A seemingly innocuous question from a friend set him off. Why do some things have money value and others not? Frankly his text book economic answer did not appease his friend. What he had learnt in economics books did not convince this reknown economist, investment banker and trader either. Since then Pavan Sukhdev, author of international bestseller Corporation 2020 has set out to reinvent P&L’s to include our impact on nature and biodiversity.
You were a banker for many years. How did you divert to this new world of valuation of nature?
My first daughter Mahima, born in 1988, was passionate about nature. We lived in Bombay where it was not so easy to bring nature to her. So we ventured away from city gardens and started to discover dozens of places around Bombay where you can see the wild: you just need to find them. I could see how important nature was for my child and yet how undervalued these places were. Our second daughter, Ashima, at her nursery school in England, got completely hooked on recycling. This was at age 3, when she could not even pronounce the word: she would say she was “lee-cycling”.
A few years later my family moved to Singapore where I managed the global markets division for Deustche Bank. A friend of mine asked me: “As a banker tell me: why are some things are worth money and others not?” I gave the typical economics answer: that money is a store of value and a medium of exchange, that it expresses prices of private goods traded in markets, but that it does not value externalities. But she wanted plain english: what does all this mean?
I realised there and then that our economic lens today simply has no means of recognising all that is valuable. I went back to the work of our oldest economics gurus like Adam Smith and more contemporary ones such as David Pearce, Ed Barbier, and others.
And you did all this while you were still a banker?
One has to make time for the things one cares about. From 2003 to 2008 I read and wrote about the ‘green economy’ and ‘green accounting’, alongside my regular job at Deustche Bank. I met David Pearce in London with a simple 7 page proposal I had written about green accounting for India’s states. To my surprise, he did not laugh at it. He pointed out two or three things I should look at and later directed me to Giles Atkinson, who has advised me ever since. Together with some friends and collaborators, I launched a full study on Green Accounting for India and its states, which became a landmark for any developing nation.
I understood this new way of thinking was going to be crucial for countries like India and China, who were focusing on GDP growth at the expense of nature. The project on India led to me being appointed Study Leader of an international project, TEEB, The Economics of Ecosystems and Biodiversity, commissioned by the G8+5 and funded by Germany and the European Commission. This became a full-scale project for United Nations Environmental Program (UNEP) after its Interim Report in 2008 was very well received at a UN conference. Although I had produced this Interim Reprot while still working at Deutsche Bank, I realized the full project TEEB would require total immersion. I requested a one year sabbatical from the bank, which then became two. It took almost three years to fully step out of the Bank and dedicate myself fully to this life project, and to its micro-economic counterpart, Corporation 2020.
Tell me about your childhood and how it shaped you.
We lived in New Delhi. New Delhi was much smaller then and at my grandmothers´s house we could hear the jackals howl from the thick hedges and the fruit bats flock around the trees in the evenings. Nature was everywhere. Every summer we would go to the Himalayas and I still have memories of my little brother and I walking long hours in beautiful hill stations with my parents.
Today the politicians claim credit for the India’s economic boom and its ‘demographic dividend’, but the secret behind this success is Indian mothers. My mother always said: “study hard and do well”. All mothers encouraged their kids, and we became good students, especially with English and Maths. So when the telecom revolution and the internet came about, suddenly our skills were international and in high demand. I was originally going into a science stream, and my first degree was in Physics at Oxford, but I felt that making a living was going to be harder there, so I moved to finance.
What is Inclusive Green Economy (IGE) and what are natural capital accounts?
Markets can only price private goods and services, not public goods and services. Since we are so dependent on markets to value things, we do not attach value to natural capital like clean air, fresh water, abundant biodiversity, fertile soils and healthy forests – these things have no markets nor prices .
But not everything that has value has a price, and not everything that has a price has much value. Water is highly useful, has great value but almost no price. Diamonds have a high price and no value in use.
The irony is that Adam Smith, the founder father of economics wrote about this ‘diamond-water paradox’ in the XVIII Century! But we have forgotten that wisdom
Because of this non inclusive view of the economy, today we tax the goods not the bads (such as pollution, mining, fossil fuel extraction). Our incentive targets are also not focused on growing natural capital. Our economy actually incentivises fossil fuel usage, subsidizing it several trillion dollars. Basically we do not calculate the impact of our actions on public goods. But this should be the thinking of the future. We need to understand value is different than price. An inclusive green economy also measures the value of natural capital in the accounts of society, and recognizes the importance of inclusion and access to opportunity for all.
In 2012 you published a book called Corporation 2020. The book has been translated into 6 languages. What is it about?
The century from 1820 to 1919 was a period of regulatory changes that shaped the corporation of today and how we think of the economy. In the 1820s in the US the concept of “limited liability” was invented. The essence of this term is that the investor can only lose his original investment – not the full cost of a company’s loss . In 1855 the United Kingdom made limited liability the law. In the 1870’s to the1890s the idea that corporations are free to operate for any purpose, anywhere, for as long as they want was legislated in some US states. Prior to that corporations were established for a fixed time for a fixed purpose. We created a system where the Corporation was an artificial being, with all possible flexibilities, and unlimited upside, but liability of its owners – the shareholders – was nonetheless limited.
Finally, in 1919 we established that the ultimate aim of a corporation is shareholder value. This happened when Henry Ford entered a dispute the Dodge brothers who were minority shareholders of Ford Motor Co. The Dodge bothers took Ford to court for not paying dividends to shareholders (instead all profits were being used to expand capacity, lowering the price of the cars to raise volumes). The court ruled in favour of the Dodge brothers.
