Putting a price on natural assets

It can be difficult to measure a return on investment when that investment is made into natural assets such as forests and groundwater, however a new study looks set to change all that.

A research team from Yale University in the US put together a study called ‘Measuring the value of groundwater and other forms of natural capital’, which was published in the Proceedings of the National Academy of Sciences journal. The report was compiled by authors Eli P. Fenichel, Joshua K. Abbott, Jude Bayham, Whitney Boone, Erin M. K. Haacker, and Lisa Pfeiffer in conjunction with researchers from Arizona State University, California State University, Michigan State University and the U.S. National Oceanic Atmospheric Administration. The report aimed to create a way in which the value of such natural resources could be measured.

The team changed the traditional valuation approach to such assets in order to track the value, linking up models of natural dynamics with economic measurements of ecosystem-related items. It is hoped that their unique research will allow policymakers to be able to better evaluate and compare the investment in natural assets, such as forests and fish populations, with other, more traditional investments such as stocks or bonds.

The team show how to place a value on so-called ‘natural capital’ using the example of a groundwater aquifer located in the High Plains of Kansas. The aquifer is an essential natural resource used to support Kansas’ economy, which is largely agriculture-based. The team found that, due to the extraction of groundwater and alterations to management policies relating to the acquifer, Kansas’ total wealth linked to groundwater was lowered by a massive $110 million every year between 1996 and 2005.

Mr Fenichel, lead author of the report and assistant professor at the Yale School of Forestry & Environmental Studies, said: “The idea that we can actually measure changes in the value of natural capital is really important. It shows that in places like Kansas, where groundwater is a critically important asset, there is a way to measure and keep tabs on these resources as part of a larger portfolio. And in a world where data is more and more available, it should be possible to do this more often. I think that bodes well for guiding policies aimed at maintaining all of society’s wealth.”

He went on to say that being able to measure the value of natural capital will enable both governments and the corporate world to redefine spending on conservation as “investments.” The team said that, while the annual losses made in Kansas were significant, the state would have been able to have offset the losses due to investment in other areas, such as infrastructure. Without this new research, there was no way of being able to make this sort of comparison.

“The key is to convert one form of capital to another in order to allow society to continue to consume more in the future. Because that’s what sustainability is really about. It’s about the ability for society to go on producing and consuming in a way that provides at least a constant, or perhaps improving, quality of life. I think we’re laying the foundations for others to go out, collect data, and do the calculations to measure the wealth stored in other natural capital assets,” Mr Fenichel went on to say.

The template set out by this research is able to be applied to a whole range of natural assets and can be used at both national and international levels, say the team.

“I’m not saying it will be easy or that we’re going to be able to measure natural capital prices for everything, everywhere in the world. But I think we’re showing that it’s feasible. And I think we’re laying the foundations for others to go out, collect data, and do the calculations to measure the wealth stored in other natural capital assets,” Mr Fenichel concluded.

GWD Forestry spokesman James Barrett said: “It is exciting that a method to enable a valuation to be placed on these natural assets has been outlined in this report. Natural assets such as forestry are proving to be increasingly popular with investors the world over and any new research that enables a greater sense of transparency into this sector is a major positive.”

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