A Business Case for Restoring and Protecting Ecosystems

By Jeffrey Potent

Our economy is a subset of the natural world.  Businesses, families and individuals all depend on services provided by nature and all have impacts on ecosystems through resource extraction, land use and pollution.    Research over the the past 15 years has begun to profile the value to society of natural capital — the land, water, air and all the living organisms therein — and the ecosystem services derived from these resources.  The value to society is being characterized both in absolute terms and in relation to the services provided through human endeavor.  As well, our collective impact is also being measured, characterizing a drawdown of many of the critical and irreplaceable services provided by the natural world needed to support human civilization.

For example, in a recent study entitled “Changes in the Global Value of Ecosystem Services,” by Robert Costanza, et. al., published in the May 2014 issue of the journal “Global Environmental Change, the researches provide an “estimate for the value of total global ecosystem services in 2011 (at between) $125 and $145 trillion/year,” contributing approximately twice as much human wellbeing as the global economy valued at approximately $70 trillion that year.  Their research, supported by numerous data sources and based on a methodology first employed by Costanza, et. al. in 1997 (“The Value of the World’s Ecosystem Services and Natural Capital“), considers the total value of ecosystem services to society, not only the current market commodity value of extracted natural resources, agricultural products, etc.  The lower figure in the range of their estimates is partially accounted for by factoring in the loss of ecosystem services during the elapsed period from 1996 to 2011 (the reference years for each of the studies) resulting from land use changes and other human impacts on natural systems.  The Millennium Ecosystem Assessment conducted by the United Nations between 2001 and 2005 complements this research by providing detailed information on the global status and trends of key ecosystem services, and offers projections and recommendations for improved ecosystem service management.

Business practices in our ever more globalized economy stand as a critical factor in the characterization of our impacts and dependencies on the natural world.   The relationship between business and the environment has evolved significant over the past 40 years and is still very much a work in progress.  Prior to the emergence of the environmental movement of the 1960s and 70s, businesses generally ignored environmental concerns.  In fact, most business leaders viewed the environment as little more than a dumping ground for waste.  As there was no charge for using and abusing the planet, businesses lacked incentive to account for their impacts and dependencies on the natural world.  As a result, companies that committed resources voluntarily to minimize their impacts found no economic benefit, and instead operated at a disadvantage compared to competitors who treated the environment as a public good there for the taking.

Environmental progress first appeared as businesses were forced to comply with increasingly stringent environmental regulations resulting from environmental advocacy and scientific study.  Later, some companies began to realize that it was to their advantage to promote environmental action beyond regulatory compliance as an element of their corporate citizenship programs.  Then, in the late 1980s, through initiatives such as pollution prevention and waste minimization, many businesses began to take actions to reduce pollution that also served to improve operational efficiency by reducing material, water and energy use in their operations.  With the introduction of corporate sustainable development initiatives over the past 10 to 15 years, efforts were expanded throughout product and service lifecycles to include the sourcing of raw materials, supplier operations, customer use and end of product life considerations.  More recently, many large companies are also assessing and attempting to optimize their social as well as environmental performance, each as key and interrelated elements of corporate sustainable development.

However, the road to corporate sustainability is not as yet well paved.  Reducing dependencies and impacts, and the ability to produce goods and services that yield economic, environmental and social benefits remains as much an art as a science.  Refinements emerge almost daily, from carbon footprinting, lifecycle assessment, environmental management systems, ad infinitum.  For now, the paving stones being placed along this road are a mix of good intentions, evolving tools and, frankly, a measure of ‘greenwash.

One innovation that may serve to advance this practice is the emerging field of corporate ecosystem service valuation.  It is intended to refine efforts at sustainability by profiling ecosystem services dependencies and impacts specific to a company, its real estate holdings, supply chains, product lines, etc.  As a field of practice dating back only about five years, it too is constrained by tools that while insightful, lack standardization, validation and verification.  While many leading corporations, industry associations, academics and NGOs are actively advancing this field, practitioners wonder whether its application can effectively advance corporate sustainability, do so in a transparent and cost effective manner and mesh well with preexisting corporate and environmental management processes.

While nature’s value to human society cannot and should not be reduced merely to economic quantification, some businesses are beginning to account for their dependencies and impacts and place dollar values on the footprints associated with their operations, supply chains and the resulting goods and services that they bring to the marketplace.  Farsighted companies are including costs in this accounting that are externalized beyond a company’s own balance sheet to include those borne by society at large.  The benefits of such bold steps go well beyond corporate disclosure.  Companies that are willing to expose these negative effects gain the ability to pinpoint and address problem areas, reduce associated risks and possibly gain competitive advantage by outperforming their competitors in terms of operational efficiency and reduced societal impacts.  As more customers and business stakeholders in general demand improved environmental and social performance from the companies with whom they do business, this can make the difference for a corporation between success and failure.

Puma, the German sporting goods manufacturer, launched in 2011 its Environmental Profit and Loss Statement (E P&L), weighing against its product output and earnings the greenhouse gas, water, waste and air pollution impacts and dependencies across its entire product lifecycle.  For 2010, the initial year of its E P&L assessment, Puma identified 145 million Euros in ecosystem service impacts and dependencies, most of which were externalized costs not borne directly by the company.  Given that Puma’s net earnings on 2.7 billion Euros in 2010 sales was 202 million Euros, incorporating all or a portion of these externalized costs would substantially change the profitability of the company.  From this initial work, Puma went on to compare the externalized lifecycle costs of conventional versus its so called green products to determine that indeed the green products had significant lower aggregate externalized costs.  The company is now using this information to improve its entire product line and Kering, its parent company, is also incorporating the E P&L methodology across all of its other brands.

An upcoming EICES certificate course, entitled “Environmental Sustainability and Corporate Decision-Making will explore how leading corporations are innovating to address environmental and social issues from a business perspective.  We will examine how the business landscape is changing in response to stakeholder expectations, the need for improved operational resiliency in the face of climate change, increasing environmental and social risks and costs, and the growth of markets for products that offer environmental and social attributes as well as satisfying customers demands for quality, timeliness and price.  The course will provide a straight-forward overview of corporate ecosystem service valuation, profile case examples of its use and include a class exercise to demonstrate how identifying environmental impacts and dependencies and associated risks and opportunities can lead to product and company differentiation and competitive advantage — essentially doing well by doing good!