Wednesday, May 28, 2014

The value of natural assets

A recent paper in the Journal of the Association of Environmental and Resource Economists highlights some issues most finance professionals either do not understand or tend to forget. However, it falls short of describing how value emanates from a basket of interacting options on the underlying tangible stock of natural assets. Such frameworks have been available for decades, but business schools and finance professional tend to focus on how to better count today’s money rather than value tomorrow’s options. Machines are fully capable of counting money and it is unclear why industries such as finance and accounting employ so many people with inferior skills compared to computers.

However, “the strategic thinking” exhibited in the paper should also be approached with caution. Ever since humans arrived on the planet, they have been worrying about “running out of” natural resources. This is understandable from an accounting sense for non-renewables and from a management sense for renewables, the latter if optimized with well understood portfolio techniques provide growing and prosperous paths to the future. Such a thinking, however, is based on static assumptions on technology and human ingenuity. What environmental economists (and non-economists) do not fully appreciate is that technology discontinuities could substantially remove the concerns of previous regimes within very short time-spans. So, although it is certainly important to manage the stock of fish, forests, ground-water and other such resources, it is much more important to effect a leap in technology that could make such concerns go away. Current education systems provide skills heavily focused on the present but not the future. This is why the “singularity,” feared (or hoped for) by the “intelligentsia” may never arrive.

Although the paper does not address this, from a policy perspective, it is also important to prioritize – For example, fish, forest and ground-water could become the least of our concerns if an asteroid of measurable size heads our way. Although self-driving cars and phones that glow under water are laudable goals for the current technology leaders, they should realize that humans are imprisoned on a small planet in the midst of an unbelievable amount of space debris. It is a miracle that we have the opportunity to think about managing our forests better.