Challenges and Solutions
During the Natural Capital Business Roundtables, companies identified several challenges for incorporating natural capital into business decisions, including:
- Lack of trusted data or methodology for quantifying use of and impact on natural capital
- Insufficient business case to make natural capital work attractive
- Absence of external incentives for undertaking natural capital work
- Lack of awareness, knowledge, and communication strategies around natural capital
Companies, non-profit organizations, academic institutions, and the federal government continue to work collaboratively to develop solutions to mitigate these problems and catalyze more and better work around natural capital.
Problem: Data and Methodology
When businesses incorporate natural capital into their decision-making, it creates space for improvements in a range of areas, such as supply-chain management, risk assessment/management, business sustainability, resilience, and uninterrupted production and operation. To begin thinking about incorporating natural capital into decision-making, businesses might ask questions such as:
- What percent of capacity of location-dependent natural assets is a business using and can these resources be replenished?
- What part of production, including location and suppliers, is based in and/or dependent on natural capital?
- How can a business create robust returns on investment given possible risks to, or scarcities of, natural capital (i.e., hurricanes or coastal storms)?
Even when metrics on natural capital are available, it is not always easy to interpret them or put them in the appropriate context. Sissel Waage of Business for Social Responsibility (BSR) writes:
Requiring multiple data points to contextualize information and generate insight is common within the private sector. Investors scoping out start-ups in the 1990s dotcom era would request to see numbers on total profits, as well as costs, and revenues to provide context in which to interpret the businesses’ prospects.
And yet today, many investor and corporate managers are operating with environmental metrics that are utterly without context and therefore impossible to interpret in terms of level of importance. How can you understand profits, without seeing the numbers on costs? How can you understand the relevance of a [sic] decreasing corporate water use, without seeing the numbers on overall demand as well as total availability of water in a particular watershed where a facility operates?
The World Business Council for Sustainable Development (WBCSD) writes that ecosystem valuation should be made using a common approach across different industries and types of businesses. It should also be credible and practical enough to be able to be integrated into business decision-making. They specify four different types of challenges related to ecosystem valuation:
- Informational: awareness and knowledge about the benefits of incorporating ecosystem valuation into business planning and how ecosystem values affect businesses
- Conceptual: a framework based on business profitability
- Methodological: a framework that incorporates economic, social and environmental goals that fit with business financial planning and decision-making
- Resource: Willingness to put forth funds, skills, and expertise to undertake ecosystem valuation as well as the support of business leaders.
Solutions: Data and Methodology
Efforts are underway to improve the measurement of how firms impact and depend on natural capital. For example, Trucost calculates environmental impacts across operations, supply chains and investment portfolios through a model which profiles 464 industries globally and monitors 100 environmental impacts. It does so by also taking into account the interplay and relationship between sectors (to account for supply chain impacts). The profiles measure the impacts for a sector, according to its business activities. Its model uses reported environmental data; when not available, it uses data on fuel use or spending to translate to emissions data. It also converts quantity data into financial values. In this way this data can be used to quantify risks and opportunities.
It is also possible to start to quantify the value of certain products in nature and the services they provide using methodology from the ecosystem services valuation field. For example, the Natural Capital Project has created the InVEST software -- integrated valuation of ecosystem services and trade-offs, which is used to map and value the goods and services from nature for terrestrial, freshwater, marine and coastal ecosystems. These models are based on how changes in an ecosystem’s structure/function will tend to impact flows and values of ecosystem services and account for services’ supply and the location/activities of people benefitting from services. See also Gecoserve, the Gulf of Mexico Ecosystem Services Valuation Database. This database is a matrix, by ecosystem services and ecosystem type, of valuation studies relevant for the Gulf of Mexico. Beyond these examples, however, businesses need more regionally relevant data and business-relevant methodology in order to answer the questions above and translate the answers into values that make sense on a balance sheet.
The federal government is also making an increasing effort to provide relevant information on natural capital to help them with their decision-making. The Ecosystem Services Assessment: Research Needs for Coastal Green Infrastructure provides key information needed by Federal planners and decision-makers to advance the broad integration of coastal green infrastructure, and identifies priority research topics related to the use of coastal green infrastructure to reduce vulnerability and enhance resilience to climate-related threats in coastal areas.
The U.S. EPA’s Enviro-Atlas is a resource hub that provides public access to ecosystem goods/services related data and tools to understand, interpret and analyze ecosystem services. In addition to downloadable ecosystem services and biodiversity data and resources, it also allows users to overlay this data and information onto national and community maps. This allows the user to identify an ecosystem service (for example, natural filtration), obtain the percent of land covered by the ecosystem that provides this service, and map this information with different layers such as state/county boundaries, biophysical data or demographic data. The tools on Enviro-Atlas can also calculate indicators/index values for ecosystem services providing quantification of ecosystem provision, benefits, and drivers of changes.
