How to spend $8.1 trillion and save the world (Part 1)
Nature Based Solutions, Modern Portfolio Theory, and Ergodicity
TL;DR:
Fixable systemic issues are withholding financial capital from flowing in the necessary volumes to scale NbS.
Accounting and ergodicity are two key barriers to funding progress.
We must realign our financial expectations with the dynamics of capital growth (particularly natural capital)
Do you know how much money nature-based solutions (NbS) need to save the biosphere from collapse?
8 of those trillion stacks, up in the image, and then some.
That is a lot of money.
Let’s put it into perspective.
Ending world hunger within the next 10 years amounts to about $330 billion.
Global GDP in 2022 was $100.5 trillion dollars.
The total notional value of outstanding derivatives, at year-end 2022: $618 trillion.
For all the rest, there is Mastercard
Jokes aside, it seems only $133 billion dollars per year are flowing towards the nature-based solutions that can regenerate Earth.
Investing those $8.1 trillion in NbS is the realest economic investment we could aspire to: after all, natural capital, the original capital, is the foundation upon which all human economic and financial growth happens.
Businesses and communities in bioregions urgently need these $8.1 trillion to fund scalable and nodal regenerative development initiatives to grow everyone’s access to abundance.
But they're not getting the investment they need as fast as they need it.
Why?
In part because 84% of this money comes from the public sector, whereas only 14% comes from the private sector.
We need ways for private investors to find NbS financially attractive.
Growing popularity, understanding, and financial viability of these solutions are key factors in making that happen. But it's not enough.
Even though directing investments to select nature-based solutions providers is part of the solution mix to accelerate their growth and generate financial prosperity, it encounters two problems.
First is an accounting one. Money is not the only type of value there is, and the full economic (understood etymologically) value NbS generate cannot be fully captured through exclusively financial accounting.
This holistic view on value includes all kinds of ecosystem services that money accounting is usually blind to. Accurate pricing strategies have thus far failed to be developed for natural systems.
It’s debatable whether or not pricing nature is even morally correct, but certainly for transitioning from capitalism to a life-affirming economy, it’s a necessary step.
A lack of clear, consistent, and repeatable pricing strategies is an important barrier to entry for investors looking to invest in NbS. The Capitals Coalition has a pretty robust framework in development for that.
The second problem relates to how the nature of modern portfolio theory limits the scalability of investment into NbS.
Most investors still structure their investments as portfolios with siloed categories and industries of investments, and proportional risk/reward incentives. This framework of investment leads investors to expect specific financial RoI’s.
But, it's extremely difficult to pin down the RoI of nature-based solutions, which aim to enhance the robustness of ecosystem services and propagate value across society through biodiversity protection and environmental stability.
Portfolios structured as such are prone to ignoring the full spectrum of value generation of investments into NbS.
To make matters worse, the linear mathematics used to predict the financial growth of these investments leads investors to expect unreasonably high growth rates.
This leads the recipients of those investments to allocate their working capital towards value extraction activities to meet investor demand.
Extractivism is part and parcel of the mismatch between the expected rates of financial growth, and the actual rates at which capitals grow (particularly natural capital). It is one of the consequences of a fatal assumption in economics that has been guiding investments for the past 350-odd years.
This financial assumption is known as ergodicity.
Understanding Ergodicity through Nature
If you're like me, you love growing plants and gardens.
Have you noticed that some seasons were better for growth while others were more challenging?
Did you notice how some plants grow better while next to particular plants (eg. Three Sisters) or how the same type of seeds sprout at different times?
This is because an individual plant's life path is significantly affected by unpredictable external factors: soil health, resource availability, weather, temperature, etc…
Some seeds die early; some survive disease and become plants, but never fully recover; others do, and grow stronger, and bear produce.
Where you are today because of the unique path you have gone through in life is the dynamic known as path-dependency. History matters.
As long as your whole garden yields a good crop, it doesn't matter much if one corn plant dies throughout the season.
This is how ensemble averages (garden yield) are different from singular time-averages (one plant’s yield).
When thinking big, we often value ensemble outcomes more. Ergodicity in complex living systems helps us understand that the system's average behavior can be deduced from the trajectory of a "typical" point or a sufficiently large collection of random samples from the system, representing its average statistical properties.
Importantly, that seed’s unique path is influenced by the complex interactions between seed systems.
That is, collaborative dynamics, like companion planting, can stabilize the variability of the system, leading to higher average outcomes.
This is where ergodicity has important applications for financial allocation strategies. This is where there is much work to be done to ensure the $8.1 trillion to be invested in NbS is done so responsibly and effectively.
That will be the focus on Part 2 of this article.
Meanwhile, I invite you to consider these key questions:
To what extent should intersectoral collaborations be formed as part of investment vehicles to ensure the successful development of NbS to tackle ecological degradation and climate change?
In a world where everything seems to be running smoothly, how can we convince investors that evaluating the mathematical assumptions they make in financial projections is severely diminishing their capacity to generate returns?
Thank you for reading! I'd love to hear your thoughts on this post and what kinds of topics you'd like to read about about the Economics of a Solarpunk future!
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To our common best, now and always,
Stefan