Natural Environment

Putting a price on the planet: Part 2 – How can businesses capitalise on nature?

07 October 2021

Contenders in the race to net zero are striving, with some success, to find viable policy and financial instruments in support of the decarbonisation agenda. There are encouraging signs that the question of biodiversity loss and ecosystems damage is beginning to command similar attention.

Kay Pitman

World Built Environment Forum Manager, RICS

Although the economic concept of natural capital was coined decades ago, the last 10 years have seen the term gain significant traction. Calls for humanity to exist within its “planetary boundaries” ^[1] are growing in number and volume. Among others, natural environment and valuation professionals, and, crucially, politicians are bringing their considerable expertise to bear. But can the planet’s natural resources, biodiversity and ecosystems services really be priced into economic policy and business practice?

Putting a price on environmental externalities

To date, the drawdown of natural capital has been ‘economically invisible’ ^[2]. According to economic wisdom, environmental externalities are underpinned by a lack of information and aligned incentives. TEEB estimates that the top 100 environmental externalities of business have cost the global economy around US$7.3 trillion annually ^[3], equivalent to 13% of global economic output ^[4].
Looking at this problem from the other side, many businesses are highly exposed to natural capital risk. A UNEPFI study assessing the FTSE 100 found that 13 out of the total 18 sectors in the index (representing US$1.6 trillion in net market capitalisation) had production processes with a high or very high material dependence on natural capital ^[5]. This year’s Global Risk report from the World Economic Forum ^[6] lists biodiversity loss as the top existential threat over the next 5-10 years, and a key driver of other economic, geopolitical, societal and technological risks.

Scaling up private capital for Nature-based Solutions (NbS) will be pivotal over the next few years ^[7]. Private sector annual investment in NbS was equal to around US$18 billion in 2018, accounting for 14% of capital mobilised. This compares to 56% of capital flows taken up by the private sector for climate finance and comes well short of the US$8.1 trillion investment required.

“Puma was the first ever company to disclose its Environmental Profit and Loss Account in 2011. It found the total value of its dependence on nature was around €145 million.”

Business reporting and decision making

Puma was the first ever company to disclose its Environmental Profit and Loss Account in 2011. It found the total value of its dependence on nature, which includes its greenhouse gas emissions, water use, land use, air pollution and waste, generated through the operations and supply chain, was around €145 million ^[8]. Wipro is another Trucost enterprise that has been disclosing its accounts since 2013. In 2017-18, the company valued its natural capital impact at 2% of revenue or 10% of profit ^[9].

While Puma and Wipro could be considered early adopters of environmental accounting at the business level, a variety of natural capital coalitions ^[10] and standards have developed over the last decade. In the UK, the BSI has published guidance for preparing natural capital accounts, under BS 8632 ^[11]. Internationally, the Capitals Coalition ^[12], formed in 2014, now has over 380 organisations in its network, and its framework (The Natural Capital Protocol) makes the strategic case for natural capital accounting. Businesses are advised to consider their impacts (e.g. through waste water or materials) and dependencies (e.g. in materials, or in flood protection) on natural capital; the costs and benefits to the business and to society; and the resultant risks (e.g. stranded assets or insurance premiums due to climate risk) and opportunities (e.g. improved access to finance or reduced production costs as a result of improved green infrastructure) to the business.

Risks, costs and benefits: assessing the value of nature

Valuation is a fundamental part of the process needed to internalise environmental externalities. A variety ^[13] of different techniques are available to calculate the value of natural capital for the purposes of strategic business decision making. However, approaches to natural capital valuation are determined – and to some extent, limited – by the data that is available and the particular kind of environmental dependency or benefit that is being examined and monetised ^[14].

“Much like the technological challenges associated with managing any complex and interconnected system, data about natural resources and ecosystems services is often unavailable or can be expensive to collect, aggregate, integrate and analyse.”

Much like the technological challenges associated with managing any complex and interconnected system, data about natural resources and ecosystems services is often unavailable or can be expensive to collect, aggregate, integrate and analyse ^[15]. Robust data collection can involve remote sensing, conducting detailed surveys, modelling and analysis, often putting this kind of approach outside the reach of everyday businesses. A lack of good data governance and standards; inconsistent and incomplete datasets or a lack of measurement methodologies; and a lack of staff capacity within businesses to ensure robust data is developed and made available to decision makers are also key barriers to further adoption ^[16].

Overcoming barriers to adoption

The market for natural capital accounting is growing, and alongside the work of land agents and valuers, the methods and technology available to account for natural capital are becoming more and more advanced. The UN Environment World Conservation Monitoring Centre uses sophisticated mapping and modelling at the watershed, regional and national level. Typical analysis measures and models the impacts of different policy and economic approaches, and their varying impacts on ecosystem flows and biodiversity change. Analysis aims to identify the causes of change, mapping hotspots and priority areas for ecosystems services, as well as evaluating options and trade-offs ^[17].

Financial institutions are also moving to address these barriers. ‘Spatial finance’ is ‘the integration of geospatial data and analysis in financial theory and practice’ ^[18]. Investors and asset managers are seeking to understand the way that location can affect exposure to the physical risks of nature loss and climate change. Alongside this, increasingly sophisticated geospatial, remote sensing and asset level data gathering relating to biodiversity ^[19] and ecosystems functioning is becoming cheaper and more readily available.

Land managers, valuation professionals, accountants, and lawyers, working alongside those engaged in ecological and environmental services will play an important role in making natural capital more visible, and its costs and value more practically applicable ^[20]. The speed of this adoption will be underpinned by new technology and market mechanisms targeting spatial analysis, nature recovery and ecosystems services. Such policies, if well designed, are set to both affect and change the legal, economic and environmental landscape in the future ^[21].

References