Third parties are also using government data to improve the health of ecosystems. One example of a successful effort to use government data to improve the health of ecosystems is the development by Cornell University of a computational tool called Adapt-N. This tool uses climate and weather data to help farmers use nitrogen fertilizers more efficiently. This not only provides savings to farmers, on the order of $30 to $150 per acre, but it reduces the negative effects that nitrogen can have on the environment. For example, fertilizer is the leading cause of water quality degradation in river and lakes in the U.S. and the second leading cause of degradation in wetlands. Thus, more efficient use of nitrogen fertilizers can have significant positive effects on water quality.
Problem: Making the Business Case
Any natural capital project or strategy will have to show that it can provide benefits to a company before it can be implemented. There are several reasons why it can be difficult to make the business case for natural capital. For example, not all ecosystem services benefits accrue privately to a firm, some benefits accrue to the public. (See the section on natural capital and market failures.) It is not clear how businesses should value those public benefits. Additionally, many companies still have financial and accounting systems that value short term paybacks. Many natural capital projects have a longer payback period. Therefore, it is difficult for natural capital projects to meet company’s return on investment (ROI) standards and compete with other types of projects for financial capital. Sometimes the necessary financing is simply difficult to come by.
It is also difficult to make the business case for managing natural capital risks, for a few reasons. First, many natural capital risks are low-probability. Even if companies are able to monetize natural capital-related risks, managers will still challenge the value of addressing those risks because they are so unlikely to occur. Also, natural capital risks do not occur uniformly over time. Additionally, “bad actor” (lowest common denominator) risk leads to high premiums and regulation, and there is a sense of needing to design regulations to meet the needs of those bad actors rather than rewarding those who are doing more.
Permanence is also an issue, as natural infrastructure, for example, can be wiped out in a severe storm. Another issue that is gaining more attention is stranded assets -- assets that must be recorded as a loss after under-performing, or which become obsolete prior to the end of their expected value cycle. For example, companies whose customers or products are based in the carbon economy face tough decisions if they want to shift their business practices to decrease their impact on climate regulation. Finally, many people and businesses still fundamentally struggle with how to address environmental issues while creating growth and jobs.
Solutions: Making the Business Case
One tool that has great potential to address some of the difficulties businesses face making a case for natural capital is the Natural Capital Protocol. The Natural Capital Protocol is a framework that businesses can use to assess their interaction with natural capital. Through consultation with businesses, this protocol will also help in the development of standard principles for valuing natural capital and accounting. While there are ways to measure and value natural capital, there is not one that is broadly acknowledged as the standard practice. Sector guides will establish the business case for natural capital measurement in specific sectors. (Note it will not provide formulas, a calculator, or a comprehensive list of price impacts nor provide a guide to incorporate results into financial accounting.)
Portfolio diversification is one strategy that can help companies make the business case for natural capital work. Taking a portfolio approach can justify the output of an overarching strategy without having to justify individual projects, some of which may have short-term losses, less tangible benefits, or longer-term paybacks. It also allows a company to take a risk in a nascent area of natural capital work and offset it elsewhere with tried and true projects.
Businesses can also collaborate with each other on mutually beneficial natural capital investments. This aggregates demand and dissipates risk across companies. An example of this is eco-industrial parks, which are communities of businesses that focus on local/regional resource and energy flows with the intention of maximizing efficiency, material conservation and waste minimization (and therefore profit maximization) between and amongst themselves. For example, inside one of these industrial parks, multiple co-located companies might jointly invest in a shared solar array to meet their energy needs. The experience in the U.S. thus far is in its early stages. In another example, during the Natural Capital Business Roundtables General Motors mentioned that it rented a solar panel-run facility rather than create and pay for one, and considers it a sunk cost that may or may not pay off. In this sense it mitigated risk of the solar panel before it was fully integrated or paid for.
Working together allows for efficiencies and integration across different elements. For example, one organization’s waste can become source material for a co-located companies’ product. Dow, knowing that its expertise is chemical engineering rather than biology, partnered with The Nature Conservancy to help them bridge the technical knowledge gaps so they could implement a natural capital strategy. This means that a company has to recognize its limitations, and reach out for help when needed.
It is also important to have an overarching natural capital strategy that brings together existing efforts and discourages piecemeal work. This includes collaborating across internal departments, across businesses and sectors, and utilizing tools like public-private partnerships (PPPs) to get work done.
Finally, it is important to be patient: Many companies at the Roundtables described a step-by-step process for implementing natural capital projects, and recommended not trying to jump directly to the “end game”. They emphasized starting small and collecting early wins, and being strategic and proactive rather than reactive.
According to companies that attended the Roundtables, the absence of external incentives, particularly the absence of markets for natural capital and ecosystem services, contributes to a lack of urgency to move forward with natural capital projects. (See the information in the section on natural capital and market failures.) Many companies face a host of daily, pressing concerns; they need external drivers and support to encourage natural capital work.
There are several potential solutions to this problem, some internal and some external.
First, companies at the Roundtables said that they take advantage of existing drivers to create change within their company and advance natural capital work. For example, Business to Business (B2B) companies already put requirements on their suppliers, some of which are related to sustainability. They can also ask for more stringent supply chain requirements from customers. However, private-sector participants acknowledged that unless natural capital is framed as a requirement, companies will only do things that are cost-reducing. This is especially true for small businesses.
