Why Should Businesses Care?
Businesses not only depend on natural capital assets, they can also impact them, and there are risks and opportunities involved in this dynamic. The figure below from the World Business Council for Sustainable Development (WBCSD) illustrates this dynamic relationship by showing selected business sectors and their associated dependencies and impacts on ecosystem services. For example, the ecotourism industry (a “green” enterprise) depends on the recreational value of the environment (a cultural ecosystem service) but can disturb wildlife habitats. Agriculture (a biodiversity-dependent industry) relies on the availability of water (a provisioning ecosystem service) but fertilizers in water runoff can affect quality of animal and plant life downstream, etc.
A recent Green Biz report also highlights natural capital connections to commerce. Most of the natural capital impacts on global industrial sectors are supply-chain related, rather than the result of direct impacts from the sector’s own operations. The table below shows that for 17 out of 19 industries, over half of the impacts are supply-chain related rather than direct impacts. For 11 industries, over 90 percent of their impacts are supply-chain in nature.
Companies are becoming increasingly aware of the ways in which their businesses have an effect on or depend on natural capital and ecosystem services. In a recent publication Business for Social Responsibility lays out some current trends in ecosystem services with respect to corporate activity. Based on their analysis of thirty-five global companies, they synthesize their research into four trends.
- Trend 1: A business case for action on ecosystem services is emerging within some industries.
- Trend 2: Corporate applications of ecosystem services concepts span the gamut of business decision types—from governance through strategy and operations.
- Trend 3: Moving from ecosystem services concept to action remains a challenge, due to relatively little corporate testing and sharing of effective approaches and tools.
- Trend 4: Many corporate managers’ preliminary conclusions about ecosystem services assessments are that they generate insights, particularly around business dependencies that may be at risk within a changing climate.
Source: Business for Social Responsibility
However, even though businesses can face risks to their profitability as a result of risks to natural capital, there are also opportunities to safeguard against these risks, develop other revenue streams, and generally work to ensure longer term resilience. One guide for identifying and managing these risks and opportunities is the Corporate Ecosystem Services Review, published by the World Business Council on Sustainable Development, The Meridian Institute, and World Resources Institute. The categories of risks and opportunities identified in the report include:
- Risk: A business that is seen as having a negative effect on the environment or that demonstrates a lack of leadership or innovation in this area can put its brand name and relationship to customers at risk. There could also be a community-based challenge to the operations of a business. For example, Chevron Texaco was sued by Ecuadorians alleging that the company was dumping enormous quantities of toxic oil wastewater into the Amazon River, which local tribes use for fishing, bathing, and drinking.
- Opportunity: On the other hand, incorporating natural capital into business purchases, operations, and investments presents opportunities for a business to be seen as a socially responsible corporate player, to differentiate its products and services from its competitors, and to develop a sense of trust with its customers. Whirlpool noted during the Department of Commerce Natural Capital Business Roundtable that it built trust with its customers by making natural capital a priority. During another roundtable, Dow mentioned that their work on natural capital attracted new, younger-generation talent who wanted to work for a company that was “sustainable” and socially responsible.
- Market and Product
- Risk: customer (public and private) preferences could shift towards other businesses that have a lesser impact on the ecosystem.
- Opportunity: firms might gain business by being involved in new markets/products/services with lower environmental impacts, such as certified “eco-labeled” products, and in new markets for ecosystem services such as carbon sequestration or watershed protection markets. For example, in 2005, Walmart changed its business practice to only buy shrimp from those fisheries certified by the Global Aquaculture Alliance for sustainable practices, and a year later committed to buying all of its wild-caught and frozen fish from sources certified by the Marine Stewardship Council.
