Natural Asset Companies
Trade ecosystems as commodities because asset managers manage best (right?)
A curious boundary may soon be crossed in law and therefore in economy. Depending on the outcome of the final rulemaking of the US Securities and Exchange Commission, the New York Stock Exchange, in partnership with Intrinsic Exchange Group, may soon list a brand new kind of financial instrument: “Natural Asset Companies,” assigning tradeable monetary value to “ecosystem services” like “water filtration” and “global climate regulation.”/
On December 28th, 2023, the SEC instituted “proceedings pursuant to section 19(b)(2)(B) of the Act to determine whether to approve or disapprove the proposed rule change. I knew the NYSE and Intrinsic Exchange celebrated forming a partnership back in September of 2021 but the issue had since slipped off my radar as a done deal. I found out about this SEC rule making and comment period thanks to Meryl Nass reposting a webinar, and though I disagree with some of their analysis of what's at stake and how the thing will play out, I'm grateful to her and to the hosts.
I was compelled to comment, I mean as though by a spirit beyond me, even though it seems to me that whether a market for ecosystem services will be created is not really in question. Part of me believes that the forces pushing in this direction since the 80s are out in front and headed for a slam dunk. And yet, it's worth observing this moment with clear attention, as it would surely lead to big things out in our material world. How the market is built matters, and is still unsettled and subject to influence.
On Sept.27, 2023, NYSE and IEG submitted a proposed rule change to “adopt a new listing standard,” for a new class of assets. To lay a groundwork of common understanding between us, here is how the SEC, borrowing from the proposed rule change, describes the thing (emphasis mine).
What are Natural Asset Companies?
"The Exchange proposes that Natural Asset Companies (NACs) would be corporations that hold the rights to the ecological performance produced by natural or working areas, such as national reserves or large-scale farmlands, and have the authority to manage the areas for conservation, restoration, or sustainable management. The Exchange states that these rights could be licensed like other rights, including “run with the land” rights such as mineral rights, water rights, or air rights, and that NACs would be expected to license these rights from sovereign nations or private landowners.
Under the proposed amendments to the Manual, capital raised through an NYSE-listed NAC's initial public offering or follow-on offerings must be used to implement the conservation, restoration, or sustainable management plans articulated in its prospectus, fund its ongoing operations, or otherwise fulfill its purpose to maximize ecological performance (i.e.,the value of natural assets and the production of ecosystem services). As proposed, while the core purpose of a NAC would be to maximize ecological performance, a NAC would also be required to seek to conduct sustainable revenue-generating operations (e.g.,eco-tourism in a natural landscape or production of regenerative food crops in a working landscape) provided that such operations are consistent with the NAC's charter, do not cause any material adverse impact on the condition of the natural assets under the NAC's control, and seek to replenish the natural resources being used. Under the proposal, all NACs would be prohibited from directly or indirectly conducting unsustainable activities, such as mining, that lead to the degradation of the ecosystems it is trying to protect. In conducting its revenue-generating operations, a NAC could monetize ecosystem services that have markets (e.g., through the sale of carbon credits). All revenues and expenses would be reported in the financial statements of the NAC prepared under generally accepted accounting principles (“GAAP”) and filed with the SEC as part of the NAC's required annual report on Form 10–K, 20–F or 40–F, as applicable."
The Federal Register includes many clues to how the ecosystem financial instruments are proposed to work and hope you will read it for yourself. The system selected to account for the ecosystem assets is the United Nations System of Environmental and Economic Accounting—Ecosystem Accounting Framework (SEEA EA). I spent a day in the minutia of this system, but it's not enough, and I don't think any reading will be enough, to really understand how it will work in practice. You can also access xls sample analysis and the “logic” and “crosswalks” at https://seea.un.org/ecosystem-accounting . The pictures below are from the Stylized Example. A tab (ES Flows) which tracks measured physical flows (tons of Nitrogen, cubic meters of wood) through prices for these units to a value/ecosystem-type/service-type precedes the Monetary Asset tab copied below.
Notice $3.6M was poofed out of thin air on an 800 hectare project. Money on the IPO is supposed to be used for conservation but there's a private jet sized loophole for “operations” expenses and it allows “sustainable” management that includes removal of resources-- fish, timber, fodder for grazing animals-- as long as regrowth is above replacement rate. This is why initial reporting on the announcement of NYSE collaboration with Intrinsic Exchange Group highlights “enabl[ing] exposure to the opportunities created by the estimated $125 trillion annual global ecosystem services market” over conservation ends. Notice also that much of the movement in the asset value was generated by revaluations, not by actual physical flows either positive or negative. I think this reflects that the value of these NACs will rise as water and fish and wood and filtration become more scarce and precious, even if the Asset Managers don't improve the underlying biophysical conditions.