BP described their process for integrating natural capital values into their business model. They utilize both formal and informal processes. For example, prior to purchasing leases, they look at indicators to determine the natural assets on the property and what their impact would be during the time of their lease. They also use a life-cycle assessment in decision making.
However, it often takes an external push to encourage natural capital work, and that requires things like markets and insurance incentives.
Insurers’ premiums are meant to reflect the risk involved in the coverage. To the degree that a business mitigates against risks, it can qualify for credits (or discounts) or reduce debits (or surcharges). Insurers incorporate risk management in two ways. They offer a formal schedule of credits/debits based on quality of risk a business faces in what is called a schedule rating. They can also offer individual risk credits in situations where the schedule rating does not account for the risk management the underwriter knows the business has undertaken. See The Insurance Information Institute for more information.
An incentive related to the insurance market relates to actions taken to mitigate liability losses. The Insurance Information Institute writes that businesses can be sued and insurance coverage does exist to protect directors and officers against claims that they did not manage environmental risk, such as global warming exposures. Lawsuits could also be filed against a business for actions that harm the environment. Shareholders could also file suit against a business for not disclosing information that could affect the financial health and shareholder investment in the company. (In 2014, Farmers Insurance filed class-action lawsuit against some Chicago communities, alleging that they had not prepared enough against the previous year’s flooding which caused significant property damage which they claim could have been predicted based on global warming.)
Ecosystem services markets, like the carbon market in California, provide another means of incentives to control/limit pollution and its effects on the environment. California has established a cap on annual emissions on businesses/covered entities (the most egregious emitters) and each business has to have an emissions allowance for every metric ton of CO2 emitted. Emission allowances can be allocated to an entity by the government, purchased at auction, traded, or created through offset projects. Businesses that exceed their allowance face a fine.
Problem: Awareness, Knowledge, and Communication
Finally, there is a fundamental lack of awareness of what natural capital is and its benefits. This is true for the general public, and also true for corporate decision makers. This translates into few experts knowledgeable about design and implementation of natural capital projects. However, some companies are capitalizing on the environmental values of younger workforce members, and attracting new hires with the talent and skillset necessary for this type of work.
Companies’ lack of awareness and knowledge about natural capital projects stems partially from difficulties in communicating across departments within a company, particularly given that these departments which may have divergent priorities. What resonates in one department often does not translate well across the culture, values, or language of another department. Companies need a common lexicon related to natural capital work, and the tools to translate that work across business units. Businesses also need help encouraging employees and managers to think broadly, and not immediately jump to a single interpretation of a word that could mean different things in different contexts.
Solutions: Awareness, Knowledge and Communication
A useful tool for understanding natural capital-related risks and potential mitigation strategies is the U.S. National Oceanic and Atmospheric Administration’s DigitalCoast. Primarily developed for coastal community planners, this resource is relevant for coastal business facilities, and particularly helpful for understanding impacts to communities surrounding those facilities. It provides a range of data, from economic to satellite imagery that is also supplemented with visualization tools, training, and predictive tools to aid in the interpretation and use of the data. For example, DigitalCoast assessed beach and dune susceptibility to storms and hurricanes and their effectiveness as barriers in coastal New Jersey.
The Case of Water
Water is one natural asset upon which virtually every business depends. The CDP Water Report for 2015 asked over 1,000 global, publically-listed companies deemed dependent on water questions about water risks. Based on the 405 companies that responded, 65 percent reported substantial water-related risks for their businesses. The report includes a host of resources for businesses relevant to specific water-related needs. For example, there are water use reduction case studies that can provide insight into previous endeavors. One example comes from Colgate Palmolive. This company required high-quality water for its production. By purifying and reusing the discharged high-quality water, rather than just discarding it, the company saves $250,000 annually and 26 million gallons per minute, resulting in a 95% water-waste reduction.
With respect to data needs, NOAA’s National Weather Service provides data, forecasts and warnings related to water. For Great Lakes-specific resources, NOAA provides short-term, seasonal, and long-term forecasts for water levels, along with tools like the Great Lakes Water Levels Viewer and Great Lakes Hydroclimate Dashboard. NOAA also monitors Great Lakes water quality, and produces forecasts for problems such as harmful algae blooms. Economics: National Ocean Watch (ENOW) provides time-series data on the ocean and Great Lakes economy and is available for counties, states, and regions and in a wide variety of formats.
To help answer questions on water risks and opportunities specific to a business’ operations, such as the amount of production generated from the most at-risk (for water scarcity) sites, or the adequacy of the water supply for its supply chain now and in the future, there are a host of tools. One example is the WBCSD Global Water Tool. This tool provides access to data and allows for its evaluation with key indicators, metrics calculations, a mapping function and a Google Earth interface for spatial viewing. To help answer questions related to procurement/logistics, a business can use tools such as the CDP Water Disclosure to gain information on the risk exposure and management of that exposure in the supply chain.