Podcast Summary: Paula DiPerna on "Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect Our Most Precious Assets"

Podcast Information:

• Title: The Sustainability Story
• Host/Author: CFA Institute
• Episode Title: Paula DiPerna: Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect Our Most Precious Assets
• Release Date: May 7, 2024

Hosts:

• Deborah Kidd
• Nicole Gehrig
• Paul Moody

Introduction

In this episode of The Sustainability Story, Deborah Kidd engages in an enlightening conversation with Paula DiPerna, the author of Pricing the Priceless. The discussion delves into the financial transformation necessary to value the planet, address the climate crisis, and safeguard our most vital natural assets. DiPerna brings a wealth of experience from her roles as a public speaker, special advisor to the CDP, former president of CCX International, and collaborator with environmental pioneers like Jacques Yves Cousteau.

Background and Motivation

Deborah Kidd [00:29]: Introduces Paula DiPerna, highlighting her multifaceted career and her pivotal role in pioneering the world's first cap-and-trade system for climate change.

Paula DiPerna [04:11]: Reflects on her diverse career path, emphasizing that her work has consistently revolved around the concept of "pricing." She explains her transition from viewing Earth as an engineering system to recognizing the metaphysical value of natural assets. This realization fueled her desire to articulate nature's unpaid labor and its omission from traditional economic accounts.

Notable Quote [02:30]:

"The only thing we're controlling now is outright pollution... but our use of resources as inputs is not controlled. And that is the source of the dilemma we're facing right now."
— Paula DiPerna [02:30]

Valuing Natural Assets in Economic Terms

DiPerna introduces the central thesis of her book: treating natural assets as quantifiable economic entities akin to those on a company's balance sheet. She argues that without integrating the value of natural resources, GDP metrics remain fundamentally flawed.

Key Concepts:

• Ecosystem Services: DiPerna discusses how nature provides essential services like pollination and water filtration without compensation, drawing parallels to unpaid labor.
• Economic Paradox: She highlights the paradox of valuing nature as a financial asset while currently, its depletion remains unaccounted for in economic systems.

Notable Quote [06:57]:

"All GDP is dependent on natural assets. Without natural assets, GDP would be just about zero."
— Paula DiPerna [06:57]

Stewardship and Sovereign Credit Ratings

The conversation progresses to how responsible management of natural resources can influence a nation's creditworthiness. DiPerna posits that nations actively preserving their natural capital could achieve higher sovereign credit ratings, reflecting better-managed national wealth.

Example:

• Forest Resilience Bond (FRB): DiPerna cites the FRB in California as a pioneering financial instrument designed to invest in forest resilience, showcasing how quantifiable benefits can attract investment.

Notable Quote [09:04]:

"If you have 60% of our forests are in perfect shape... that country would be seen as having a well-managed portfolio."
— Paula DiPerna [09:04]

Corporate Environmental Profit and Loss (E-P&L) Statements

DiPerna elaborates on the concept of Environmental Profit and Loss statements, using Puma as a case study. By quantifying environmental costs, companies can gain a clearer picture of their true profitability and long-term viability.

Discussion Points:

• Puma's E-P&L: Original financial statements showed strong net revenue, but after accounting for environmental costs (€145 million), the net position significantly weakened, revealing the hidden costs of environmental degradation.

Notable Quote [10:27]:

"If nobody paid their workers to do anything and work was all just freely contributed... the same situation obtains now with nature."
— Paula DiPerna [10:27]

Valuing Nature Compared to Traditional Assets

DiPerna draws comparisons between valuing natural resources and valuing intangible assets like intellectual property or brand equity. She underscores that, unlike human-made assets, nature operates independently of market mechanisms, leading to its undervaluation.

Illustrative Examples:

• Coral Reef Insurance: Highlighting how natural barriers like coral reefs are not insured despite their substantial protective value, contrasting them with man-made structures like cement barriers.

Notable Quote [13:15]:

"Nature is like out there. It's not us, it's not human, it's not something that we control. And therefore we kind of to some extent denigrate it because we didn't make it."
— Paula DiPerna [13:15]

Climate Change and Resource Depletion

The discussion intensifies around climate change as a catalyst for accelerated resource depletion. DiPerna emphasizes the unsustainable extraction and consumption of fossil fuels, leading to irreversible atmospheric changes.

