The Conservation Exchange
The Conservation Exchange
This is a piece I first wrote back in 1998 and then edited in early 2000. It was inspired largely by insights gained from reading Gretchen Daily’s book “Nature’s Services”, and while some of this seems naive and/or fanciful to me now (in 2006), I still think something like the Conservation Exchange may actually take shape over the next 10-20 years.
Executive Summary
The development of a new marketplace for conservation, which we call simply The Conservation Exchange, will capture the imagination of market players by revealing entirely new sources, directions and flows of rapidly appreciating capital.
The Conservation Exchange combines the excitement of the market with the necessity of conservation through a trading mechanism which is as sophisticated as the NASDAQ or the NYSE. The value of the issues being traded is more essential than anything being traded on more conventional markets, and the excitement generated by the creation of an entirely new market sector will be substantial.
The Conservation Exchange is backed by state of the art scientific assessment of the physical capacity of specific parcels of land, using both satellite observation of land characteristics and on-site field certification, along with state of the art web based technology to execute trades.
The Conservation Exchange is a market which trades in the flow of services such as clean water, biodiversity, carbon sequestration and sustainable yield from conserved ecosystems. The value of these services, measured in terms of replacement cost using human technology, has been estimated to be worth trillions of dollars annually. While the exact figure is still in dispute, and frankly will not be known until a market mechanism allows free market valuation of such services, there is no doubt that the total value is enormous. Nor is there any doubt that the value is currently unrecognized by existing markets.
The key to understanding The Conservation Exchange is understanding that these services were once free and unlimited in relation to human population. As human population doubles and doubles again, the flow of services provided by intact ecosystems becomes increasingly scarce in both actual terms and even more so in per capita terms.
It has been shown convincingly that flows of services from ecosystems are quantifiable, limited and inherently valuable. It has also been shown that there are buyers and sellers for these services. These are the constituent elements of any market, and the basis of the The Conservation Exchange opportunity.
This business plan describes the intellectual basis, the actual mechanism, and the marketing approach for a web-based trading system called The Conservation Exchange. We believe that trading of conserved ecosystem services represents a significant wave of market activity for the 21st century.
The Fundamentals
There are 51 billion hectares of earth surface, of which 14.5 billion are land. However, only 8.9 billion hectares of the land area are ecologically productive. The human population of the earth is currently 6.0 billion, up from 3.0 billion in 1945 and 1.5 billion in 1890.
Each hectare of land surface which is owned via property rights provides a quantifiable flow of services to the human population if the hectare is conserved from traditional development. By “traditional development”, we mean the destruction of the productive capacity of the ecosystem to provide service flows.
Human development has reduced the number of productive hectares through development, desertification, clear cutting, destruction of wetlands, paving and other methods by x% over the last 100 years. Because the number of people has increased so dramatically during the same period, and technology has increased the impact per person, the net result is that the total flow of ecosystem service flows has been diminished both in total and per capita. This scarcity is the root cause of the future value of these services.
The Deal
The Conservation Exchange is based on three essential activities:
· Measurement of ecosystem service flows
· Certification of ecosystem conservation, and;
· Trading of the Ecosystem Service Units
Measurement:
New technology has made measurement of ecosystem service flows from enormous land areas practical and sufficiently low cost. This has minimized the transaction cost associated with measurement to the point where the The Conservation Exchange market is now within reach.
Each type of flow is essentially a “stock” which offers both appreciation and yield (a dividend). Appreciation is the result of increased scarcity which is measured by a Scarcity Index for each type of ecosystem. Yield is the result of economic activity carried on in a sustainable fashion.
The value of each stock is measured in Ecosystem Service Units (ESU’s) on the The Conservation Exchange Big Board. ESU’s appreciate over time based on the scarcity of hectares which provide various types of flows to the human population, and offer a yield based on the economic activity taking place on conserved land in a sustainable fashion. Each type of flow has a moniker, usually two to four letters.
The specific flows which are tradable on The Conservation Exchange are:
· Carbon sequestration (CSEQ)
· Water filtration/purification (WFP)
· Biodiversity (BDV)
· Sustainable harvest yield (SHY), and;
· Preservation and bequest value (PVBQ).
Each of these flows, and the basis for numeric valuation is described in more detail below.
Each moniker is followed by the designation for the type of ecosystem the flow comes from. Each type of ecosystem can be understood as a sector. While the same type of ESU’s can be generated by a variety of ecosystem sector types, the relative value of ESU’s may be in part determined by the scarcity of the ecosystem type it came from.
The types of ecosystems understood as sectors on The Conservation Exchange are:
· Rainforests (RF)
· Temperate Forests (TF)
· Aquatic fisheries (AF)
· Wetlands (W)
· Prairies and Plains (PP)
· Riparian Zones (RZ)
· Desert Zones (DZ), and;
· Savannah Zones (SZ)
Each flow can be understood as a type of currency. While the numeric units of each type of service per hectare will vary, they are convertible like other currencies, so we can understand their relative value.
