We Are Discounting the Future Out of Existence - And Calling It Finance
There is a number quietly embedded in almost every financial model for a nature-based project. Most people never question it. Yet more than almost any other variable, it determines whether restoring a mangrove forest, protecting a fish stock, or regenerating degraded land looks value-adding or uneconomic.
That number is the discount rate. And the way it is applied to nature is one of the most consequential misguided applications of modern finance, one that is literally devaluing our future.
The Hidden Assumption
The discount rate is often presented as a technical detail. It is not. It is a value judgment about how much the future matters and whose future counts. When a model uses a high discount rate, it is saying that benefits arriving decades from now are worth very little today.
The logic behind this is intuitive in the right context. Money received today can be invested and grown. A pound now is worth more than a pound in twenty years. For a factory or a piece of machinery, assets that depreciate, become obsolete, and sit in a competitive market, this framework makes reasonable sense.
But a fish stock is not a machine. A mangrove forest is not a warehouse. These are living systems whose value does not simply depreciate over time. In many cases their value rises, as climate risks increase, as other ecosystems degrade, and as the services they provide become harder to replace. Yet the financial logic used to assess them is still borrowed from industrial capital, applied wholesale to assets that behave in fundamentally different ways.
The Maths of Devaluation
The effect of getting this wrong is extraordinary. At a standard corporate discount rate, long-term ecological value is crushed. A benefit that may be immense in 30 or 40 years can appear almost negligible in today's investment appraisal. Fish stock recovery worth billions to a fishing economy registers as barely worth protecting in a standard financial model, until it is too late. A mangrove forest that will shield coastlines from storms for 80 years looks marginal on a routine NPV calculation. The cultural and ecological value passed down to future generations of indigenous communities approaches zero in conventional discounted cash flow analysis.
This is not just a modelling issue. It changes real decisions. It affects whether a coastline is protected by mangroves or left exposed. Whether a fishery is restored or over-extracted. Whether communities that depend on healthy ecosystems are treated as stewarding valuable assets or simply standing in the way.
The Assumption That No Longer Holds
Defenders of higher discount rates have a ready answer: future generations will be wealthier than we are today, so a pound in the future is inherently worth less than a pound now. If the world keeps growing richer, it makes sense to weigh present costs heavily and discount future benefits. This logic has dominated mainstream economic thinking for decades and sits at the heart of influential work by economists such as William Nordhaus, whose climate models argued that aggressive action today was hard to justify because future generations would be better equipped to adapt.
It is a coherent argument, but it rests on a critical premise that is rarely stated explicitly: that economic growth is independent of the natural systems it is drawing down. That premise is wrong. The World Economic Forum estimates that over $58 trillion of global GDP, more than half the world's entire economic output, is moderately or highly dependent on nature and its ecosystem services. Degrade the natural world, and you degrade the engine of the very future wealth that the orthodox discount rate assumes will exist. The argument for discounting away nature's long-run value is, at its core, self-undermining.
Once climate change and biodiversity loss are taken seriously, it becomes even harder to sustain. A future with more extreme heat, declining fisheries, degraded soils, disrupted water systems, and widespread ecological loss is not straightforwardly "richer" in the ways that matter most. And even if some forms of produced capital increase, they cannot simply substitute for what is lost. A destroyed reef is not replaced by a larger GDP. A collapsed fish stock is not compensated for by a new office block.
The conventional framework assumes that natural capital can always be substituted away and that future generations will inherit a larger overall stock of wealth. Under accelerating climate and biodiversity stress, those assumptions are becoming increasingly fragile. They are not neutral. They shape the outcome before the model has even begun.
The Science Is Moving the Other Way
That is why the intellectual debate on discounting has shifted so markedly in recent years and why a growing body of evidence challenges the orthodox position.
