consumption of finite energy sources, but also saves water and reduces nutrient pollution, providing an estimated USD 95 billion in annual value. Addressing plastic waste through reduction, recycling, and alternative delivery models benefits the retail sector. All these strategies promote sustainability while considering economic factors.18

Conclusion

Investment possibilities

Find investment products that suit your personal needs. Choose from our extensive range of investment solutions across all major asset classes, and access all product-related information.

Get in touch with Asset Management

Contact us to learn about exciting investment opportunities. We are here to help you achieve your investment goals.

All investments involve some level of risk. Simply defined, risk is the possibility that you will lose money or not make money.

To the extent that these materials contain statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties and are not a guarantee of future results/performance.

Every investment involves risk, especially with regard to fluctuations in value and return.

The individuals mentioned above only conduct regulated activities in the jurisdiction(s) where they are properly licensed, where relevant.

1 Orange Skies and Burning Eyes as Smoke Shrouds New York City - The New York Times (nytimes.com), accessed on July 18, 2023
2 Canadian wildfire maps show where fires continue to burn across Quebec, Ontario and other provinces - CBS News/, accessed on July 18, 2023
3 Canada wildfire season is now the worst on record - BBC News, accessed on July 18, 2023
4 Investing in nature improves equity, boosts economy | Natural Capital Project (stanford.edu), accessed on July 18, 2023
5 Countries can grow in harmony with protecting the planet (worldbank.org), accessed on July 18, 2023
6 System of Environmental Economic Accounting |, accessed on July 18, 2023
7 Half of World’s GDP Moderately or Highly Dependent on Nature, Says New Report > Press releases | World Economic Forum (weforum.org), accessed on July 18, 2023
8 Construction, agriculture and food and beverage. Source: WEF, 2020
9 Continued high losses from natural catastrophes in 2022 | Swiss Re, accessed on July 18, 2023
10 Natural catastrophes and inflation in 2022: a perfect storm - Swiss Re sigma | Swiss Re, accessed on July 18, 2023
11 Perimeter Solutions, First Quarter 2023 Earnings Call Presentation; https://ir.perimeter-solutions.com/news-events/events-presentations, accessed on July 17, 2023
12 Natural catastrophes and inflation in 2022: a perfect storm - Swiss Re sigma | Swiss Re (wfca.com), accessed on July 18, 2023
13 Live Carbon Prices Today, Carbon Price Charts • Carbon Credits, accessed on July 18, 2023
14 Almost 40% of western wildfires traced to carbon emissions - Los Angeles Times (latimes.com), accessed on July 18, 2023
15 Wildfires and Your Home: How to Protect Yourself | Barron's (barrons.com), accessed on July 18, 2023
16 World Bank Group, Nature’s Frontiers, 2023, accessed on July 18, 2023
17 The power of AI in wildfire prediction and prevention, accessed on July 18, 2023
18 Nature in the balance: What companies can do to restore natural capital | McKinsey, accessed on July 18, 2023
19 With the “pure-play” concept, we mean companies which have at least 50% in revenues directly attributable to the corresponding theme.

This is a marketing communication.

Source: Credit Suisse, unless otherwise specified.
Unless noted otherwise, all illustrations in this document were produced by Credit Suisse AG and/or its affiliates with the greatest of care and to the best of its knowledge and belief.

This material constitutes marketing material of Credit Suisse AG and/or its affiliates (hereafter "CS"). This material does not constitute or form part of an offer or invitation to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, or enter into any other financial transaction, nor does it constitute an inducement or incitement to participate in any product, offering or investment. This marketing material is not a contractually binding document or an information document required by any legislative provision. Nothing in this material constitutes investment research or investment advice and may not be relied upon. It is not tailored to your individual circumstances, or otherwise constitutes a personal recommendation, and is not sufficient to take an investment decision. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable.CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. The information provided in this material may change after the date of this material without notice and CS has no obligation to update the information. This material may contain information that is licensed and/or protected under intellectual property rights of the licensors and property right holders. Nothing in this material shall be construed to impose any liability on the licensors or property right holders. Unauthorised copying of the information of the licensors or property right holders is strictly prohibited. This material may not be forwarded or distributed to any other person and may not be reproduced. Any forwarding, distribution or reproduction is unauthorized and may result in a violation of the U.S. Securities Act of 1933, as amended (the “Securities Act”). In addition, there may be conflicts of interest with regards to the investment.In connection with the provision of services, Credit Suisse AG and/or its affiliates may pay third parties or receive from third parties, as part of their fee or otherwise, a one-time or recurring fee (e.g., issuing commissions, placement commissions or trailer fees). Prospective investors should independently and carefully assess (with their tax, legal and financial advisers) the specific risks described in available materials, and applicable legal, regulatory, credit, tax and accounting consequences prior to making any investment decision.

Singapore: This document is not a prospectus as defined in the Securities and Futures Act 2001 of Singapore ("SFA") and has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply, and this document should not be construed in any way as a solicitation or an offer to buy or sell any interest or investment referred to in this document.
Copyright © 2023 CREDIT SUISSE. All rights reserved.

Distributor: UBS Asset Management (Singapore) SGR, 9 Penang Road; Singapur 238459