Ideas
Pavan Sukhdev

How can the value of nature be embedded in the world of business?

Burgess COMMENTARY

Peter Burgess

How can the value of nature be embedded in the world of business?

Natural capital isn't about putting a cash value on a Siberian tiger or a mangrove forest; it's about business risks and costs

Siberian tiger growling
Natural capital does not require costing up a Siberian tiger, it means understanding risk to avoid future surprises. Photograph: Mathieu Belanger / Reuters/REUTERS

Natural capital is a new class of business risk that is often overlooked. It is measured in terms of the structure and function of ecological systems. For example, wetlands buffering coastlines from storms, forests sequestering carbon and enabling natural filtration of water as well as the recharging of underground aquifers.

A former banker at Deutsche Bank, Pavan Sukhdev, has been drawing attention to the importance of natural capital for years, since leading The Economics of Ecosystems and Biodiversity (TEEB) study and reports.

Natural capital is simple. The value of well-functioning natural systems is clearly manifest to all people and companies – in the form of clean air, reliable availability of freshwater and productive topsoil in which to grow food, among other benefits.

Yet, the way that finance works – from GDP calculations through corporate to accounting – it is as if reliable flows from well-functioning natural systems have no value. And so, pollution associated with business operations are only additions to the balance sheet in the form of revenues earned from manufacturing and selling goods. Clearly, the value of nature is not zero. But, what is it? And how can this value be embedded into the number crunching world that is business?

A few pathways are emerging to help companies, investors and insurers, among others, factor natural capital into business decision-making processes.

1. Environmental profit & loss (EP&L) and corporate accounting approaches

In addition to Puma's development of an EP&L statement, Puma's parent company Kering is applying enhanced EP&L methodology across all its brands (including Gucci, Stella McCartney and Volcom). Novo Nordisk recently released its own EP&L. The Dow Chemical Company is assessing 'nature's value to a company' and teamed up with Royal Dutch Shell and Swiss Re to examine the business case for 'green infrastructure'.

2. The Investment Risk Pathway

Bankers and investors are beginning to explore a different approach to get at similar issues. It is based on risk exposure, or more specifically what we at BSR describe as 'ecosystem malfunction risk'.

Considering this new risk begins by asking whether a company's reliance on particular key inputs into the business can be reliably provided by natural systems over time, as well as its impacts associated with operations that may alter, and undercut, ecosystems.

For example, for utilities with hydropower facilities, illustrative questions include: will rainfall be sufficient in an era of climate change to keep turbines of hydropower plants above water, or not, as has been the case in Ghana?

For companies that rely on ocean water to cool facilities: will ocean temperatures be within the specified range to cool facilities, such as nuclear power plants? Or will they rise during hot summer months above that range, thereby forcing facilities offline until water temperatures are back within range, as has occurred in recent years?

For companies reliant upon water from underground aquifers: will underground aquifers 'recharge', or re-fill, at rates needed to satisfy the demands of all businesses as well as residential users, or might your company be operating in an area that faces groundwater depletion?

For agricultural, food and beverage companies: will bees and other natural pollinators be around and available to pollinate apples, almonds, and other crops, or will we face more bee colony collapses with effects on agriculture?

The questions go on.

While both approaches have merits, it can be challenging to agree upon the monetary values of nature. Hence, the considerable (and diverse) array of analytical tools and approaches, as laid out in a recent BSR working paper. This situation is the rationale for the new Natural Capital Coalition initiative, which focuses on a harmonised approach to valuation.

In the interim, until such a clear, credible approach is created, validated and verified, there is a way forward that does not require placing a monetary value on a Siberian tiger, a tiger shark, a wetland, or a mangrove. Rather, corporate decision-makers can assess the magnitude of risk, particularly when viewed in terms of importance to the business as well as cost of avoidance or mitigation actions. For example, the Hyogo framework offers guidance on disaster risk preparation, including related environmental factors, such as climate change and water scarcity.

It is time to reconsider risk protocols to include consideration of natural capital, including unintended effects to businesses associated with biodiversity loss and changes in the flow of ecosystem services. Valuing nature in business decision-making processes does not need to be slowed by the lack of clarity on the 'price' of elements within nature (though ongoing work is seeking to address that issue), but can be acted upon immediately within a magnitude of risk to business approach.