A “Corporation 2020” looks at success differently because, unlike the 1920 corporation, its focus goes beyond physical capital. It also measures its public impact: on human, social and natural capital. It also goes beyond shareholder value and looks naturally to the interest of employees, suppliers, customers, the government, society at large and the planet –in short, all of the stakeholders. It is named Corporation 2020 because of the urgency of the problem we are dealing with. I think we have just about 5 years. Most of the changes we need to make have to be made now, and globally.
I would imagine this needs to be looked at globally. No country wants to put itself at a disadvantage.
That is true. We should focus on the biggest sectors that have the greatest impacts to the natural world: energy, palm oil, beef, soya, pulp and paper, etc – and look for global solutions sector by sector. This means getting all key stakeholders along the entire value chain of the sector into one common, negotiated, sustainability strategy: governments, producing companies, and consumer representatives.
One example is palm oil. Today India is the biggest importer of palm oil from Indonesia, the largest producer. Each country wants to keep the biggest economic benefits. So Indonesia taxes crude palm oil higher than refined (RDB) palm oil so that it can gain development value from its industry. India does the opposite, imposing higher import duties for processed oil over crude oil. These tax and tariff wars lead to changes up to ten times per year. And the real issue is lost sight of: there should be higher tariffs for unsustainable palm versus sustainable palm, so that Indonesia’s forest fires stop, people in Indonesia and Singapore can breathe clean air, and the rain forests that are being cleared can instead support the rainfall cycle vital for all of us.
But these two countries can not solve the issue alone as other countries can take up the demand or supply. We could solve the issue of deforestation and move to sustainable palm oil production by reaching agreements between the largest palm oil producing countries, the biggest palm oil importers and the largest purchasing palm oil corporations that incentivize sustainable oil. Such solutions can and should be done on a per sector basis.
For instance, in the coffee sector, Starbucks seeks an industry initiative that solves this problem and achieves sustainable coffee production by 2020.
Please give me some examples of green economy and how we can measure its value?
Healthy forests provide water vapour to seed rainfall, nutrients to feed agriculture, and they keep soil from being washed away. If you cut forests, you would gain some logging value but lose the value of nutrients and erosion prevention. We could calculate fertilizer costs to replace lost nutrients. But unfortunately we just don’t calculate the cost of deforestation for society including what nature could provide to science. 60-70% of today’s medicines come from molecules discovered in rainforests or reefs. This is not normally valued either
What we are doing is just accounting for the value of physical capital, in our GDP and our Profit-&-Loss. So today we are just measuring one dimension of performance. The ‘2020’ corporation instead would report not only the shareholder value but also the impact that it has on all stakeholders. This would mean ‘2020’ corporations would behave much more like communities rather than just as production engines.
I see some early momentum for change. There are some leaders who are experimenting with their ethos and reporting. AkzoNobel just put out a “4D-P&L”report: a study we did for them of their pulp business in Brazil (all 6 large factories); Amata, a forestry company in Brazil will soon be publishing their research; a company in Tata Group also tested our model; the Soneva hotel chain in Asia, and Infosys in India have used our apporach to calculate human and social capital impacts. What all this shows is that a new world is possible.
Do you see a relationship between putting a value on nature and planetary boundaries?
A planetary boundary is like a planetary time bomb. When you cross the boundary you enter a new phase and we don’t know what that looks like nor whether you will last in it. I work closely with Johan Rockström and the Stockholm Resilience Center where I am a member of the board. From their work we see that we are reaching tipping points in terms of the planet. We know emissions cause climate change and they also cause acidification of the ocean. We are seeing loss in marine life and problems with regeneration of coral reefs.
People understand now that a green economy is a necessary solution to address climate change and sustainable development. There is increased focus. Brazil has for instance taken a huge leap and committed in their INDC’s (Intended National Determined Contributions) to eliminate Amazon deforestation by 2030. That has a huge impact on climate change. You see also the growth in investments in renewable energy which are have been touching USD 200-250 billion over the last few years. There are success stories such as Tesla and First Solar. 25 countries are implementing project TEEB and 65 countries that have programs for green economy. But we need to do more with corporations, the engines of the economy.
Let´s talk about the link between poverty and the environment.
Nature is the wealth of the poor. It is their GDP.
We looked at the “GDP of the poor” ( a TEEB metric). In Brazil there are 20 million people that depend on the Amazonian forests. In Indonesia 100 million people as small farmers who benefit from nature, and in India there are 350 million people that are either small farmers or directly depend on forests. In these countries, nature is between 45 and 90% of the “GDP of the poor”. In other words, real development cannot be at the expense of nature. Countries should measure this “GDP of the poor” too.
Is migration to cities a positive thing?
Migrations to cities is natural and if we get our cities right we can lower our environmental impact. This is a good thing. Cities however, disconnect us from nature. We stop valuing water when simply believe it comes from the tap.
What is happiness to you?
This has changed over time. When I was younger happiness was watching my little babies grow. Today their happiness is still very important to me, but happiness would also be to see that the changes that I seek as an economist, activist and thought leader actually happen within the next 5 years.
What is the most underrated value?
The values of Nature and Women.
Nature is the ultimate underdog. It is her bounty that sustains us and it is her bounty that is the least appreciated. The role of women and mothers is very much underrated too.
What is the most overrated value?
Private profits, especially when they are at the expense of public losses.
Do you have a life motto?
I have a life approach, which is to do good. It starts with appreciating value myself (and acting on it) and ensuring real value is appreciated by others, so that future generations will have it too.