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July 13th, 2016 saw the launch of the first comprehensive protocol, developed by The Natural Capital Coalition, which can help business assess the value of nature to their operations. Jonathan Shopley traces the origins and predicts the future of natural capital concepts in corporate strategies.
Natural Capital comes of age with the launch of a tool to help business
With a focus on enabling “a world where business conserves and enhances natural capital”, last week saw the launch of the first comprehensive protocol, developed by The Natural Capital Coalition, which can help business assess the value of nature to inform business strategy.
The protocol is designed to help generate ‘trusted, credible, and actionable information that business managers need to inform decisions’ around an issue that is complex and where it is difficult, if not perilous, to pursue solutions that work outside the boundaries of a single organisation. It’s a framework consisting of four stages – ‘Why’, ‘What’, ‘How’, and ‘What Next’ – broken down into nine steps and delivered through a 132 page master document. At launch, the protocol was supplemented with two sector guides, one for Food & Beverage and another for Apparel, which identify the issues that are most material in these sectors. There will be more sector guides to follow, and refinements based on practical experience in their application.
While the protocol is not alone in offering business guidance to natural capital thinking, it is singular in its broad base of support from the 200+ coalition members and the highly consultative process that informed its evolution over an action-packed year of development. Included in that process were around 40 pilot applications of the draft protocol. The majority of those pilots were executed by businesses seeking to understand their direct and supply-chain impacts on natural capital.
As a contrast, our pilot used the protocol to assess the positive impact of a carbon mitigation project in Kenya. Working with our carbon offset partner, The Paradigm Project and consultants Anthesis, we ran a Kenyan clean cook-stove project through all steps in the draft protocol. That exercise allowed us to qualify, and in some cases quantify, the positive impacts of the project across six Sustainable Development Goals (SDGs), in addition to the Climate SDG (for more information about our pilot, see our webinar recording.
Environmentalists spotted the opportunity
Seeds of the revolution that has spurred the rise of natural capital thinking can be traced to environmentalist Paul Hawken’s ‘The Ecology of Commerce’ published in 1993. His opening remarks to that ground-breaking book … “I have come to believe that we in America and in the rest of the industrialised West do not know what business really is, or, therefore, what it can become,” put the private sector at the centre of an exploration of whole system thinking that has redefined environmentalism, sustainable development -- call it what you will -- over the past quarter century.
Hawken’s next publication was ‘Natural Capitalism: The next industrial revolution’ in 1999 with Amory and L. Hunter Lovins. It argued then that most businesses were operating according to a world view that hadn’t changed since the start of the Industrial Revolution when natural resources were abundant and labour was the limiting factor of production. Now, there is a surplus of people, while natural capital – the natural resources and ecological systems that provide vital life-support services – is in decline and relatively expensive. The authors predicted that the next industrial revolution, like the first one, will be a response to changing patterns of scarcity.
Governments frame the challenge
Fast forward to 2012, and the work of the Natural Capital Commission in the UK with Oxford economist Prof Dieter Helm as chair. The commission has delivered three reports: the first focused on the need to measure and value natural capital in order to better manage it; the second made the case for a long-term plan to restore, maintain and improve natural capital; and the third calls for an action plan and investment programme to protect and improve natural capital within a generation. All its work seeks to end the apartheid between economic growth and protecting and enhancing the environment, noting that it is natural capital that provides us, for free, with ecosystem goods and services imperative for our survival and well-being. As a result of this work the UK has taken a global lead in the development of a 25 year protection and investment plan for the natural environment.
Business seizes the opportunity to better understand risk and capture value from nature
In November 2015, some of the 600+ companies involved in natural capital initiatives used the World Forum on Natural Capital in Edinburgh to explain how they were putting that concept to work in their businesses. Kering, owner of the Puma sports brand, showcased its Environmental Profit and Loss Account (EP&L). It noted that the company’s operations and supply chain depend on nature for services such as fresh water, clean air, healthy biodiversity and productive land. The PUMA EP&L estimates the ‘true costs’ of the business’s impacts on nature by placing a monetary value on them along their entire value chain.
In the US, chemical company Dow leads the field in a different application of natural capital concepts by shifting the focus from valuing nature to capturing the value from nature. The company's 2025 goals include the objective to create $1 billion in value for the company — either through cost savings or new cash flow — by applying natural capital thinking to major capital investment decisions (think replacing chemical waste water treatment works with natural water filtration systems).
Natural capital thinking works best when it spurs investment in nature
At the Natural Capital Protocol launch it was clear that a significant portion of the value currently comes from the new way the protocol offers to think about and internalise the importance of natural systems outside the direct control of business. When it gets to acting on that information, the field remains a bit murky, and there is a lot of practical work yet to be done.
TATA the Indian conglomerate, presented work which applied carbon pricing to estimate the value of its climate impacts. Natura, the Brazilian organic cosmetics company, showed how it was able to use carbon offsetting to net out its climate impacts. These case studies provided examples of how results-based financing can extend the reach of natural capital approaches by providing project-based interventions that compensate for key impacts on natural capital – in this instance the ability of the atmosphere to maintain a stable climate system.
Our pilot exercise showed that climate mitigation projects can be a useful tool for those corporates wishing to move beyond assessment and valuation of natural capital towards protection and restoration. For those with a commitment to maintain and enhance natural capital in their supply chains, the results-based focus and quantifiable natural ecosystem co-benefits of climate mitigation projects offer a mechanism by which to take action.
As natural capital thinking takes hold in the private sector, we see these results-based financing approaches, of the sort that has been pioneered in carbon offsetting, playing an increasingly important role in delivering the positive impact on our natural resources that’s required.