Without Earth’s ecosystems, human life could not exist. But is there any way to place a monetary value on the “services” that the Earth provides civilization and human enterprises? And is there any value in pursuing such an exercise?
The answer is undoubtedly “yes,” according to the 24 global 500 companies that have joined forces under the Corporate Eco Forum (CEF), a membership organization for large companies committed to the environment as a business strategy issue. CEF, in partnership with the Nature Conservancy, recently released a report called The New Business Imperative: Valuing Natural Capital.
Each year, our planet’s complex land and water systems — a “natural living infrastructure” — produce an estimated $72 trillion worth of “free” goods and services essential to a well-functioning global economy. Because these benefits aren’t bartered and sold in the marketplace, their value is exceedingly hard to monetize on corporate or government financial statements. As a result, this value has largely been left unaccounted for in business decisions and market transactions. This is starting to change.
The 24 companies endorsing the report include Alcoa, Coca-Cola, Dell, Disney, Dow, Duke Energy, Enterprise, General Motors, Kimberly-Clark, Lockheed Martin, Marriott, Nike, Unilever, Weyerhauser and Xerox.
According to the paper, executive decision makers are realizing that such resources as water and raw materials will become rare and costly and threaten business models and profits. Environmental problems can destabilize the communities where companies operate. Climate change threatens businesses with potentially catastrophic losses from extreme weather.
These threats point to the “business imperative” of accounting in a monetary way the value of ecosystem services.
This makes eminent sense, according to Gregory Unruh, professor of global business at the Thunderbird School of Global Management, in Glendale, Ariz., and director of the school’s Lincoln Center for Ethics in Global Management.
Unruh tells me, “Environmentalists have resisted this as something immoral, the idea of putting a price on nature. But if you’re going to be practical, putting a price on ecosystem services is the most successful way for managers to do their work.”
“When managers are looking at the managerial accounting,” Unruh says, “they just see the market price, which doesn’t cover the environmental damage. So, in general practice, to most managers it just doesn’t exist. Putting a price on this is, I think, a very good step.”
The Value of Natural Capital
The idea of monetizing the services nature provides to the economy goes back a long way, but one of the most important studies was written up in a May 15, 1997, paper in Nature called “The value of the world’s ecosystem services and natural capital,” by Robert Costanza and his colleagues.
“Ecosystem services,” Costanza wrote, “consist of flows of materials, energy and information from natural capital stocks which combine with manufactured and human capital services to produce human welfare.” The paper grouped ecosystem services into 17 major categories, not including non-renewable fuels, minerals and the atmosphere. These categories included services like regulation of atmospheric gases and climate, water regulation and supply, soil formation and erosion control, waste treatment, pollination, food production, raw materials, genetic resources and recreational and cultural opportunities.
Valuating such services is difficult and controversial, Costanza acknowledged. However, he argued that as a society, we already make decisions that imply valuation of the environment. The question is whether we are going to make that valuation explicit or leave it vague and undefined. He and his colleagues used various valuation techniques in its study, including estimations of “willingness to pay,” or how much individuals would be willing to pay for ecosystem services. Costanza explained how this could work:
For example, if ecological services provided a $50 increment to the timber productivity of a forest, then the beneficiaries of this service should be willing to pay up to $50 for it. In addition to timber production, if the forest offered non-marketed, aesthetic, existence and conservation values of $70, those receiving this non-market benefit should be willing to pay up to $70 for it. The total value of ecological services would be $120, but the contribution to the money economy of ecological services would be $50, the amount that actually passes through markets.
In 1997, Costanza estimated that the value of the biosphere was in the range of $16 to 54 trillion per year, with an average of $33 trillion per year. In comparison, the global gross national product at the time was $18 trillion per year. The authors of the study asserted:
We must begin to give the natural capital stock that produces these services adequate weight in the decision-making process. Otherwise, current and continued future human welfare may drastically suffer… If ecosystem services were actually paid for, in terms of their value contribution to the global economy, the global price system would be very different from what it is today.
