Even something as basic as clean water, which we all require for survival, depends on nature. Forests, wetlands, and grasslands filter pollutants and regulate water flows, supplying roughly three-quarters of the world’s freshwater.7
In most industries, nature is a critical input that has simply been treated as free.
One company, the shoe manufacturer Puma, attempted to quantify the value of its natural inputs. It is estimated that if it had to pay for the environmental resources it uses, those costs would equal 72% of its net earnings.8
So, what happens if natural systems break down? The consequences extend far beyond individual companies.
Healthy ecosystems don’t just support economies, they can help protect them. Coral reefs and mangroves, for instance, reduce storm damage for coastal communities. When those natural defenses disappear, the financial consequences can be severe.9
What would we owe if we had to pay nature for its work? | Paula DiPerna | TEDxBoston
Entire economies are affected when natural systems degrade. Countries hit by more frequent and severe natural disasters often see their credit ratings pressured as rebuilding costs rise.10 This can lead to higher borrowing costs and long-term fiscal strain. As the ecosystems that make our planet livable come under progressively greater pressure, financial markets can face increasing risk.
But despite this, our economic measures ignore the true cost of environmental damage. Economists call these costs that aren’t reflected in the market price of goods or services “externalities.” In a sense, these indirect costs are “external” because they are rarely borne by the companies, and sometimes not even by the countries responsible for creating them.
And yet the price of these externalities will eventually be paid. As forests are cleared, air and waterways are polluted, and sea levels rise due to climate change, the resulting damage will increasingly be reflected in economic terms. Investors should be aware of these risks.
We live on a finite planet. We need to stop behaving as if our natural resources were unlimited. At current consumption levels, humanity needs the resources of roughly one-and-a-half Earths to sustain itself into the future. Unfortunately, one Earth is all we have.11
Investors, regulators, and companies are starting to wake up to this truth. There is a growing movement to treat nature as an economic asset — sometimes called “natural capital” — that must be measured, managed, and carefully preserved.12
Investors can play a role in this process. As shareholders, they can engage with companies to better understand their dependence on natural capital. They can pressure them to measure and report on their environmental impacts. They can encourage transparency and push for better risk management. And they can favor businesses that are positioning themselves for a future where natural resources are no longer treated as free and infinite.
Sustainable funds that employ these strategies are available to many investors today. Investing in such funds is one approach that some investors can consider.
This isn’t just about values — it’s about long-term financial outcomes. A healthy economy ultimately depends on a healthy planet.
Article by Leah Cantor, the Sustainability Manager for EP Wealth Advisors, where she works with advisors and clients to create value-aligned portfolios with socially and environmentally responsible investing principles.
She holds a Master of Science in Sustainability Management from Columbia University and an undergraduate degree from Reed College. She is an advocate for using business as a force for good by adopting a triple bottom line approach that places equal emphasis on people, planet, and profit.
This content is for informational purposes only and does not constitute investment advice. Investment decisions should be made based on individual circumstances.
Footnotes