Recent posts have wandered across the UK and Ireland considering the gifts endowed by nature – our forests, peatlands and coastlines. These bounties are not just fountains for recreation, but also offer hugely valuable natural assets to underwrite our futures.


While it may seem that such musings lie far from finance, nothing could be further from the truth. For example, one of nature’s strengths lies in biodiversity. This helps to sustain it in the face of uncertainty. The value of portfolio diversification may have been reinvented by Harry Markowitz in the 1950s, but that lesson has been visible in the natural world for centuries.


Imagine you had allocated your savings to an asset manager promising you a well-spread, resilient portfolio to meet an uncertain future, making due allowance for your individual circumstances. You might admire his or her wisdom. Imagine you suddenly saw your well-constructed portfolio being dismantled in favour of an individual high-risk share that could ravage your wealth. You may not be endeared to your manager then.


Yet, in essence, this is what we are doing as stewards of our natural inheritance. The Dasgupta Review reveals some interesting statistics. Globally, between 1992 and 2014, physical capital per person doubled, and human capital per person (things like health and education) increased by 14%. Over that same period, the stock of natural capital, per person, fell 40%. Biodiversity is falling faster than at any time in our human existence. We have seriously lost the plot.


This decoupling of natural and physical capital values cannot persist in perpetuity. Merton Miller and William Sharpe’s contribution to finance theory, based on the notion that fair asset prices are founded on a ‘risk-free’ rate of interest, holds the clue to the dangers in the denouement. A climate catastrophe could jeopardize underlying monetary stability.

The second is to start to look at the world in a different way, and specifically to realise that we are a part of nature, not separate from it. As such, we have to organise our societies in a way that contributes to, and benefits from, our inherited natural capital. 

If global investors lose confidence in the world’s proxy for ‘risk-free’ (long-dated US treasuries), risk premiums and asset valuations in all classes around the globe (bonds, equities, real estate and their associated derivatives) would gyrate wildly. Liquidity would be sucked irreversibly from markets, and in this situation, even quantitative easing (QE) would not be able to help. The metaphor of a hurricane in capital markets could suddenly become all too real.


So, next time someone tells you that Nasdaq does not depend on Nature, think twice.


How do we get off this path to the precipice? The first action point is to realize we are on a road to destruction. The good news here is that the evidence is now becoming so clear that even the historical doubters are piping a different tune.


The second is to start to look at the world in a different way, and specifically to realise that we are a part of nature, not separate from it. As such, we have to organise our societies in a way that contributes to, and benefits from, our inherited natural capital.


This will involve many things. Here is just one example. Since the Apollo mission, we have become used to thinking about how technology can help us escape our planetary boundaries. For the coming decades, technology needs to tilt to help us survive within them.


Further, a new journey requires huge institutional reform, nationally and internationally, to ensure polluters compensate for environmental damage under strict and enforceable laws of liability. Currently, we subsidise damage to nature to the tune of some US$5trn per annum. This is just insane. We can lean on markets to help us along a new route. However, we need to remember markets are institutions to facilitate trade, not our delegates for global conservation.


But most of all, this will only work if we live in harmony with the natural world. If I may borrow an image from John Maynard Keynes and take wings into the future, that will involve changes to consumption and investment patterns by all of us, with radical implications for industries and supply chains from food to fossil fuels. Only that is likely to preserve the risk-free rate, and with it ensure the economic possibilities for our grandchildren. 

Get Harold's Herald delivered to your inbox

Get Harold's Herald delivered to your inbox

Please fill in the form below to receive regular articles and insights from Harold Hutchinson

Investec Bank plc and its subsidiaries recognise and respect the privacy and data protection rights of individuals with regards to personal data.


We may use your personal data to provide you with services you request from us,  or to manage your accounts, make decisions, detect and prevent fraud, fulfil any contractual relationship with you, undertake analysis and assessment, ensure that we comply with legal and regulatory requirements and/or for other purposes where in our legitimate interests.


For further details as to how Investec uses personal data, please refer to our Data Protection Notice.


Please complete all required fields before sending.

Thank you for registering your details.

We look forward to sending you Harold's Herald soon

Sorry there seems to be a technical issue

Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.