- During the Department of Commerce Natural Capital Business Roundtables, we heard many examples of market and product opportunities. Whirlpool noted that 10-15 percent of their consumers are willing to pay more for appliances that are environmentally sustainable. Whirlpool also created a true ventless heat pump technology used in one of its dryer models to achieve a 73 percent energy reduction. General Motors saw competitors’ profits rise when their Zero Emissions Vehicles were eligible for high-occupancy vehicle (HOV) stickers, inspiring GM to create cars that were also eligible for the sticker. The Port of Cleveland dredges sediment, which is a combination of silt, sand and gravel from the Cuyahoga. Sediment flows downstream and must be removed since it tends to fill up channels and harbors, so dredging helps to ensure safe passage of boats and ships. The Port intercepts larger and heavier sediment upstream to leverage the energy of the water flowing there. This prevents the heavy sediment from entering the shipping channel and prevents the sediment from being contaminated by pollutants downstream. In this fashion, the Port creates a product safe enough to be sold and reduces the cost and amount of dredging. Additionally, during one of the roundtables, the biomimicry field was discussed. Biomimicry looks to nature and its strategies and patterns to help spur innovation and solutions for businesses. For example, a collaboration between GOJO (makers of Purrell, the hand sanitizer), the University of Akron, and Great Lakes Biomimicry has led to research to design energy-efficient hand soap dispensers and sanitizers based on how organisms in nature disperse liquid.
- Risk: Lenders might tighten requirements or raise the cost of borrowing based on perceived negative ecosystem impacts and dependence by firms. For example, ABN Amro is no longer financing projects that mine resources from areas that have a high conservation value. High conservation value can come from ecosystem services like biodiversity or watershed protection. During the Department of Commerce Natural Capital Business Roundtables, businesses mentioned that many investors require companies to disclose risks in their annual reports and see actions taken to evaluate and address those risks.
- Opportunity: Easier, better, cheaper access to capital to fund projects or investments that are environmentally conscious, by lenders who value that vision. Rockefeller Ocean Strategy invests in businesses that not only have positive outlooks but also positively impact the ocean ecosystem. An early theme for such investments is improving the negative impact of trade on oceans. An example is a cargo ship that uses efficient and cleaner liquid natural gas.
- Regulatory and Legal
- Risk: Businesses can face new fines, permit/license denials or suspensions, lower quotas, extraction moratoria regulations, and lawsuits on behalf of those impacted by business’ effect on natural capital. For example, Union Pacific, a railroad company, was fined $102 million for damages in a 6,500 acre California forest fire. The company started the fire when cutting and welding rail without the use of tent shields. Fines were for firefighting and lost timber, and also included the negative impact on soil, wildlife, and recreation.
- Opportunity: Business engagement with government provides opportunities to help create policies incentivizing the protection of ecosystem services that businesses depend on and impact. There are also opportunities for businesses to develop new products to meet new regulations. Many of the participants in the Department of Commerce Natural Capital Business Roundtable from the oil and gas industry stated that they saw incorporating natural capital into their business decisions as a way to self-regulate and safeguard their competitive edge in the event that government regulation come along in the future.
- Risks: Increased scarcity leading to a higher cost of natural capital inputs; disruption to operations; and/or decreased output or productivity. For instance, water shortages during a drought in 2001 negatively impacted Anheuser-Busch, the beer brewery. These shortages increased the cost of irrigation for barley and decreased the amount of aluminum cans available for bottling as smelters-relying on hydroelectric dams for energy- decreased output as the cost of electricity jumped. During the Department of Commerce Natural Capital Business Roundtable, Water Standard (a global water treatment specialist company) highlighted $8 billion in agriculture loss from the 2011 Texas drought. It can be difficult for businesses to properly assess natural capital risks, but it is important. For example, the likelihood of a devastating coastal storm might be very small, but the negative impact of such a storm could be tremendous. In risk analysis, these are referred to as “low probability/high risk” events. The expected value of such a loss, namely the size of the potential loss times the probability of the event occurring, has to be weighed against the cost of the investments that would be needed to protect against the harm from such an event. Major Japanese automakers’ disruptions of operations due to flooding in Thailand is a telling example of operational risk not only for facilities but also throughout the supply-chain.
- Opportunity: To create greater efficiency and lower-impact industrial processes. During the Natural Capital Business Roundtable, Parker Hannifin discussed their water and energy-efficient plant in Chennai, India and its positive impact on hiring and retaining good employees.
Source: Corporate Ecosystem Services Review
The Corporate Ecosystem Services Review also notes that these risks are not mutually exclusive. For example, a regulatory risk could also lead to a financing, reputational, or market/product risk. The U.K. in 2004, declined to issue a permit for Associated British Ports to expand its port in Dibden because of the possible negative impact on the biodiversity of the coastal ecosystem (regulatory risk). The project was abandoned and the investment, in millions of dollars, was written off while the share price suffered after the permit denial (financing risk, reputational risk).