Do Natural Asset Companies Pose a Threat?

In response to growing concerns about climate change and other environmental problems, an entrepreneur, Douglas Eger, has proposed a new kind of corporation, a Natural Asset Company (NAC). Eger is the CEO of the Intrinsic Exchange Group (IEG), an organization that, in partnership with the New York Stock Exchange, “is providing a platform to list ‘Natural Asset Companies’” in order “to take them public and enable the conversion of natural wealth into financial wealth.”

As the idea has been publicized some have expressed misgivings. One group of critics views NACs as a kind of capitalist plot to profit from peoples’ desire to protect the environment, while continuing to exploit it. A careful analysis of the concept of NACs suggests that there is little reason to fear them. Neither should we expect them to accomplish much of what their proponents hope to accomplish.

An NAC can be created via an Initial Public Offering (IPO) that is “tied to a specific tangible asset” such as a forest, farmland, or marine ecosystem. The proceeds will be used to manage the property containing he asset.

What purpose is to be served by natural asset companies? According to IEG, their primary purpose is to maximize “the production of ecosystem services to which they have rights and authority to manage.” This includes services like carbon capture, soil fertility, and water purification. NACs can be used to “protect, expand and restore natural areas” and to “convert agriculture to restorative practices.” They can even be used in built areas to invest in infrastructure improvements such as storm water control, sewage treatment, and greenspace to improve the quality of a nearby body of water.

But there are already a variety of ways that investors can profit from natural assets while producing ecosystem services. One can own a natural asset and manage it in an environmentally sensitive way while earning income by charging a fee and allowing people to engage in various activities involving the asset, such as hiking, hunting, fishing, or canoeing. One can monetize natural assets by selling timber, raising crops, or grazing livestock, while still preserving the soil and producing clean water that can flow from streams and springs. Even if the income earned from activities that might be permitted on the land where the asset is located is low, it may increase in value in the future, and owners may be able to earn capital gains from preserving the asset(s) for a variety of possible future uses.

Another purpose for NACs is to provide a way for investors to financially support sustainability, that is to emphasize the production of ecosystem services that cannot easily be sold, such as clean water, clean air, habitat for birds, etc. But one can already do this by contributing to a nonprofit corporation that buys and invests in managing land or resources in a sustainable way. An individual or a non-profit organization can purchase a conservation easement to limit what can be done on specific tracts of land and compensate owners for certain kinds of management practices.

The one purpose that makes some sense is coming up with a way of accounting for the value of ecosystem services. Some proponents speak in terms of monetizing natural assets. But the reason it is hard to monetize the ecosystem services provided by natural assets is that those services are not sold in a market and are not likely to be. If NACs are to be publicly traded, their value must depend on what private investors are willing to pay for the shares they own. That value likely depends on the satisfaction they receive from knowing how the asset is managed combined with an expectation of what future investors might be willing to pay for shares.

Whether or not NACs can do a better job than existing institutions of estimating the monetary value of natural assets, they could provide standardized information on ecosystem services. Robert Herz, former chairman of the Financial Accounting Standards Board (FASB), says, “We believe it is absolutely critical to provide investors in Natural Asset Companies with relevant, reliable and understandable information on the flows of the ecosystem services they produce and their stocks of natural capital assets.” Providing such information will be costly at least at the beginning, which would likely reduce the financial return that investors can earn on such investments.

Unless government gives special privileges to natural asset companies, such as tax breaks, there does not appear to be any reason to fear harmful consequences. If we take the stated objectives of proponents at face value, they do not seem to be a threat. If asset owners are willing to bear the opportunity cost of not using the full productive potential of land or resources, that is their prerogative. It could be a problem, however, if this is just a new way for government to provide some kind of preferential tax treatment or subsidies to those who manage resources in a way that may enhance incentives for either locking up the resources or exploiting them so as to harm the environment in a way that is contrary to what their proponents say they are trying to accomplish.

Some proponents see NACs as offering something for everyone -- “dividends that could contribute to sustainable livelihoods for local community members, be reinvested in the NAC, shared with the government and invested in new protected areas.” But a more realistic assessment should acknowledge that in many cases providing ecosystem services, will, at least in the short run, offer a very low rate of return for investors, if the asset is going to continue to provide those services for the long run. Preserving and in some cases restoring the capacity of a natural system to provide future services will require reinvestment of much of what is earned from the natural asset. In most cases, expectation of a decent rate of return from NACs would require patience over a very long time. But that same outcome and possibly more could likely be obtained with current ownership arrangements.

Tracy Miller, Ph.D. (Economics), is Senior Policy Editor at the Mercatus Center in Falls Church, VA, and a Senior Fellow of The Cornwall Alliance for the Stewardship of Creation.

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