My impression is that SEC is not specifically seeking engagement on the question of whether assets should be formed for ecosystem services, only how the process of market-making and operation should play out in their jurisdiction. They recommend comments address the concerns focused on the novel accounting primarily, though they do make a point to invite comments on whether the proposed rule meets the condition of SEC-blessed markets in general, namely,
“The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange.”
Is the inclusion of ecosystem assets which are highly complex to measure, monitor, verify and report compatible with “just and equitable principles of trade”?
I invite you to dig into this and comment if you have the bandwidth, or if you like my comment, you can send me your name, organization name (if applicable), and city/state/zip code and I'll add your name as signing on to my comment.
My Comment Draft
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email to rule-comments@sec.gov. SUBJECT: SR–NYSE–2023–09
Securities and Exchange Commission
Division of Trading and Markets
Assistant Secretary, Christina Milnor
Re: file number SR–NYSE–2023–09 - Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies
Assistant Secretary Milnor,
I appreciate the opportunity to comment on this matter, as it represents a momentous change in the way the market and the planetary landbase relate to one another, a change which is largely unrecognized in the vast majority of the public, even among people who consider themselves to be informed about finance or ecosystems. I believe there are fundamental ways that the proposed rule change does not meet the standard of “just and equitable principles of trade” and that the proposed rule of the exchange is NOT “designed to prevent fraudulent and manipulative acts and practices.”
Enclosure is not Production- value not apportioned equitably in keeping with 15 U.S.C. 78f(b)(5)
The creation of this market converts by fiat non-monetized common 'goods' into corporate assets which profit private individuals (either through employment and fees related to the management and the measuring, monitoring, reporting and verification (MMRV) or through appreciation of the stock for shareholders). This fiat ‘Enclosure' through MMRV is fundamentally different than creating value by production. Because the value is intrinsic to the land, determining how the identified value should be apportioned is perhaps uniquely difficult to do in a manner that is “just and fair.” In spite of equitable benefit sharing policy, the fact is that a tiny fraction of the world's people who can invest and play risk in the markets, along with the always-growing class of people who are required to track policy outcomes in an ever more complex world, will profit from this newly-generated asset class.
The core question for all the marbles, for the planetary systemic transformation towards a condition that supports widespread wellbeing in the coming centuries, is this: if we allow the Asset Managers to make their money by creating this new asset class, will they find it in their hearts, skills, and new-market driven incentives to heal damaged places? Many of us carry a deep apprehension that layering more separable monetizeable “rights” onto Land will alienate People even further from the true story that we come from the land and belong to its community of all Life. And we’ve seen how fund-managed group care homes saw declining quality and length of life for residents on the whole.
We may tend and nurture life on the land with our adaptive minds, restoring the Garden that was our ancient home and birthright before our great separation. The sense that we are gods who manage the world but are not of it is a false sense. That we can name and measure a service does not mean we served or created the conditions for that service. Perhaps this is the way to the sacred economics of the more beautiful world our hearts know is possible, but it is at least as likely that this policy allows the exploiting hand to extend into the last frontiers where the world has thus far maintained a quality of being organized by original principles, principles much older than markets. This question can’t be avoided. You make a choice on this question, as there is no barrier left beyond you and this rule, no barrier beyond here and now where this question will be addressed before the change is made.
To preserve the appearance of fairness, we are told that all the massive pulse of capital generated during this new Enclosure will be invested in conservation of the lands which are gathered into Natural Asset Companies. However, “capital raised through an NYSE-listed NAC's initial public offering or follow-on offerings must be used to implement the conservation, restoration, or sustainable management plans articulated in its prospectus, fund its ongoing operations, or otherwise fulfill its purpose to maximize ecological performance (i.e.,the value of natural assets and the production of ecosystem services).” An unknowable percentage of this massive pulse of capital will be incorporated into corporate “operations” budgets and another unknowable portion will be used for “maximizing ecological performance” which in this framework can include logging, grazing, fishing, and trading carbon credits, as long as the take is less than the projected replacement rate. In fact, the charge to “maximize” means that this should be done at the highest rate which is technically still not crossing the line to “unsustainable”—another impossible line to honestly and accurately identify in a time of massive ecological planetary instability.
Ecosystem Service Value Inherently “Manipulated” in contra to 15 U.S.C. 78f(b)(5)
It may be that the people who formed this plan many decades ago, back when people first spoke of Environmental Economics, truly envisioned a lever to “protect, restore, and grow the natural assets under their management to foster healthy ecosystems” <https://www.intrinsicexchange.com/ >. Sometimes it seems that the most likely pathway to change behaviors in a society with a market economy at the center is to bring positive and negative externalities which impact ecosystems into the market space so that they are accounted for. However, the complexity of natural systems means that the ecological accounting and measurement is always interpretive, and that the interests of shareholders and those of the ecosystem which might be “fostered” are in tension. The Commission would be ultimately responsible for regulating this interpretive accounting were it to allow trading of NACs. Perhaps by attending to the detail of the ecosystem service valuations the Commission could ensure that “the rules of the exchange are designed to prevent fraudulent and manipulative acts and practices,” but, as written, we believe that the valuations of these services are inherently manipulated and manipulative.
