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Environmental Finance 1 - Environmental Finance 1 Compendium Introduction "Environmental Finance: Value and Risk in an Age of Ecology" Naronal Pol~ri;r Preventm Center tor Higher Educatorl Un~versity01 M~chigan I May be reprodilced Daqa Bullding 43C Easl Un~versilyAnq Arbor MI 48105.11 15 ' freely !or non-commercial I 734 704 ,412 Fax 734.647.5841 - nppc@urnrch edu - ~ww.um~ch.edu..-nppcpub I ebuca:ional p~~:poses. I The National Pollution Prevention Center Your Input is Welcome! for Higher Education We are very Interested rn your feedback on these materiais. ~nlverslt~of Mlchlgan Dana Bu~ldlng Please take a moment to offer your comments and communicate 430 East Un~vers~tyAve them to us. Also contact us if you wlsh to recelve a documents Ann Arbor, MI 48103-1 115 I~st.order any of our materials. collaborate on or review NPPC Phone 734-764-141 2 resources, or be lrsled In our D~rectoryof Pollution Prevent~on Fax 734-647-5841 ~nHigher Educat~on. E-mall. nppcQumlch edu We're Online! The mlssion of the NPPC #.slo promote sustalnable development The NPPC provides information on ~tsprograms and educatlonal by educat~ng.stu3ents. faculty. and professionals about pollut~on materials through the Internet's Worldwide Web; our URL IS- prevention: create educational materials: provide tools and http://www.urnich.edu/-nppcpubl strategies for addressing relevant environmental problems; and Please contact us 11you have comments about our online establish a national network of pollution prevention educators. resources or suggestions for publ~c~zlngour educatlonal In add~tionto developing educational materlals and conduct~ng materlals through the Internet. Thank you1 research, the NPPC also offers an Internship program, profes- s~onaleducation and tralnlng, and conferences 2 lntroduct~on Mav 1998 Business Strategy and thc Enmrammt, Vol. 5,198-206 (19%) ENVIRONMENTAL FINANCE: VALUE AND RISK IN AN AGE OF ECOLOGY Mark A. Wte, Mchtire School of Commerce, University of Virginia, Charlottesde, Vir@a, USA Environmental issues are restructuring markets and reduecting capital flows throughout the world. An outline is pro- ecent years have seen an explosion of concern by individuals, businesses and vided of concerns facing the development Rgovernments regarding the use of the of an environmentally responsible or natural environment. The 'greening' of business is 'environmental finance' perspective. It underway as environmental issues impact and reviews the major ways in which organ- change managerial practices throughout the izations are respondmg to environmental world. Global integration of the world's financial threats and opportunities in the three markets is progressing at a breathless pace and, in some instances, has fostered and/or accelerated the major branches of finance - corporate degradation of natural environments. In others, the finance, investments and financial free flow of capital has faditated a redirection of institutions - hghlighting in particular financial resources towards investment opportun- novel programs and initiatives. In the ities, promising overall increases in both human past, financial concerns have exacerbated and environmental welfare. the degradation of the natural environ- This paper seeks to achieve two objectives. Firstly, it attempts to define the structure of the ment; in the future, they probably hold financial system with respect to the natural envir- the key to their preservation. onment. Secondly, it outlines ways in which environmental concerns are impacting financial Only after the last tree has been cut down, deasion-malung by corporations, investors and only after the last river has been poisoned, financial institutions, briefly describing the current only after the last fish has been caught, only responses to these challenges. The financial system then will you discover that money cannot faditates the exchange of financial resources be eaten. (Cree Indian Prophecy) among economic agents. The exchange of resources is generally not an end in itself; rather, decision- makers engage in such activity to further their own designs. Understanding the relationship between finance and the environment requires an examina- tion of the goals of human activity and the role of hanaal markets in achieving those goals. THE FIELD OF FINANCE Traditionally, the role of the hanaal system has CCC W733/%/03019&09 been to fadlitate the transformation of savings into 1996 by John Wiley & Sons, Ltd and ERP Environment. investment. Financial institutions (banks, brokerage BUSINESS STRATEGY AND THE ENVIRONMENT M.A. WHIT€ houses, insurance companies) accomplish this by The hnk between finance and the environment creating financial instruments (deposits, mutual ulhmately rests on one's definition of capital, or funds, insurance