sustainability – your responsibility.

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Finally we set up the necessary conditions for markets to start taking care of our environment. While we may be rejoicing over the most recent institutionalisation of CO2 emission certificate exchange, I’m afraid financial markets, for various reasons, still have a very long way to go to come to terms with sustainability.

FIRST, despite of the fact that sustainability is supported by nearly everybody by now, the precise meaning of the buzz-word of the past has been blurred. Everybody seems to have his own interpretation of what sustainability means or calls for. While this reflects a lively social discussion culture, the lack of a broadly accepted minimum definition prohibits sound economic calculations.

SECOND, financial markets do not reward savings in non-renewable resources per se, but rather ways to profit from newly arrived business opportunities or the creation of future trends. Brokers may generate CO2 trading commissions; other companies might have developed a new «sustainable» technique, i.e. a particle filter. The net effect of any new technologies upon the environment seems to be far from certain. In many instances ISO certification and higher profits might go hand in hand with higher environmental pressure. Let’s take the CO2 certificates. No doubt, the pressure for ongoing of cost-minimization will exert a CO2 reducing influence, but will this be sufficient to reduce the overall production of CO2 ? Are we really convinced that an extra 10 cents at the gas stations here and in the US will compensate, let’s say, the increased mobility in China? Couldn’t it be that we’re mainly fighting the symptoms rather than trying to tackle basic issues?

THIRD, discounting as an evaluation method is a terrific instrument for the bulk of economic decisions. While the marginal perspective successfully tackles cost issues, it seems helpless, when it comes to systemic problems. In that way, a cost minimizing approach might be prone to fail when confronted with a basic threat of our current culture: the accelerating erosion of biodiversity and thus declining economic health. The crux with this issue is twofold: a) when it comes to evaluating the value or even the significance of healthy eco systems, discounting is prone to give dubious advice; b) the health of ecosystems and biodiversity call for a longterm, multiple usage, commons perspective, which is quite far away from the current standard of green equity funds, i.e. a defined share of a private company which might be sold at any time at a reasonably predictable price.

FOURTH, the scope of the challenge to align the economy with a long-term ecological strategy seems to be enormous. Besides all the legal challenges, any biodiversity related projects would tend to have most layouts now, and any payoffs would not only be uncertain, they would also tend to be in distant future, i.e. net present value would be negative. Thus it is clear that as long as discounting is the overriding criteria for ecological investments, no financial institutions, asset managers, or pension funds would feel able to participate in such an endeavour, even if they would like to.

FIFTH, shouldn’t any financially sound performance of green investment be based on an ongoing healthy, biodiverse environment? Maybe «Eco-Perpetuals» might serve as an element connecting current economic institutional structures and ecological necessities. An institution issuing «Eco-Perpetuals» could agree to upgrade or restore an environmentally degraded eco-system. The initial investment would be compensated by a stream of benefits using this ecosystem over the next 50 or 100 years. Certificates about the entitlements could be traded, but the initial investment could not be recollected, thus guaranteeing the long term perspective of the capital employed. If this construction is backed by a guaranteed minimum rate of return, a kind of ecological investment incentive, this could really be a first step towards an ecologically based retirement scheme. Too theoretical, too idealistic? Well, why don’t we start cleaning up the Baltic Sea? Any objections?

Joachim Schütz ist Chief Economist Switzerland der UBS Investment Bank.