How do we value ‘invaluable’ commodities?


Ah one of society’s ultimate dilemmas!

Putting an economic value on, for example, our natural environmental, or art work, is difficult, both from an ethical and from a technical perspective and is therefore often regarded as ‘priceless’. 
However, some people believe that regarded some things as ‘priceless’ just isn’t good enough in the current society that we live in. Take ‘nature’ for example…

in our globalized economic system, the value of nature’s multitude of critical services is subsequently translated as “0”. This is true for services such as crop pollination, water purification, climate regulation and carbon sequestration, and the list goes on.
Many people know in the back of their minds that as we continue to overuse our forest ecosystems, deplete soils, and overuse our water resources, at some stage the “rubber will hit the road”. 
In other words, there will be real economic and financial impacts. For the private sector then, the race is on to identify how changes in our natural environment can positively or negatively affect the costs and revenues of a business.
We are entering an era where water scarcity, deforestation, soil degradation and biodiversity loss will increasingly incur real costs or affect revenues by companies caught unaware. Take the Malaysian palm oil producer ‘IOI Corporation’, whose shares has been on a roller coaster. 
On 1 April 2016, the Roundtable on Sustainable Palm Oil (RSPO) suspended the corporation due to failure to prevent its subsidiaries from illegal deforestation in Indonesia. As a result, 27 major corporate buyers - including Cargill - suspended and terminated relations with IOI and its share price fell 17%. Then on 5 August 2016, shares rallied 5% on the news that the RSPO will lift its suspension effective 8 August 2016. Moody’s - a credit rating agency - however maintains a “negative credit outlook” on its debt. (See research conducted by Chain Reaction).
So, if you understand as a business that environmental destruction is real and relevant for your operations, what tools are out there for the private and financial sector to understand the extent to which your company can be affected by natural capital risks?
A good starting point is the Natural Capital Coalition, which has just released a Protocol that guides companies through nine steps to identify, measure and value their impacts and dependencies on the natural environment. It has also issued two sector guides for food & beverages and for the apparel sectors. Specific sector guides for more sectors will follow.
If your company is specifically or exclusively interested in understanding the financial impacts related to natural capital, then the Natural Capital Declaration (NCD) is developing a range of tools that directly integrates natural capital in credit risk analysis of loans and bonds, as well as in market valuations of companies listed on stock exchanges. 
The basic premise of any of these tools is that they look in principle at costs and revenues, and how to embed these in standard financial metrics such as EBITDA (earnings before interest, tax, depreciation and amortization). 
A water risk tool target (equities) developed and released in 2015 by Bloomberg and the NCD enables financial professionals to gauge the extent to which water scarcity affects earnings and potentially the share price of mining stocks using a standard discounted cash flow model (DCF). It found for example in the case Antofagasta, a copper mining company, that the difference between free cash flow in a business-as-usual scenario in 2021 and when taking water risks into account, is about 40% or US$ 2.5 billion. This is large enough to affect equity value and the projected share price. 
The NCD has also co-developed a water risk tool focused on corporate bonds. It found that water stress could have a significant impact on credit ratios. In the case of South African utility, Eskom, the model predicts that its debt/EBITDA ratio, (which is an important yardstick for the value and riskiness of corporate bonds), will almost triple if the full cost of its water use is internalized.
Yet, could we not expand our concept of value as more than economic value to include for example ‘spiritual-value’ using concepts like Marx’s use and exchange values and Baudrillard’s sign-value? If this idea sparks your interest check this paper out on the value of souvenirs -
But wait, if we go back to the start of this discussion with priceless commodities such as art or nature – if we accept these need to be assigned some sort of value – what are our thoughts about self worth ? is self worth our most invaluable commodity? Is self worth a priceless possession that so many of us underestimate or devalue?? Is it perhaps the only thing that is invaluable as it is the only thing that can be unconditional? What do you think?

What a wicked problem…whose got some solutions?!


by LizzieH on August 27th at 7:18pm
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