Therefore, a particular conserved parcel of land will have a number of flows associated with it, which will convert to a specific number of ESU’s. For example, a particular tract of forest land might be rated:
|
Temperate |
|
|
CSEQ |
80 |
|
WFP |
60 |
|
BDV |
60 |
|
SHY |
50 |
|
PVBQ |
40 |
|
Total ESU’s per hectare |
290 |
This temperate forest has above average ability to sequester carbon, filter water and house biodiversity, average ability to provide a yield through sustainable forestry and eco-tourism, and below average desirability in terms of unusual physical beauty and uniqueness.
Certification
Only hectares which are certified as conserved can be listed on The Conservation Exchange, and economic activities which are not indefinitely sustainable, defined as no net decrease in the flows of ecosystem services, are not acceptable and will cause the stock to be delisted. This is because the value of a stock on The Conservation Exchange is directly related to the flow of services from conserved hectares.
The Conservation Exchange works only with organizations of the highest reputation which have extensive experience in certification of sustainable practices. The Forest Stewardship Council, for example, is the leading certifier of sustainable harvesting practices for timberlands, and provides the certification services which underlie the purchasing decisions of Lowe’s, Home Depot and other companies which are phasing out old growth and conventionally harvested timber from endangered areas.
These practices have grown enormously over the past decade, as evidenced by the total land area currently certified, which is over 25 million hectares.
Trading
ESU’s are traded on our state of the art website, conservationexchange.com. The site provides the full range of services available on conventional trading sites like Schwab, Ameritrade or Etrade.
Information is available by sector, by stock, by specific parcel and for the market as a whole. Information is available in chart form and graphically, showing performance over time.
Just as specific measures are used to understand the flow of earnings from a corporation, specific measures are used to understand the flow of ESU’s from conserved parcels. Some of the measures used in analyzing specific stocks and sectors have conventional equivalents. You will notice that some measures are based in terms of ESU’s, and others in monetary terms, as follows:
|
Value Measurement Conventions NYSE/NASDAQ v. The Conservation Exchange |
|
|
Sales |
Total ESU flow |
|
Earnings |
Value added ESU activity |
|
Price to Earnings |
Price to total ESU flow |
|
Yield |
Yield |
|
Price per share |
Price per share |
|
Market Capitalization |
Market Capitalization |
|
Financial Strength |
Conservation potential |
|
Management effectiveness |
Certification rating |
The site lists the Scarcity Index of each sector on a screen shot showing sectoral analysis. This provides a scientifically based analysis of the scarcity of each type of ecosystem based on the IPAT equation (Impact = population x affluence x technology) affecting the sector. Similarly there is a Scarcity Index rating for each type of ecosystem flow, worldwide, by continent, and by country.
Summary
Intangible values such as ‘goodwill’ and ‘intellectual capital’ are a significant component of present earnings, but which are not accurately measured by conventional methodologies. Similarly, The Conservation Exchange creates a market space where ecosystem service flows are valued on their future position relative to basic supply and demand drivers.
The argument that the value of conserving a forest is of current equivalent value to cutting the forest down is similar to the argument for the value of ‘goodwill’, or ‘reputation’. The markets for pulp and lumber are well established, and will pay a forest owner cash for the cut trees. At the present time, the markets to value the intact forest ecosystem are dispersed, and rely on complex, expensive transactions to determine wetland, species habitat, water, and CO2 sequestration values.
However, it is absolutely clear that the future value of intact forests will grow as human population grows and human impact on intact forests renders them increasingly scarce. Therefore the future value of conservation, if measured, certified and traded with skill, is greater than the current value of destruction. This is true of many, but not all ecosystem services.
The Conservation Exchange will provide a mechanism to value ecosystem services in ESU’s, and the value of ESU’s will appreciate over time as scarcity and relative scarcity increase. Individual owners, corporate owners, and government owners of private property right will have, for the first time, an opportunity to test the market value of conserving parcels of land they own.
Next Steps
v Construction of the web site, with spectacular high speed graphics and state of the art information presentation features comparable to conventional trading sites.
v Hiring top notch credible scientific talent to provide the basis for establishing market consensus on the rate of specific flows from specific ecosystem types. The scientific talent will also operate the ongoing research required to provide iterations of the scarcity index, utilizing satellite and air observation, direct measurement, and use of publicly available peer reviewed publications.
v Establishing a short list of top-notch certification companies to provide services to those wishing to list an asset on The Conservation Exchange, and finalizing certification criteria sufficient to gain market consensus.
v Marketing the trading opportunity on the site with a major national splash, aimed square at the heart of capital markets.