The Unconsidered Elephant

The elephant in the room is everything we do not count.

When investors say a speculative opportunity is a “sure thing”, most people know to treat their certainty with suspicion. Some prefer to focus on the emotional satisfaction of having come in contact with a “sure thing” windfall opportunity, but it’s easy to see the incoherence: speculation + X = certainty.

In this formula:

  • Speculation = a state of asserted future vision that is admittedly, and necessarily, working from incomplete information.
  • X stands for all dynamic interacting facts and their mutual and compounding implications.
  • Certainty means either that X is a defined picture of all possible variables already settled or that the event has passed and we have clear access to all available evidence of what happened.

Barring omniscience? Speculation is fraught with risk.

But so is any calculation that leaves out, or does not value, critically important influences. 2+2=4 can be flatly wrong, if the units one is counting are too narrowly construed. $2+$2 does not and can never equal $4 if on the way from the first $2 to the second $2, you destroy something worth $400.

When an investor makes the argument that the Keystone XL pipeline is worth more than guaranteeing zero contamination of the Ogallalla Aquifer, that investor is making a claim that a narrow monetary value is worth more than a major body of water that fuels the most productive agricultural economy on Earth.

The elephant in the room is everything we do not count.

If we don’t consider the unpriced non-market value of the Aquifer’s pristine state to be worth anything–or if we discount its value to zero in order to justify the temporary flow of profit from destructive extraction–then we aren’t doing honest math.

On October 14, in the Per Jacobsson Climate Finance Roundtable at the headquarters of the International Monetary Fund, Lord Nicholas Stern criticized the standard practice for building economic models, where he noted “you tend to leave out anything you find hard to capture, which is essentially like saying your best estimate is zero cost”. He described the logic behind that standard practice of counting at zero the cost of anything we don’t know how to count as “obviously daft”.

The elephant in the room is the almost palpable insight that such omissions are in fact an active way of courting serious danger.

So, what measure can we use to judge the relational dynamics between rainfall and financial instruments that move through a speculation-fed market?

Consider the price of bread.

We can’t live without food, which means there is always market demand for its production. So, the water cycle, soil fertility, optimal ecological conditions for the persistence of pollinating bees, and reliable flows of food production are all part of a value chain that is bigger than the rest of the human economy, whether it is counted or not.

If the food price shocks are severe enough, everything else unravels.

  • Mohammed Bouazizi, the Tunisian fruit vendor who set himself on fire in 2010, setting in motion the Arab Spring, reportedly asked in desperation “How am I supposed to live?”
  • The Syrian civil war was ignited by internal migration and economic degradation driven by 12 years of chronic and worsening drought that ravaged the food-growing economy of the country.
  • In retrospect, the way in which commodities markets drove prices down, incentivizing overproduction and coinciding with other unsustainable land-use practices, created the Dust Bowl of the 1930s.

The elephant in the room is everything we do not count.

In the climate-smart economy we are now in the process of building, no investment will be able to ignore non-market values. The Sustainable Development Goals map a landscape of interrelated macrocritical non-price values that underpin all other metrics in any functioning economy. The Paris Agreement process for redirecting national wealth–financial, natural and human capital–into climate-smart practices holds the promise of achieving sustainable resilience and shared prosperity for all nations.

Some things to think about:

  • Sustainable farming practices–including farming to build carbon ecology in the soil–are worth a lot more than standard market analyses suggest.
  • Biodiversity, safe natural habitat for non-agricultural species, such as elephants, healthy watersheds, and the ecology of forests, grasslands, marshes and mangroves, all shape and sustain the human economy.
  • Common practices that depend on externalizing unmanageable cost and harm are becoming very high-risk investments and will be phased out in coming years and decades.
  • Resilience Value is a complex, still emerging measure of overall value, but will become a top-line indicator for major investments and institutions, possibly as soon as 2020.

We must, now, get to know the elephant we have been ignoring, come to grips with the vast and existential weight of non-market values, and commit to making climate-smart investment choices that build future value in a real and reliable way. Serving the market interest means doing this as well and as imaginatively as possible, with no more delay.

[ The Note for October 2017 ]

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