What is the present value of nature?
“How much do I care about the well being of future generations?” If you’ve been thinking about climate change, sustainability, and the state of our natural environment, you may have asked yourself that very question. The question gets to the root of a term called intergenerational equity. Considering the value you place on this concept entails the consideration of our planet’s productive resources (i.e. forests, clean water, nutrient-rich soil) in the stewardship of current generations that cannot be recreated by humans, but that can be used to improve the welfare of humans and society today. However, the manner in which these productive resources are used today can impact their future productive capacity. At its core, considering intergenerational equity means addressing whether or not today’s generations work to preserve and/or enhance the natural resources, assets, and cultures that are at their disposal, or whether they deplete these resources, assets, and cultures for their current gain at a rate that limits the ability of the resources to provide benefits in the future.
Implicit in intergenerational equity is a time-oriented valuation of our natural environment, cultures, and institutions. A good example to illustrate this is a rainforest. A rainforest today provides natural capital and resources to humans in forms such as land, trees, carbon storage, biodiversity, oxygen generation, and tourism. Rainforests can also be chopped down to provide land for mining and other industrial operations, large-scale soybean farms, or cattle grazing. When the rainforest is chopped down it stops providing some benefits to humans (carbon storage, oxygen) in exchange for others, and the rainforest’s value is irreversibly altered to improve the welfare of people living today. In determining whether or not to chop down rainforests and pursue industrial activities, it is prudent to consider not only the benefits that stand to be gained by investors and society at large, but also the cost of using the rainforest today and reducing the productive capacity of that rainforest for future generations. There is not only a cost and benefit relationship to consider, but also a moral principle of equity. How much do we owe future generations?
A similar theory also makes its way into any introductory finance class in the form of the basic time-value of money principle. The central idea behind the time-value of money is that an average rational person would prefer to have a benefit – say $100 – in their pocket today, rather than a benefit ($100 in their pocket) in one year’s time. In other words, the present value of the $100 is greater than the future value of $100. Analogously, when a person decides to delay working on an important project for work to spend an hour on Facebook, they are making a valuation that that hour on Facebook is more valuable to them than working on the important project. This basic concept of having something today being more appealing than having something tomorrow can be found throughout society. Finance, economics, and investment classes just happen to teach it in terms of money. Interestingly enough, the time-value of money principle has served to emphasize profits (benefit) today over wealth in 100 years time, and it is driving the depletion of our natural resources for future generations.
Financially, when a person is making an investment decision they will estimate all of the projected costs and revenues incurred over the course of the investment’s life cycle. The person will then perform a calculation to determine if the total revenues exceed the total costs of the project (see here for a basic overview of this analytical tool). If the revenues exceed the costs, the investment is viewed as profitable. As you may have deduced, the process that people use to make these kinds of decisions – the way they reach the conclusion that $100 today is better than $100 in one year – will determine if that decision is truly in their best interest. If costs or revenues are missing, or estimated based on incorrect assumptions, the present value of the investment will be incorrect and may lead to a poor investment decision. Extending from that, if today’s investment and management decisions do not properly evaluate the value of our natural capital to humans, we run a very real risk of failing in our stewardship of these resources for future generations.
People make decisions every day that implicitly place value on the present and future value of an action. People decide if they should study now or later, take fifteen minutes to play the piano, or invest a portion of their monthly wages, and not every person makes these decisions consciously. But extending this valuation of time to the well being of future generations brings in a new realm of questions. Should I cycle more to work? Should I use compostable paper cups or plastic cups? Should we build a new hydroelectric dam? While these are economic decisions, they also entail implicit valuations of the importance of intergenerational equity at a personal and societal level.
At the personal level, it’s hard to deny that systemic issues, such as power and equality imbalances, can inhibit individuals taking the ‘sustainability’ plunge and actively choosing the most sustainable and environmentally-friendly actions at all times.
At the societal level, our current global markets, political systems, and transportation systems are largely oriented toward unsustainable behaviours. So, at this point, maybe it would be good if everyone took a little time to reflect on intergenerational equity.
Do it for the kids.
This article was originally posted by Sustainable Collective, which has since joined forces with The S