The first challenge is ethical. Nicholas Stern's landmark review on the economics of climate change argued that applying a high discount rate to future welfare is morally indefensible. It implies that the lives of people born in 50 years count for almost nothing in our calculations today. Stern used a near-zero pure time preference rate, and found that the economic case for urgent climate action became overwhelming. His critics argued his rate was inconsistent with observed market returns. But that objection misses the point: market returns describe what investors currently demand, not what rate is ethically appropriate for decisions affecting future generations.
The second challenge is theoretical. The late Martin Weitzman demonstrated that when we are genuinely uncertain about long-run growth and future discount rates, as we always are, the mathematically correct approach is to use rates that “decline” over time, not remain fixed. The further into the future a decision reaches, the lower the effective rate should be. Several governments, including the UK's, have incorporated this insight into their public appraisal guidance.
The third challenge is about asset type. Christian Gollier's work on ecological discounting makes a more precise argument: different assets warrant different rates. Produced capital, factories, machines, infrastructure, can legitimately be assessed at conventional market rates. But biodiversity-related benefits, which become relatively scarcer as economic growth continues and ecosystems shrink, should be assessed at materially lower rates, potentially as low as 1.5%. The relative scarcity of nature compared to produced capital is only going in one direction.
And a 2024 paper in Science added empirical weight to the case. It showed that ecosystem service benefits can ‘increase’ as ecosystems become rarer, partly because wealthier societies value them more, and partly because their absence becomes more acutely felt. If that is right, then applying a high fixed rate to long-duration nature revenues is not simply conservative. It systematically encodes into finance a prediction that nature will matter less tomorrow, just as the world is demonstrating it may matter considerably more.
Policy is beginning to respond. In the UK, HM Treasury launched a formal independent review of the Green Book discount rate in 2026, following stakeholder concerns that the current rate may unfairly penalise long-term transformational investments in climate and nature. The direction of travel is clear. The pace, however, remains too slow.
The Philanthropy Trap
In the meantime, the investment world has largely found a workaround rather than a solution: blended finance. Public institutions absorb first loss. Philanthropy accepts below-market returns. Governments provide guarantees. All so that private investors can meet their standard hurdle rates and projects can proceed.
As a short-term mechanism for getting individual projects built, this can be useful. But as a long-term model, it is ethically uncomfortable.
Too often, blended finance means that public and philanthropic money is used to compensate private investors for using the wrong valuation logic in the first place. It socialises risk while preserving private return expectations. Nature becomes permanently dependent on the goodwill of foundations and public budgets, rather than on the honest logic of markets. As the economist Mariana Mazzucato has argued, blended finance should be used to change market structure, not to permanently prop up returns for investors who have not updated their frameworks.
Changing the Rules, Not Subsidising Them
The real task is not to make nature dependent on philanthropy. It is to change the institutional rules so that capital markets can recognise long-duration ecological value honestly.
That means several things in practice. Reforming discount rates in public appraisal, and over time in private investment practice, so that long-horizon nature benefits are not rendered near-worthless before analysis has even begun. Recognising in valuation standards that some natural assets are scarce, appreciating, and difficult to substitute. Ending the harmful subsidies that still reward ecosystem destruction at scale, because no volume of clever green financing can offset incentives of that magnitude flowing in the opposite direction. And reserving public and philanthropic capital for genuine public-good provision, rather than deploying it to make nature legible to private equity on terms that were designed for something else entirely.
Elinor Ostrom showed that tragedies of the commons are not inevitable. They are the product of rules, incentives, and institutions. Change the rules, and you change the outcome.
A Question of Choice
The discount rate applied to nature is not a law of economics. It is a choice, a choice about whose future counts, how far ahead we are willing to look, and what kind of world we believe we are heading into.
Using the wrong rate is not prudent. It is reckless, in the most precise sense of the word: it fails to account for consequences we already know are coming. The question is not whether the world can afford to use a lower, more appropriate rate for long-duration ecological assets. It is whether we can afford to keep using the wrong one.
