How Businesses Can Manage Risks and Opportunities from “Natural Capital”

Businesses can manage natural capital – the natural resources that fuel economic growth. Here are five key steps your business can take.

Each month, NBS spotlights a key sustainability issue for business leaders. These issues have been identified by NBS’s Leadership Council, a group of Canadian businesses recognized for their leadership in sustainability. This month, the focus is on how businesses can best manage natural capital—the natural resources that fuel economic growth. Nancy Olewiler, director of the School of Public Policy at Simon Fraser University, and Michelle Molnar, environmental economist and policy analyst at the David Suzuki Foundation, provide guidance.

Start by understanding ecosystems.

A paradigm shift is underway. Once, businesses saw nature as a provider of free resources to be used as an input to production. Waste was dumped into water without thinking of the impact to those downstream; timber was harvested without concern for reforestation due to the vast amount of forest available.

Today, savvy business leaders are aware of the fundamental role that natural systems play in business operations. They recognize that intact natural systems are economic assets.

The Value of Nature

Natural Capital is the term given to the planet’s renewable and non-renewable natural resources—land, atmosphere, water, and the many diverse ecosystems that support life. Natural capital provides economically valuable goods and services, or “ecosystem services.” Some of these have well-defined markets; these include minerals, oil, gas, commercial forests, and fisheries. Others are not traded in markets but sustain life; these include soil microorganisms, the atmosphere, and the quality of water used for consumption or production.

Virtually every business activity benefits from natural systems in some way. For example, fresh water is critical to many industrial processes, from agriculture to mining; wild genetic resources underpin the pharmaceutical sector; natural environments drive the tourism industry; and intact wetlands and forests protect buildings from flooding, storms, and other natural disasters. Even labour productivity is affected by natural capital: healthy environments improve workers’ mental and physical health and reduce absenteeism.

Yet, natural capital can fly under the radar. Decision makers often don’t think about ecosystem services. This is partly because many ecosystem services are not traded in markets—they simply can’t be owned. All too often, people only appreciate the value of an ecosystem service when it becomes damaged or scarce. Ask the farmer who needs to artificially pollinate his crops, or the business owner whose insurance premiums increase when degraded local wetlands and forests lead to flood damage on his property. Regulation can protect some ecosystem services, but it is a limited solution.

Risks and Opportunities for Business

Businesses can incorporate natural capital into their planning. Environmental degradation poses business risks, and environmental protection can provide opportunities.

Recognizing business risks: When natural systems decline, business risks emerge. Businesses need to make sure that they—or others responsible—protect the resources they rely on. For example, a forest company will face declining productivity of second and third growth timber if it fails to invest in land productivity. A food processor, dependent on clean water, will face higher production costs if it has to pre-treat the water it uses. Businesses also need to make sure that their treatment of natural capital meets the standards of different external groups. Advances in natural capital measurement will lead to increased scrutiny of business impacts by stakeholders and customers, as well as increasingly stringent environmental regulations. Risks may also be indirect, as when different businesses draw on competing ecosystem services. For example, a manufacturer may face rising costs for raw materials due to competition for land use.

Recognizing business opportunities: If businesses identify, assess, and manage risks to ecosystem services early, they will have a competitive advantage. Businesses that understand their relationship with natural capital can find untapped opportunities to address its decline. Some will capitalize on maintaining the environment. They might develop new technologies and production practices that reduce degradation and increase efficiency. Others will differentiate themselves from competitors by integrating natural capital considerations into their management systems and planning; investors and customers increasingly reward such foresight.

Five Key Steps for Business

Business owners and managers should take these steps to minimize risks and maximize opportunities associated with natural capital. Traditional environmental performance measurement and planning does not address natural capital systematically, in part because the issues vary from sector to sector and sometimes within sectors. Links between businesses and natural capital depend on the location of the business, the source of raw materials, the location of customers, and the technologies employed. Working through these five steps may show that a business has thoroughly identified some threats (e.g. climate change), while not considering others (e.g. loss of habitat).

1. Select the scope:

A business should start by choosing a boundary for its initial natural capital analysis. The focus might be a particular location, business unit, product line, facility, product, customer segment, or natural asset owned by the company. The scope should be strategically important. Examples include a fast growing market, a major product line, or the business unit with the largest market share. There should be internal support for the selected scope so that it is capable of influencing business decisions.

