This post is in response to a discussion with an advocate for San Francisco Bay. They liked the concept of IVE but wondered how it could actually work and what the result of it working might be.
What we agree on:
I think we agree that San Francisco Bay [SFB] is a valuable asset.
We would agree that SFB has both intrinsic value (like gold) and service value. The service value is what SFB does year after year that is good for us all. Its intrinsic value is derived from being a unique place with unique wildlife and geology.
We would agree that there exists a growing body of data to identify and quantify the value of SFB and its services.
I think we would agree that one of the major impediments to a healthier SFB is competing interest for SFB’s resources; the use of natural assets or destruction of assets to allow for commercial or industrial efforts. Industrial and commercial users can point to known metrics of financial value for existing or proposed uses of the SFB such as jobs, personal income, business revenue, taxes, etc. But the natural resources of the SFB have little or no corresponding metrics to counter the financial metrics of commercial and industrial interests.
SFB natural assets rely on research reports that can suggest values, even quantify those values in financial terms but those values cannot be directly plugged into the economy and counted. The values must be expressed via regulation and taxes that force the public, individuals, commercial and industrial players to, in part, value in financial terms the natural assets of SFB.
Those assets that have a direct relationship to commercial use, fisheries for instance, are weighed more heavily because wetlands that produce fish stocks that can be commercially harvested can be more easily quantified in financial terms. The value of an American Avocet, however, is much harder to determine and include in this traditional approach to valuation.
- SFB is a natural asset that has value
- We have data to quantify its value
- The value is not fully captured in our economic and political system
- SFB and its component assets are owned both publicly and privately
The IVE solution for the SFB valuation problem begins with the existing valuation data.
Step One: Collect existing data on valuation and make it accessible. We know we can do this
Step Two: Make this data available to the public and ask them to vote “price” the value of SFB. We know we can do this — it is a distilled opinion poll. Data goes in and we have an agreement on price (useful information) comes out.
At its most simple form IVE is a structured online system for collecting existing data and transforming it into a form that SFB stakeholders can more easily use. It has the added benefit of adding the public’s opinion on value in more or less real time.
We can add measures, such as SFB water quality, wetland area, and wildlife populations and have people bet on if these measures will change. This adds a predictive quality to IVE. If 90% of the public that uses IVE thinks SFB water quality will be less in 5 year then that is a powerful tool to take to stakeholders.
I am betting you are totally with me up to this point. IVE is an information system that turns mountains of research reports into prices and people can use these prices to make better decisions.
- We can collect data on SFB
- We can make it available to the public in a user-friendly format
- The public can vote on the value of SFB
Investing In Natural Assets
The usual questions are:
How can we own a share in SFB, it cannot be owned privately?
What we have developed is a financial instrument to own the value of an asset without the burden of private ownership and the notion of rents. Owning and charging rents is an Industrial concept that doesn’t fit our needs today. The options, derivative, debt and insurance markets are all abstracted from the direct transfer of a good or services and its production. Finance is a creative and powerful tool that way. Recall it solved the problem in agriculture of the need for farmers to invest before they could harvest their crops and there was a risk the crops would be less or more or fail entirely. That was the origin of futures contracts.
SBF can be valued like any commodity, like gold, for its intrinsic value. And we would also capture its service value, which is very similar to what a corporation does today. But in this case SFB is the entity that has asset and service value and what we are doing is creating a financial instrument that can invest in that value without traditional ownership.
We know that natural assets also have service value that can be captured in this same way that makes them more valuable than a commodity like gold and the price of a natural asset is linked to its production (health). If SFB is healthier — more wetlands, more birds, more wildlife — it has more value. If it gets destroyed, it loses value.
- We can value intrinsic worth, and do it with commodities, without ever taking possession of the asset. We can own value without owning the asset.
- We can value the change in the productivity of the natural asset (its health) so it acts more like a stock than a commodity contract.
SFB, Inc. — A Natural Asset Corporation
We have overcome a lot of hurdles and the last one is how does someone actually invest in SFB, Inc. and what does that do?
- We create the new entity SFB, Inc.
- We aggregate information on SFB’s value, intrinsic and service
- We offer a percentage of SFB, Inc. to local stakeholders (let say at zero cost)
- A percentage of SFB, Inc. is retained by the company, its capital value
- A percentage is offered to the public world-wide in an IPO, the trading float
When we offer SFB, Inc. to the public, they will have the information that suggests the potential value of SFB. The traders make their assessment and bid for SFB, Inc.’s shares.
The second someone bids even one cent, the intrinsic and service value of SFB is transformed into financial capital in SFB, Inc. And markets then do what they do best, they find a price level everyone agrees to and it stabilizes. The price then is affected by what potential events or actions would help/hurt SFB and thus the price of SFB, Inc.
What this does:
- The unrealized financial value of SFB is turned into actual financial value
- The holders of SFB, Inc. have a financial stake in a real financial asset
- Traders and stakeholders can make/lose money on how the price moves
- SFB now has a financial value that can be factored into the decisions about how the Bay is managed
- Proposed actions will be quickly reflected in price. The healthy building of wetlands would increase value; oil spill would reduce value, etc.
- Stakeholders have a new level of advocacy for SFB
As more and more natural assets are priced, a picture will emerge as to the costs of doing business that were not quantifiable before. For example, if the extraction of oil or gas uses valuable (mined) groundwater (for fracking) that is priced properly, may prove to be a foolish investment, simply uneconomical. The risk of things going wrong also can be priced. For example, the risk of toxic chemical leaching into the ground water or into SFB may be a “black swan” event but the cost would be so high that when coupled with known ecosystem or human capital damage the extraction of oil and gas with this method would be just too expensive. The market, not regulators, would find alternatives in 1,000’s of creative ways.
The corporation, its managers and shareholders will now have financial resources as a result of turning intrinsic value into financial capital. This can be employed to work for the SFB asset via SFB Inc. to do things like build wetlands, reduce storm water runoff into the Bay, protect and grow wildlife resources, and find less impactful ways of the industrial economy interacting with SFB.
By valuing natural assets and turning them into financial assets, we have a new capital ecosystem that better fits the needs of our modern world.
- We know natural assets have value that is not being included in our economy
- We know that information to price these assets exists
- We know there are financial tools already in existence that do most of what we need
- A majority of people want to have both a healthy environment and healthy economy
- IVE is a reasonable approach to the problem