Key Points:

• Temperature Metrics: She analogizes Earth's temperature rise to human fever, stressing that even seemingly small increases have catastrophic systemic impacts.
• Carbon Pricing Dilemma: DiPerna explains the inadequacy of current carbon pricing mechanisms and the necessity for comprehensive, globally integrated carbon markets.

Notable Quote [14:59]:

"The temperature of the Earth is the metric of 100 years of environmental trampling."
— Paula DiPerna [14:59]

Innovative Financial Instruments for Environmental Stewardship

DiPerna presents groundbreaking financial tools designed to integrate environmental value into economic systems:

1. Forest Resilience Bonds (FRB):

   • Function: Invests in forest maintenance to prevent wildfires, with returns linked to the quantifiable benefits of reduced fire risk.
   • Impact: Demonstrated success in California with a $4 million benefit from a small forest area, expanding to a $25 million portfolio.

2. Coral Reef Insurance:

   • Function: Provides financial coverage for the restoration and maintenance of coral reefs, akin to insuring man-made infrastructure.
   • Significance: Recognizes the protective and ecological value of reefs, promoting their preservation through economic incentives.

Notable Quote [17:32]:

"Forest resilience means it doesn't burn down, it doesn't fall down. It withstands all kinds of challenges."
— Paula DiPerna [17:32]

Challenges and Breakthroughs in Environmental Finance

DiPerna identifies critical bottlenecks hindering progress and potential breakthroughs to overcome them:

Bottlenecks:

• Information Silos: Lack of sharing innovative financial ideas across sectors and geographies.
• Demand for Perfect Metrics: Hesitancy to adopt imperfect but actionable metrics delays the implementation of vital financial instruments.
• Inadequate Carbon Pricing Integration: Slow and fragmented carbon pricing policies impede the establishment of effective global markets.

Potential Breakthroughs:

• Enhanced Information Sharing: Promoting broader dissemination of successful financial models like FRBs.
• Comprehensive Carbon Pricing: Establishing integrated, global carbon markets to standardize pricing and incentivize reductions.
• Economic Accounting Reforms: Embedding environmental costs into national and corporate financial statements to reflect true economic impacts.

Notable Quote [30:16]:

"We have to shift from bad things to good things. That's the number one bottleneck."
— Paula DiPerna [30:16]

Advice for Leaders and Emerging Leaders

Paula DiPerna offers pragmatic advice for current and future leaders committed to environmental sustainability:

1. Engage with the Real World: Prioritize tangible environmental actions over virtual distractions.
2. Embrace Risk and Innovation: Leaders should seek out and implement new solutions rather than waiting for them to emerge.
3. Integrate Financial and Technological Solutions: Focus on leveraging finance and technology to drive climate action, rather than solely relying on advocacy.
4. Champion Economic Shifts: Advocate for changes in how economic value is assigned, ensuring that environmental stewardship is financially rewarded.

Notable Quote [32:54]:

"The solutions to climate change are on the finance and technology side. They're not on the advocacy side."
— Paula DiPerna [32:54]

Conclusion

The conversation concludes with DiPerna reiterating the urgency of reimagining economic systems to incorporate the true value of natural assets. She emphasizes that without substantial financial shifts and innovative instruments, efforts to combat climate change and preserve natural resources will remain inadequate.

Final Thoughts:

• Economic Accountability: Integrating environmental costs into financial metrics is essential for sustainable development.
• Collaborative Efforts: Combining the strengths of private sector finance and public policy can lead to scalable solutions.
• Urgent Action Required: Immediate and concerted efforts are necessary to prevent further environmental degradation and ensure long-term economic stability.

Notable Quote [35:52]:

"The economy, the economic accounting, we have to change it."
— Paula DiPerna [35:52]

Closing Remarks

Deborah Kidd thanks Paula DiPerna for her insightful contributions, highlighting the importance of integrating environmental value into financial systems. She also mentions the CFA Institute's Climate Risk and Investing Certificate, encouraging listeners to further their education in managing climate risk.

Contact Information:

• Deborah Kidd: Deborah.Kidd@cfainstitute.org
• Nicole Gehrig: Nicole.Gehrig@cfainstitute.org
• Paul Moody: Paul.Moody@cfainstitute.org

This episode of The Sustainability Story offers a compelling framework for understanding and integrating the value of natural assets into our economic systems, providing actionable insights for investors, policymakers, and leaders committed to fostering a sustainable future.