2. Identify priority ecosystem services:

Once the scope is selected, businesses should ask which ecosystem services may affect operations. Businesses should look upstream in the value chain to understand how key suppliers impact ecosystem services, as well as downstream to understand their products’ impacts on ecosystem services. Gather a list of 10-15 ecosystem services the business impacts and/or depends on, and prioritize the top 3-5 for the next step. Prioritize ecosystem services that meet these criteria: (1) they serve as an input into business processes or increase the likelihood of business success (i.e. they are vital for the business); (2) they do not have a low-impact, cost-effective substitute (i.e. they are difficult to replace).

3. Analyze trends in priority ecosystem services:

For each priority ecosystem service identified in step 2, get a sense of its current condition and future prospects. How stable is it? Is there reason for concern? Information on the status of specific ecosystem services is provided by the Millennium Ecosystem Assessment, which details international trends in its report for business and industry, as well as by national and local publications on the health of the environment.

4. Identify business risks and opportunities:

Assess business risks and opportunities that arise from the condition and trends identified in step 3. These could occur at a range of levels, including operational, regulatory, reputational, market, or financial. For example:

• the operational risk of increased freshwater scarcity could lead to the opportunity to build an on-site wetland to filter wastes

• the regulatory risk of new user fees could lead to the opportunity to work with government to develop new incentives to protect and restore ecosystem services

• the financial risk of the higher capital costs as investors implement more rigorous investment criteria could lead to the opportunity for more favourable financing terms for companies that improve resource efficiency

5. Develop strategies:

With a list of potential risks and opportunities, begin to design strategies to minimize the risks and capitalize on the opportunities. Three types of strategies are possible. Internal changes might include altering operations or product and market strategies. Sector or stakeholder engagement allows businesses to address risks and opportunities collaboratively—for example, paying landowners to protect a water supply. Policymaker engagementdraws on government’s power to protect ecosystem services. The appropriateness of each strategy depends on the specific situation; consider common criteria such as return on investment or ease of implementation.

These steps will make a business part of the new paradigm in which firms work to protect natural capital and its related ecosystem services—benefiting the bottom line and the broader planet.

Additional Resources

• The Corporate Ecosystem Services Review: Guidelines for Identifying Business Risks and Opportunities Arising from Ecosystem Change (World Resources Institute, Meridian Institute and World Business Council for Sustainable Development). Report provides detailed guidance on the five-step approach described above.

• Ecosystems and Human Well-being: Opportunities and Challenges for Business and Industry (Millenium Ecosystem Assessment). Report provides overview of international trends in different ecosystem services and implications for business.

• The Economics of Ecosystems and Biodiversity for Business. Project describes natural capital’s inclusion in mainstream business practices. The Business Executive Summary provides an introduction.

• Natural Capitalism: Book frames natural capital as a lens on a new industrial revolution and offers four key principles for businesses.

• The Natural Value Initiative: Initiative works with the finance sector to identify risks relating to ecosystem services. Reports focus on specific sectors, including agriculture, mining, and pharmaceuticals.

About the Authors

Nancy Olewiler is the Director of the School of Public Policy at Simon Fraser University in Vancouver, British Columbia. [PL1] She has a PhD in Economics from the University of British Columbia. Her areas of research include natural resource and environmental policy, the impact of environmental regulation on the economy, and environmental tax policy. She has published in academic journals, edited books, has written two widely used textbooks, and produced numerous reports for the Canadian federal and provincial governments on a wide range of environmental and natural resource issues. Nancy is a research mentor to the Environment and Economy Program for Southeast Asia and the Latin American and Caribbean Environmental Economy Program.

Michelle Molnar is environmental economist and policy analyst at the David Suzuki Foundation. She received her master’s degree from Simon Fraser University. Her work focuses on the conservation of natural capital using tools of ecological economics and policy analysis, such as environmental cost benefit analysis, natural capital valuation, and environmental fiscal reform. Prior to joining the David Suzuki Foundation, she worked as an economist for Environment Canada, where she developed a Benefit Analysis Guide for employees to quantify non-market goods and services.