Making the business case for natural capital valuation
A Rosetta stone for the private sector?
26th Sep 2017 by Edwin Piñero Guest Authors
Sustainability consultant Edwin Piñero considers how natural capital approaches can motivate the private sector to start taking sustainability seriously
I have prepared for and presented at various events where the discussion of the business case for natural capital investment was the topic. Ironically, the discussions have been in either business-heavy groups, or conversely, conservation-heavy groups. In all cases, the groups were not evenly balanced, although it was clear that most agreed there is economic value in natural capital and ecosystem services. Businesses certainly understand this point, but that does not guarantee that the business case can be made for specific investment or integration. In parallel, I have been in involved in numerous events and discussions, predominantly in business-focused settings, talking about the circular economy.
I used an analogy in those aforementioned presentations where I stated that what we need is a Rosetta Stone for translating natural capital value into business case inputs. The Rosetta Stone refers to the stone found in 1799 that provided the core translation between Egyptian hieroglyphics, early Egyptian text, and ancient Greek. In essence, it opened a door that allowed understanding across different languages. The term is now often used to refer to a key tool that translates across languages, thereby promoting common understandings.
I argue that we need a Rosetta Stone for making the business case for investing in natural capital beyond reducing the demand on raw materials. And I contend that the business case for transitioning to a circular economy can serve that role. The entire basis of the circular economy that makes it different from more traditional industrial ecology and design for the environment concepts of the 1980’s and 1990’s is that there is now a much stronger economic perspective. True, circular economy has significant environmental, biodiversity, and natural resource value. But it has equal emphasis on cost efficiency, creating opportunity, reducing risks associated with raw material availability and price volatility, and addressing indirect costs of environmental degradation and resource depletion.
“The reality is that regardless of the social responsibility value or other sustainable development commitment the company may have, any dedication of resources, financial or otherwise, needs a compelling business case.”
The Ellen MacArthur Foundation report “Towards a Circular Economy: Business Rationale for an Accelerated Transition”, explicitly points out the role of natural capital. Specifically, the need to slow down resource depletion as it degrades natural capital. But natural capital can play many other roles in achieving the spirit of circular economy practices. Such roles can include water treatment, flood management, infrastructure resilience, and many others. Each of these roles reflects using nature in lieu of built facilities and grey infrastructure.
So what is holding up more wholesale integration of natural capital investment as part of the transition to a circular economy? What appears to be slowing uptake is the complexity in making the investment business case. One can argue we need such a translation approach for many sustainable practices. This challenge of making the business case is common when it comes to adopting any type of sustainable practice. The reality is that regardless of the social responsibility value or other sustainable development commitment the company may have, any dedication of resources, financial or otherwise, needs a compelling business case.
This is not intended as a slight to sustainable solutions. All business decisions typically need a business case. I have held C-Suite positions in both public and private sector settings and in all cases, be it for a new computer system, new employee hiring, or energy efficiency projects- we had to make the business case when competing for the often limited investment resources. None of my counterparts ever challenged the inherent value of doing the right thing for the environment, and there were even resources allocated for work to be done simply because it was the right thing to do.
But that is a different discussion than what occurs in strategy and planning sessions when it comes to proposing investment in projects that are competing for allocation of company resources. In these cases, we had to show how such an investment would be good for the long-term health of the business. But whereas it is relatively “easier” to discuss practices such energy efficiency and waste reduction in business case terms, it is a bit more challenging with natural capital and ecosystem services. Therefore, I offer several tenets that make the case for a “natural capital to business case Rosetta Stone”. These can be characterized in the context of three “languages”: financial, value, and leverage.
A key unit of measure for making the business case has to be financial. In other words, monetizing the impact or benefits will help promote common understanding between organizational elements. One difficulty in doing so is the angst and controversy surrounding the concept of putting a dollar value on nature. We need to keep in mind though that we are not trying to price “nature”. The intent is not to put a dollar amount on a tree or a river. Instead, it is the service provided by natural capital that is being valued. It is not practical to price a wetland, but it is possible to put a dollar value on the reduced risk to infrastructure from flooding that is provided by wetlands. Once we accept that we are monetizing natural capital or ecosystem services, and not putting an intrinsic value on nature itself, we can get past the discomfort.
Second, we need to be able to speak of the value of natural capital not only as an environmental or sustainability benefit, but also in terms of risk mitigation, operational efficiency, and opportunities. As long as investment in natural capital is couched only in Corporate Social Responsibility terms, then only CSR resources and support will be available. However, companies already spend considerable resources on operational, risk, and opportunity aspects. Being able to see how natural capital can factor in will provide the company with more options and at the same time make a case for natural capital investment.
When it comes to natural capital, there is a difference between quantification and valuation. Quantification is the value-neutral measurement of natural capital. These measures can include straightforward metrics such as acreage of wetlands restored, or impact-related metrics such as the carbon sequestration capacity of a forest. Another common measure of natural capital may be storm water retention capacity of green space or surface water nutrient reduction capacity of wetlands.
Valuation then is a representation of what value this quantified attribute brings. These valuation measures can be very direct, for example determination of the difference in cost of providing the green space for storm water management vs. construction of deep tunnels or retention basins. Valuation measures can also be more indirect, such as jobs created or quality of life improvement. Valuation is a metric that a company uses in making the business case for investment.
A caution on this quantification and valuation aspect: In trying to value the impact from natural capital, the tendency is often to reflect the value in terms of impact to the local economy or community. Although this is useful information, if we are trying to make the business case for companies to invest in natural capital, the quantification and valuation has to also be relevant internally. There needs to be an element where the company can integrate the valuation into their own business model and investment models. In other words, how can such an investment help the company?
Preserving, managing, and restoring natural capital not only has environmental, biodiversity, and social impact value, but it also has leverage benefit. How can natural capital and ecosystem services be leveraged to help the company, thereby making a more compelling business case? Ecosystems services and green infrastructure can be leveraged to replace or supplement human-provided services or built infrastructure. This ability to reflect natural capital in the context of doing the work that human-made services do can help demonstrate a comparative business case analysis.
For example, restoring coastal wetlands certainly has environmental, biodiversity, and carbon sequestration value. But restored coastal wetlands also provide water treatment and flood mitigation services. These latter attributes can be compared, in cost terms, to building wastewater treatment plants or floodwalls. As with any other case of investment options, it provides balanced and consistent metrics to inform the decision maker whether to invest in natural capital or another solution. In other words, investing in natural capital becomes part of a company’s management and growth decision-making process.
Is this a good thing? Or is it best to let the conservation/restoration community remain disengaged from the corporate strategy community? My experience has shown that more often than not, when evaluated on equal terms and in monetary, return-on-investment terms, natural capital scores well against more traditional, artificial features or infrastructure. In other words, investing in natural capital makes business sense- be it for operational efficiency, risk mitigation, or creating new opportunities. Companies know this and are already integrating natural capital and ecosystem services into operations and risk management.
What will facilitate more wholesale uptake of this are the new tools and methodologies that provide consistent, transparent, and credible approaches. Restore the Earth Foundation’s Eco Metrics model and The Natural Capital Coalition Natural Capital Protocol are examples of this contemporary Rosetta Stone. And if biodiversity improves and the environment, local economy, and community benefit in the process, is that not a good thing after all?
Edwin Piñero, President, the Piñero Group LLC