Recently, the high environmental costs of doing business were highlighted in a report from professional services firm KPMG, called “Expect the Unexpected: Building business value in a changing world.” The report examined earnings in 11 business sectors against their estimated external environmental costs and found that across these sectors, the average environmental cost per every dollar of earnings would have been approximately 41 cents in 2010.
The highest environmental cost, according to KPMG, is generated in the food production sector. In fact, in food production, environmental costs are upside-down — 224 percent of earnings — at about $200 billion per year compared to $89 billion in earnings. Also showing high environmental costs is the electricity sector, at 87 percent of earnings. Oil and gas production generates high environmental costs — almost $150 billion per year — but because earnings in the sector are so high, at $670 billion, they are overshadowed at 23 percent of earnings.
KPMG said the environmental costs of business operations are rising rapidly. Expanding economic activity connected with population growth, urbanization and resource scarcity is contributing to climate change, deforestation and ecosystem decline. Its data suggests that the environmental costs of the 11 sectors are doubling every 14 years.
There is likely to be increasing pressure over the next 20 years for the price of resources, products and services to reflect the full cost of their production, including the cost of environmental impacts. Such pressure is likely to grow as governments address climate change and other sustainability challenges such as resource scarcity. Possible futures include the removal of fossil-fuel and water subsidies, the spread of carbon pricing systems to more markets and higher carbon prices.
KMPG warned that “these external environmental costs could therefore represent near-future financial risks for companies.”
Unruh, of the Thunderbird School, says one of the principal obstacles to putting a price on natural capital is going to be political. “The easiest way to make this work is for governments to somehow set a price or establish a regulation that factors nature into the market price,” he says. “But in a place like the U.S., politically that’s going to be impossible because it will get labeled as a tax.”
He says it would be inaccurate to call a payment for ecosystem services a business tax, because “right now, business isn’t paying for it, but somebody is. So it’s a social tax.” Society at large is picking up the environmental tab. Environmental impacts are shunted off as external effects that don’t enter into a product’s market price.
The other challenge, Unruh says, is “measuring the value of ecosystem services.” What’s the right way to calculate that value? “You know that a forest or wetland provides the service of purifying the water you use, but putting a price on that is very difficult,” he notes. “Because it’s so difficult, most companies just don’t try. You can’t be precisely correct, so you decide to be precisely wrong; you put the price at zero.”
A Framework for Action
The 24 companies that signed off on the CEF report agreed that no company is immune to the risks of mounting environmental damages. The report noted:
As naturally produced goods and services are compromised or lost altogether, companies could experience supply chain disruptions, be forced to introduce costly alternatives to traditional inputs or face new regulatory and legal risks. Few will escape pressure from stakeholders (including regulators and investors) to be accountable for their contribution to the problems.
The CEF is urging the private sector to “leapfrog slow government efforts with their own innovative solutions to ecosystem management.” In the long run, this will give companies greater control and possibly competitive advantage as well.
The report outlined a “framework for action” that will help companies reduce risks, cut costs, enhance their brands and fuel growth, through nine principal actions:
- Assess your company’s impacts and dependencies on ecosystems. Employ new tools that help evaluate the full risks and opportunities associated with use of ecosystems.
- Put a price on nature’s value. Use data systems to automatically monitor ecosystem impacts and resource usage.
- Optimize resource use to minimize environmental degradation. This simultaneously produces cost savings.
- Invest strategically in conservation and restoration. Consider such investments not just philanthropically but fiscally, in the “natural infrastructure” that the business depends on.
- Engage your value chain to bring solutions to scale. This results in the “multiplier effect.”
- Innovate in materials, processes and products. Anticipate market demands for sustainable solutions.
- Build natural instead of man-made infrastructure. These include wetlands, forests, watersheds and habitats, especially in areas where the company builds facilities.
- Leverage new natural capital markets and investment tools. Invest in methods for paying for ecosystem services, whether directly to landowners or managers, or indirectly through trading of ecosystem “credits,” or by purchasing certified sustainable products and services.
- Join forces. Establish collaborative efforts with other companies and non-governmental organizations (NGOs).