What’s a Clean Earth Worth?

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by: Joel Makower

What's a clean earth worth to your company's bottom line?

That seemingly academic question was addressed in large part last year by the United Nation's Millennium Ecosystem Assessment, a four-year international scientific assessment of the condition of earth's ecosystems.

It concluded that that 15 out of 24 of the ecosystem services it studied are being degraded or used unsustainably, while only three of the ecosystem services have been enhanced in the past 50 years.

The significance of this to the private sector is nontrivial. Natural systems provide a wealth of tangible and intangible services to business — some $33 trillion worth of "free" deliverables a year, say experts. Those services include fertile soil, fresh water, breathable air, pollination, species habitat, soil formation, pest control, a livable climate, and a host of other things most of us take for granted. And none of which appear on companies' balance sheets.

The ecosystem trends of particular concern to businesses reads like a litany of well-covered topics: climate change, water scarcity, biodiversity loss, invasive species, overexploitation of oceans, nutrient overloading into water systems, and so on. Each has specific implications for business operations, from reduced access to raw materials to increased regulation to heightened awareness by customers and communities.

Now comes a new report, from a group whose corporate members are as varied as Chevron, Chiquita, and Cisco, saying that businesses need to pay closer attention to the natural systems on which they rely. According to Environmental Markets: Opportunities and Risks for Business (PDF), published this week by Business for Social Responsibility, the role of such services in business "can no longer be taken for granted."

Moreover, says BSR, "It is likely that in the foreseeable future, attention to these services will become similar to the attention companies give to other corporate assets, such as infrastructure. In this case, the 'infrastructure' is the environmental services upon which the company relies." It continues:

As hard, tangible value is assigned to environmental services, companies will be well served by exploring potential investments, as well as their exposures associated with them. Some companies are beginning to see increased value for their real estate, a new ability to ensure consistent and high-quality supplies of raw materials, more cost-effective environmental management, cheaper cost of compliance and regulatory "goodwill."

Failure to do so could pose potential risks and uncertainties to companies. In a report last year (PDF) that discusses the implications of the Millennial Assessment findings for the business community, the authors summarized the risks of ignoring the downward trend of nature's services to two key issues:

  • If current trends continue, ecosystem services that are freely available today could cease to be available or could become more costly. Once internalized by primary industries, additional costs that result will be passed downstream to secondary and tertiary industries and will transform the operating environment of all businesses.  
  • Loss of ecosystem services also could affect the conditions within which businesses operate, influencing customer preferences, stockholder expectations, regulatory regimes, governmental policies, employee well-being, and the availability of finance and insurance.

On the other side of the ledger, says the report, new business opportunities will emerge as demand grows for more efficient or different ways to use ecosystem services for mitigating impacts or to track or trade services. Examples include clean technologies for increasing food and fiber production, and markets for carbon-reduction credits, water banks, and other market-based mechanisms that promote conservation.  

BSR decided to take on this issue after engaging in a dialogue with “several dozen thinkers” from inside and outside companies in recent months to learn what issues will be most important to them over the next two to five years, Aron Cramer, BSR’s president, told me recently. “This one rose to the top because it addressed marketplace solutions of current importance that are only going to grow in importance in the coming years.” Moreover, he said, a recent invitation to BSR member companies to engage in an initiative to turn these ideas into practical policies and programs yielded positive responses from about 20 large companies. “It suggests some positive developments are going to come out of all this,” he said.

Clearly, BSR isn't the first group to address these risks (see also the World Bank's guide to biodiversity for the private sector, released last year), but it is by far the largest business association to address this topic. The BSR report describes market mechanisms being used to protect ecosystem services (emissions trading, conservation banking, philanthropic programs); lists some of the risks companies face when they engage in environmental markets (high transaction costs, increased regulatory scrutiny, lack of guarantees) as well as the opportunities associated with engagement (regulatory certainty, avoid project delays, enhancing economic development in emerging markets); and suggests questions companies should ask to get started.

Among the questions it asks:

Most of these services are currently provided free of charge and would be prohibitively expensive or impossible to replicate with technology. If they are worth so much in their natural state, how should companies invest in environmental services to assure their continuity for sustained business operations now and into the future?

It's a question that is no longer academic.

Original Post: http://makower.typepad.com/joel_makower/2006/08/whats_a_clean_e.html