policies) which are traded on endowments used in the generation of income. finanaal markets. By thts means savings, i.e. income Classical economists recognized two forms of remaining after current-period consumption, are capital: land and labor. Recent scholars in ecological redirected into various forms of productive capital. economics have identified three broad types of The field of finance is often divided into three capital (Costanza and Daly, 1992): (i) natural capital branches: (i) managerial or corporate finance, prirnar- - natural resources used to generate income, i.e. ily concerned with the investment and finandng farmland, forests, and fisheries; (ii) manufactured derisions of corporations and other business organi- capital - factories, buildings, tools and other zations; (ii) investments, whch seek to achieve the artifacts; and (iii) human capital - the stock of greatest return for a gven level of risk and (iii) education, skills, culture and knowledge stored in finanaal institutions and markets, dealing with issues human beings themselves (see also Becker, 1975). specific to the management of finanaal institutions The key in understanding the role of finance in and/or the operation of finanaal markets. As a either exacerbating or alleviating environmental Uphe,hance works towards maximking value damage is to recognize that, for the most part, the wlule managing risk Because risk and value are two above forms of capital are substitutes for one sides of the same coin (decreasingrisk inueases value another and that transforming one to the other and vice versa), it is impossible to entreat one without generally involves a fourth kind: financial capital. invohg the other. Uncertainty in estimating both risk Financial capital, or money, enjoys a spedal place in and value, particularly with regard to environmental this taxonomy, for it alone is truly fungible. It serves amenities, is the source of much fnction between as a unit of account (numeraire), as a store of wealth economists and environmentalists. and as the means to acquire additional welfare. Finance is often dehned as a form of applied Some kinds of capital, e.g. unspoiled wilderness, economics relying heavily on ~nformationcollected factories, education, etc., provide welfare in and in accounting. It comes as no surprise, then, that of themselves. Financial capital is valued for its many of the tools and analyses used in finance are Liquihty, i.e. the ease with which it can be rooted in these fields. The majority of environ- exchanged for the other three kinds of capital. mental amenities are not traded in markets, either More capital, be it natural, manufactured, human because property rights are not well defined (fish- or hnancial, is preferable to less. Moreover, an eries, biodiversity) or because the services in inhvidual's welfare is most likely maximized by question are public goods (clean air and water, the acquisition of some combination of these four beautiful views, etc.). The disapline of economics types. For example, a farmer may choose to offers numerous methods for dealing with both exchange the products of his or her land and labor problems and also provides teduuques for valuing for a new tractor, for education, or simply for non-marketed environmental assets, a first step in money (which is then either consumed or invested). financial decision-rnakmg. lndvidual choices concerning the types of capital to New accounting techniques are expandmg the hold and how much to consume and how much to measurement of environmental costs and benefits save are ultimately responsible for the depletion or to indude regulatory costs, auditing costs, volun- preservation of natural resources. tary costs, contingent costs and irnage/relationship costs. Recognition of the mynad and subtle ways environmental issues impact companies' cost and ENVIRONMENTAL FINANCE revenue streams is often the first step in developing a proadve environmental management program. Environmental finance concerns itself with the Sirmlar efforts are taking place on the mauoeco- impact of environmental issues on financial nomic level. Projects to ascertain the contribution of deasion-making, which is essentially a three-step natural and human or social capital in the national process. The first step is to identify sources of risk income accounts have been undertaken by national and/or opportunities to create value. This requires governments, the United Nations, the World Bank a better understanding of the interconnections and others (6.Ahmad et al., 1989; Peskin, 1991; between ecology and economics, which is a good IBRD, 1995). The results are informative '... identi- thing. 'Knowledge on the whole is an environ- fymg dozens of countries like Kenya, Libya, Nigeria mentally neuhal asset
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