Partha Dasgupta: Profit statements don’t consider the impact of a company on nature

UBS envisions a world that puts the well-being of all people and planet at the center of financial and strategic decision making. You have dedicated most of your career to making the case for exactly that world; how do we create an economic system that works for all people?

It has to happen on an institutional scale, all the way from the household up to the international stage. The logic of ecological economics that I’ve been trying to pursue would inform all groups of ways to adapt and change. It’s not for me or anybody to create a blueprint.

We have to experiment with a conceptual framework that is radically different from that which has guided us for the past 70 years.

My reviewabout The Economics of Biodiversity tried to expound a vision of economic reasoning that embeds the human economy in the biosphere in a very essential way.

How come the world is focused on profit for just a small proportion of the population and are we on the verge of reversing this?

Profit per se is not a bad thing. The problem we face is the way that profit is factored in.

An investment project may trash the neighboring ecosystem, but this is not included in the profit statement. It does not take into account the impact of a company or project on nature. That’s the bad news.

Of course, there are other things such as monopoly profits. However, they are much discussed. What I’m saying is the way profits are accounted and measured is wrong and things will go awry because of that.

GDP says nothing about income equality or whether society treats all groups fairly. Should we shift our focus to a broader set of socioeconomic outcomes?

The notion of inequality in economic measurement is old now. If anything, we have too many measurements concerning humans. But nature is missing from these accounts.

We have enjoyed 400 to 500 years of scientific advances and democratic change since the Enlightenment, but one weakness has been an excessive focus on humans as being external to the biosphere. That’s been a tragic mistake.

We need to see ourselves as part of nature.

We’ve inherited characteristics that go back 200,000 years, ever since we were homo sapiens. We are embedded in the biosphere and that sets constraints on our desires.

Could you talk to us about the human economy being embedded in nature and not being external to it?

Conventional contemporary models of growth and the economics of poverty assume that human ingenuity can ensure indefinite GDP growth. My review exposed that fallacy.

It’s become customary for some to say ‘why are you worried about climate change? We can substitute our way, and don’t have to have dirty energy but clean energy with solar panels or wind or waterpower’. There is truth in that, but it is dead wrong to assume this is the framework within which our economic models ought to guide us.

Climate regulation isn’t the only service we enjoy from Mother Nature. She offers a multitude of other services, such as pollination, nitrogen fixation, decomposition of waste, soil regeneration. They are complementary to one another, not substitutable. In terms of biodiversity conservation, we have to care about all these services at once. If you concentrate on one and trash the others the whole ecosystem will start crumbling.

A complaint we hear from the industry is that people issues are less tangible than environmental issues – we don’t have a 1.5 C degree target equivalent for people. Is this a barrier and, if so, do you have suggestions on what the industry should focus on?

I think the claim is wrong. We have targets for poverty alleviation and income growth. The entire language of economic development is focused on the human person. Environmental issues are less tangible, but that’s because we have neglected them.

It is hard to create metrics for humans, but the same is also correct regarding environmental matters. The 1.5-degree climate warming target only pertains to climate change, it doesn’t pertain to the conservation of wetlands or mangroves. If we recognize that ecosystems are assets, that Mother Nature is a gigantic asset, environmental issues will, rightly, concern us as much as asset management. Once we view the economic world through the lens of portfolio analysis, we will see that the right metric for our engagement with ecosystems is their productivity, that is the value of the services they provide to us.

UBS wants to play an active role in changing the system. Do you have any advice for us on how we can be more effective?

I would suggest it is in the financial interest of private companies to cooperate in order to maintain biodiversity.

Many companies’ supply chains start in the tropics, and the ecosystems where these products are produced are related to one another. If one gets into trouble, the next does too. Those problems reduce profitability by if nothing else, increasing financial risks.

Each company may think ‘I cannot control the supply source of my rival, and if they trash theirs, it affects mine adversely’. Ecological risks are positively correlated. Insurance is therefore an imperfect avenue. That tells us companies should cooperate to mutually protect their supply sources. That cooperation might require government support to make a credible agreement, such as declaring the state of supply across the supply chain. Companies that supply food already disclose the contents of the food. Disclosure is a substitute for missing markets. There are mutual gains to be enjoyed by companies in tying their hands by agreeing to disclose the state of their supply sources, which are often fragile ecosystems in the tropics.

I believe that kind of argument is relevant for biodiversity protection. Companies could gain by cooperating and UBS could take a lead in that, by bringing nature actively into the discourse of private companies. There’s a lot to be gained in cooperation, to enhance profits and to reduce risks.

The interviewee is external to UBS and the answers provided do not necessarily reflect UBS’s view.

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