For example, in the 'stylized example' available at <https://seea.un.org/ecosystem-accounting > we can see that once the unambiguously quantitative elements like the area under a particular ecosystem type or the species richness in a baseline measurement are established, the value of ecosystem service flows must be determined (ES Flows Tab). These exchange values for never-before-traded services have to be made up, and they have to be made up every year. The structure proposed ensures that the individual services are never traded on an open market, because of course the intention is not to exclude people from access to “water filtration” and then see what they will pay for it on an open market once it has been taken from them. And so, these data points have to be made up by “Compilers” who may be experts at statistics or ecosystems or both, but who won't find comps for the dollar value of water filtration which reduces nitrogen in run off and or the cost of algae blooms in the ocean-- because that data doesn't exist. And unlike in the case of property valuations, the affected party (in this case an ecosystem rather than a homeowner, for example) cannot contest a valuation which it perceives to be against its best interest, removing one of the other means that valuations can be checked. Since NACs are only traded based on their Total Economic Value which aggregates all of the ecosystem stocks and service flows for a unique project; only that total value is ever traded and priced in a market setting, never the underlying services.
This selection from 10.74 of the SEEA-EA reveals another facet of this challenge.
The final aspect in establishing the expected future returns is forming expectations about future institutional arrangements. The starting assumption for accounting purposes is that the current institutional arrangements will continue to apply. However, in cases where it is strongly expected that these arrangements will change in the future and the nature of the changes can be clearly understood, the effects of future changes in institutional arrangements and the expected timing of the changes should be factored in when estimating the future returns of ecosystem services. Examples of relevant institutional arrangements include natural resource management regimes, taxation arrangements, government environmental conservation programs and markets for environmental services (e.g., carbon markets)
As observed in the “stylized example,” (Monetary Asset Tab) a portion of the movement in the asset value was generated by revaluations, not by actual physical flows either positive or negative. Does this reflect that the value of these NACs will rise as water and fish and wood and filtration become more scarce and precious, even if the Asset Managers don't improve the underlying biophysical conditions? As speculation about carbon markets grows, does financial speculation drive the price up without requiring actually growing stock of carbon in the soil of the ecosystem type? The accounting shown in the chosen UN framework is not like the application of a standard depreciation against a property with an initial price determined by its purchase or sale price because the ecosystem-services are non-excludeable and fundamentally outside market dynamics. How can the Commission ensure that “the rules of the exchange are designed to prevent fraudulent and manipulative acts and practices” with regard to the individual valuations of many distinct services within and underlying the Total Economic Value of each NAC?
Defining “Sustainable” and pressures on Compilers influencing measurement
“As proposed, while the core purpose of a NAC would be to maximize ecological performance, a NAC would also be required to seek to conduct sustainable revenue-generating operations (e.g.,eco-tourism in a natural landscape or production of regenerative food crops in a working landscape) provided that such operations are consistent with the NAC's charter, do not cause any material adverse impact on the condition of the natural assets under the NAC's control, and seek to replenish the natural resources being used. Under the proposal, all NACs would be prohibited from directly or indirectly conducting unsustainable activities, such as mining, that lead to the degradation of the ecosystems it is trying to protect.”
As I’ve suggested above, identifying the point where sustainable activity shades into unsustainable is not a judgement-free calculation. Also note that the rules require only that the “operations” “seek to replenish natural resources.” This confirms recognition of the sticky problems I’m pointing to here, e.g. the managers of the NACs will not really know if they have effectively replenished and are continuing to effectively replenish natural resources, so the rules require only that they “seek to” move in this direction. This is a fig leaf. Logging companies operating today could argue legally that they are “seeking to replenish” by planting seedlings on demolished hillsides of mud and invasive bush honeysuckle, and they do claim.
Additionally, the writers of the rules recognized that there will be incentive and pressure on compilers to give the appearance in Measurement, Monitoring, Reporting and Verification that the ecosystem health is better than the reality; and that the amount of sustainably removeable ecosystem outcomes is higher and holding steady. For this reason the rules require that the auditors of the financial statements of NACs also audit the Ecological Performance Reports.
“The audit committee of the NAC must… set clear hiring policies for employees or former employees of the Independent Reviewer. Employees or former employees of the Independent Reviewer may be valuable additions to the NAC’s management. Such individuals’ familiarity with the business, and personal rapport with the employees, may be attractive qualities when filling a key opening. However, the audit committee should set hiring policies taking into account the pressures that may exist for personnel of the Independent Reviewer consciously or subconsciously seeking a job with the NAC they review.”
