Finally we set up the necessary conditions for markets to start taking care
of our environment. While we may be rejoicing over the most recent
institutionalisation of CO2 emission certificate exchange, I’m afraid financial markets,
for various reasons, still have a very long way to go to come to
terms with sustainability.

FIRST, despite of the fact that sustainability is supported by nearly
everybody by now, the precise meaning of the buzz-word of the past
has been blurred. Everybody seems to have his own interpretation of
what sustainability means or calls for. While this reflects a lively
social discussion culture, the lack of a broadly accepted minimum
definition prohibits sound economic calculations.

SECOND, financial markets do not reward savings in non-renewable
resources per se, but rather ways to profit from newly arrived
business opportunities or the creation of future trends. Brokers may
generate CO2 trading
commissions; other companies might have developed a new «sustainable»
technique, i.e. a particle filter. The net effect of any new
technologies upon the environment seems to be far from certain. In
many instances ISO certification and higher profits might go hand in
hand with higher environmental pressure. Let’s take the CO2
certificates. No doubt, the pressure for ongoing of cost-minimization will exert a CO2
reducing influence, but will this be sufficient to reduce the overall production of CO2? Are we really convinced
that an extra 10 cents at the gas stations here and in the US will
compensate, let’s say, the increased mobility in China? Couldn’t
it be that we’re mainly fighting the symptoms rather than trying to
tackle basic issues?

THIRD, discounting as an evaluation method is a terrific instrument
for the bulk of economic decisions. While the marginal perspective
successfully tackles cost issues, it seems helpless, when it comes to
systemic problems. In that way, a cost minimizing approach might be
prone to fail when confronted with a basic threat of our current
culture: the accelerating erosion of biodiversity and thus declining
economic health. The crux with this issue is twofold: a) when it
comes to evaluating the value or even the significance of healthy eco
systems, discounting is prone to give dubious advice; b) the health
of ecosystems and biodiversity call for a longterm, multiple usage,
commons perspective, which is quite far away from the current
standard of green equity funds, i.e. a defined share of a private
company which might be sold at any time at a reasonably predictable

FOURTH, the scope of the challenge to align the economy with a
long-term ecological strategy seems to be enormous. Besides all the
legal challenges, any biodiversity related projects would tend to
have most layouts now, and any payoffs would not only be uncertain,
they would also tend to be in distant future, i.e. net present value
would be negative. Thus it is clear that as long as discounting is
the overriding criteria for ecological investments, no financial
institutions, asset managers, or pension funds would feel able to
participate in such an endeavour, even if they would like to.

FIFTH, shouldn’t any financially sound performance of green
investment be based on an ongoing healthy, biodiverse environment?
Maybe «Eco-Perpetuals» might serve as an element
connecting current economic institutional structures and ecological
necessities. An institution issuing «Eco-Perpetuals»
could agree to upgrade or restore an environmentally degraded
eco-system. The initial investment would be compensated by a stream
of benefits using this ecosystem over the next 50 or 100 years.
Certificates about the entitlements could be traded, but the initial
investment could not be recollected, thus guaranteeing the long term
perspective of the capital employed. If this construction is backed
by a guaranteed minimum rate of return, a kind of ecological
investment incentive, this could really be a first step towards an
ecologically based retirement scheme. Too theoretical, too
idealistic? Well, why don’t we start cleaning up the Baltic Sea?
Any objections?

Joachim Schütz ist Chief Economist
Switzerland der UBS Investment Bank.