The new financial ledger

First published in The Guardian, July 10, 2013

We all know about the two sides of the financial ledger – profit and loss corresponding to cost and expense. But there is a basic piece of the financial picture that is not yet on the books – cause and effect. Every financial transaction affects the environment, and the environment is embedded in every financial transaction. Every transaction.

Our financial and environmental crises are inextricably connected – both in the causes and solutions. Much too often, one corporation’s actions and assets become liabilities for other parties – taxpayers, businesses, families and natural ecosystems. I call this “environmental debt”, and it is as risky for financial security as subprime mortgages wrapped in credit default swaps. These are the connections we do not yet account for properly.

For example, in 2011, floods in Thailand effectively shut down the country. These intense storms became catastrophic because of massive deforestation, much of which occurred in the 20th century. Without enough trees, the ground was unable to soak up the floodwater. Local Thai factories that produced car parts were closed for months. These closures caused shortages for Toyota and Honda, and both companies were forced to suspend manufacturing in Kentucky, Singapore and the Philippines. Toyota alone lost production of 260,000 vehicles (3.4% of its previous annual output) and tens of thousands of workers lost their jobs in several countries.

Logging in 20th century Thailand caused financial havoc around the world in 2011 – a good 20 years after much of it occurred. The people of Thailand, several governments, numerous companies and shareholders from around the world all paid the logging’s environmental debt.

The financial industry is beginning to debate