How does one set hiring policies to “take into account” these pressures? This critical question is not addressed in the proposed rules.
Perverse Incentives
The only Material Information example is “forest fires” which leads me to consider “Forest Fires and Selling Short.” That primary food crops are also commodities makes it far more difficult to redesign a food system more in keeping with planetary limits and human needs. We should not repeat this by commodifying ecosystem services.
In the current draft of the rules, delisting is the only penalty for taking up “unsustainable” activities like mining. This enables scenarios where money is made trading on ecosystem services for some intermediate time while the price of raw materials continues to rise and then the ecosystem is demolished later when a new approach is more profitable. While understanding that the holder of the ecosystem rights may not be the same as the holder of the mineral rights on a property, it seems that there will be scenarios when the purchase of the ecosystem rights and the exclusion of some productive activities on a piece of land drive the price of the underlying asset down, which can then be bought by the same parties which own the ecosystem rights, enabling this path where ecosystem services pay a dividend until mining a plot is perceived to be an “unfortunate but inescapable necessity.” The penalty for taking up unsustainable activities on these lands after earning on their freely provided ecosystem services should be greater than “delisting”.
Keeping management in local hands
“It seems obvious that those who are in constant touch with the land are the ones who best know what to do. It lowers quality, happiness, and health for non-farmers to organize farms. Organizing for short term profit rather than long term abundance creates problems on farms. Living organisms are organized, and a comprehensive view is required to understand the many interactions that make a farm thrive. The farmer is the only one who is in the position to organize this complexity” (Agriculture Abridged- Rudolf Steiner’s 1924 Course by Jeff Poppen, 2020 pp.13).
The above is true of other local landscapes as it is of farms, which may be included in these NACs. As the previous sections of this comment indicate, ecosystem services are not like other services, partly because the most critical of them are non-excludable and can’t therefore be priced through market exchange on the services themselves, partly because the projections of what they might produce in units or currency are something like infinitely more complex than projecting what revenue an apartment complex or a factory might be projected to produce. What an ecosystem produces is the result of trillions of microscopic interactions, none of which are directly controlled by so-called managers, but rather flow in waves of causes and effects occurring between soil life, plant life, animal life, minerals, all weather, solar radiation, telluric currents, lunar and planetary influences, relationships, food webs, cycles and recycles, molecular chemistry…
What if health care financing was dependent on patient outcomes, even categories of patient outcomes as in “the underlying asset of all patient’s circulatory systems was maintained or improved in quality”? Could the asset manager control that outcome? Could they effectively measure that? Now project that thought exercise onto a node or organelle in a planetary water system. Does the asset manager “manage” the water? Does it know how? If a person were going to take responsibility for outcomes in “patient’s circulatory systems” for Hospital System X, would it make more sense for that “person” to be a company incorporated in Delaware, or a lead nurse on the floor?
It will be proposed that AI will become more effective than the lead nurse. In the hospital example, the patients at least are probably being monitored relatively closely with sensors. But not that closely. It still takes a nurse to find the vein, to hook up the blood pressure test cuff. Meanwhile, the sensor landscape, thankfully, is nowhere close to having the level of data needed to effectively model landscape-scale ecosystem processes. This takes people. People who are closer to the land know better what metrics matter in their particular landscape, the seasonality of water, the tipping point when an over-dominant plant species needs addressed and when it can be safely ignored.
William Irwin Thompson writes in his 1987 work Gaia and the Politics of Life (published together with James Lovelock’s Gaia Hypothesis which clearly has a place in the heart-minds of some of the people who think marketing ecosystem services will be good for ecosystems),
“In the domain of science, the hatred of ambiguity, wildness, and unmanageability creates a superstitious belief in technology as an idol of control and power; thus irrational experiments like nuclear energy and genetic engineering become forms of seemingly managed activity that generate chaos and disease…The more chaos there is, the more science holds on to abstract systems of control, and the more chaos is engendered. There is no way out of this closed loop through simple rationality, or through the governing systems that derive from this rationalization of society” (Gaia and the Politics of Life: a program for the Nineties? pp. 211).
Do you want to be the Commission that crosses the boundary in law and economy, bringing the hand of the market to the next frontier of the planetary commons, the networks of beings and elemental structures which support life on Earth? I humbly request that you do not approve the proposed rule as written, and do not permit assignment of tradeable asset status to ecosystems or to their processes and products through the vehicle of Natural Asset Companies.
Sincerely,
Alice Melendez, natural person
Yes... "the value of these NACs will rise as water and fish and wood and filtration become more scarce and precious, even if the Asset Managers don't improve the underlying biophysical conditions." There you have it.
Thanks for sticking an oar into muddy waters, Alice.
"The creation of this market converts by fiat non-monetized common 'goods' into corporate assets which profit private individuals"
Very well said!