Peace with Earth shattered when firms become environmentally insolvent
New report reveals UK water companies close to the edge
This is something for investors in peace with the Earth: the concept of environmental insolvency. It happens when a business creates an environmental liability (in this case, when water cleaning activities pour sewage into rivers and coasts requiring massive reparations). This liability comes when the operational contract requires restitution and the firms do not have enough assets to fund the restoration and upgrade.
We prefer “natural capital” to environment, and this covers the gifts of nature: biological material and minerals and metals from the lithosphere.
Business activities, then, harvest biological material or extract minerals and metals from the lithosphere. They also emit materials to the ecosystem and even back into the lithosphere.
In the case of the UK, the insutry has chosed to dish out profit to inveostros instead of investing in the infrastrucutre needed to prevent overloading rivers and costal waters with sewage. Rivers, lakes and the sea can act as a recipient of nutrient-laden water to a certain degree. This is the asset part of the equation. To exceed that loading kills the ecosystem potentially. This is the liability part of the equation: to keep within safe limits. The equity is the operating space left to emit treated wastewater into the recipient. In this case the industry reached negative equity: waters could not take any more and needed restoration.
Read the full report here about the UK water industry insolvency:
https://www.taxresearch.org.uk/Blog/wp-content/uploads/2023/06/Cut-the-Crap-June-2023-final.pdf
And the conversation:
https://www.taxresearch.org.uk/Blog/2023/06/29/englands-water-industry-is-environmentally-insolvent/
Richard is acquainted with Steve Keen and they both appeared on Ty Keynes' youtube bonanza (an educative watch if you are into economics and systems thinking)
https://www.youtube.com/live/CLFhDrfEhNI?feature=share
How come this aspect has been missed? Might it be because economists do not have this thinking in their toolkit? Liability for the environment you extract from or emit to, whilst being there in law and in contracts does not appear on balance sheets until the cost of cleaning it up comes up!
One suggestion: The environmental cost is equal to the investment required to NOT degrade the asset/environmental capital in the first place. Once degraded, like the water companies, they end up in insolvency because the cost of restoration is far higher than the assets the companies possess. This cost MUST APPEAR on the balance sheet of every operating company. (ISO 14000 should demand it.)
This is the founding principle of the circular economy: you do not extract anything without having the assets available to either restore the harvest or ensure the minerals are recycled. The extractor does not ever release ownership through the supply chain, rather leases the materials under a contract from government to ensure their return to the economy after use.
One solution for all companies that have got into this insolvency is for government take-over. As Yanis Varoufakis offers:
Save capitalism from itself by the state becoming part-owner of the shares, injecting cash to clean up the mess and then paying dividend to each citizen once the operation gets profitable again.
Do comment this newsletter with your views! This is indeed a work in progress.