CEF is pleased to share this feature from member company CH2M HILL, as a preview of the expertise they will be showcasing in the upcoming Natural Capital Business Hub, coming in January 2014. To learn more about the Hub and our ongoing efforts to engage business leaders on this critical topic, contact CEF Director Amy O’Meara at firstname.lastname@example.org.
How do we get involved? How will it help the bottom line? What should we focus on? These are common questions at many companies today as “sustainability” becomes a permanent addition to the business lexicon. Sustainability is about taking care of our natural capital—the earth’s air, land, water, and biodiversity. As a member of the Valuing Natural Capital Initiative, CH2M HILL has made a commitment to work with our clients on water stewardship and to support the Corporate Eco Forum with efforts to inspire others. While good for the health of the planet, integrating natural capital considerations into business can also increase profitability through cutting costs, avoiding liabilities, taking market share, and protecting against price volatility. It can also help ensure business longevity by maintaining access to resources that are critical to operations. Outlined here are four major ways in which companies are integrating natural capital considerations into their business operations: efficiency reviews, project-specific decision-making, assessing business risk, and defining the real cost of goods and services.
1. Efficiency Reviews
Efficiency reviews involve assessing ways to reduce the use of natural resources as inputs into the production process (e.g., energy or water), or as receptacles for residuals from production such as air emissions, wastewater, and solid waste. Many companies have engaged in this type of review with positive results. For example, CH2M HILL has reduced paper use by 30% over the last 3 years.
In most cases, the tie to natural capital is not explicitly stated in an efficiency review. However, directly or indirectly, this type of effort plays a role in conserving natural capital. It is the simplest of the four forms of natural capital analysis, because reducing operational cost is the sole driver. When an investment is required to make a change, the decision is based on the time to payback, accounting for the cost of money. A challenge with this type of analysis is that many companies are purchasing inputs (e.g., chemicals) from other companies, and these inputs may rely heavily on natural resources (e.g., energy). As a result, a more comprehensive approach would involve a second level of analysis working with supply chain members to conduct their own efficiency reviews. Overall, this simple form of natural capital analysis can be effective in meeting environmental sustainability targets, while also contributing to the financial bottom line.
2. Project-Specific Decision-Making
Decisions involving a wide range of projects require making ecological tradeoffs. Examples include pipelines and renewable energy infrastructure, road construction, environmental impact mitigation, mine operations, water and wastewater treatment, watershed management, flood protection, ecosystem restoration, habitat conservation, and land management. Typically, alternative approaches are considered, with cost being the key selection criterion. However, the ecological consequences of these decisions, which are sometimes less tangible, are becoming increasingly important to regulators and other stakeholders, who need and want to know how a decision will impact their environmental interests.
The integration of natural capital considerations into the analysis of alternatives can take many forms, from relatively simple checklists to quantification of net change. In an example of both checklists and quantification, a CH2M HILL client prepared key performance indicators (KPIs) for use in evaluating alternatives during mine expansion planning. The KPIs focused on the key sustainability issues associated with resource extraction projects, such as water use, water availability, energy, ecosystem effects, and worker quality of life. By tracking these parameters under each alternative, the company facilitates inclusion of this information into the decision-making process.
Another flexible and cost-effective method of integrating natural capital considerations into decision-making is called a net environmental benefit analysis (NEBA), also known as a net ecosystem service analysis (NESA). NEBA is a framework for quantifying the changes in the value of ecosystem services—the benefits humans derive from the environment—associated with implementation of each alternative. NEBA takes into account baseline, the quality of the natural resources, and changes over time.
One of the key benefits of valuing ecological services is the potential to reduce business liability. For example, CH2M HILL conducted a NEBA for options to address contaminated wetland sediment posing a marginal risk to wildlife, which an industrial client was considering removing with heavy equipment. The NEBA demonstrated that the benefits to wildlife from reducing exposure to contamination would be completely offset by the ecosystem service impacts associated with accessing the site and implementing the removal. As result, the NEBA effectively showed that spending over $1 million on sediment removal would provide no net benefit, paving the way for a less invasive and less costly solution. Although this was a contaminated site, the same benefit—identifying options that maximize environmental benefit and minimize environmental cost per dollar spent—can be derived when applying NEBA to capital projects.
Regardless of method, consideration of impacts on natural capital—positive and negative—during decision-making can create better environmental outcomes and reduce costs by identifying natural resource liabilities, business risks, and environmental improvement opportunities. It can also be an effective way to engender regulatory and public support for a project.
3. Assessing Business Risk
Directly or indirectly, all companies use the earth’s air, land, water, or biodiversity to support their business. This reliance on ecosystem services represents some level of risk to profitability, today or in the future. Future access may be constrained due to regulation, higher demand, or scarcity. These factors can also cause price volatility. Given the critical nature of this risk, an increasing number of companies are taking action in this area.
The first step is to identify how your business is dependent upon ecosystem services. Examples include plant species in tropical forests, energy derived from coal, the dilutive capacity of the air, or pollination. A comprehensive analysis would extend beyond the facilities your company owns, and would include the ecosystem services relied upon by the entities within your supply chain and customer base. The latter is particularly important if a significant portion of your revenue is based on business-to-business sales. Work conducted as part of the collaboration between The Dow Chemical Company and The Nature Conservancy provides a good example of understanding ecosystem service dependencies. At Dow’s Texas Operations at Freeport, the dilutive capacity of the air, water supply, and the storm damage protection provided by coastal wetlands were all identified as high-priority ecosystem services because of the value they provide and their importance to the business.
The second step is to assess the costs and benefits of measures that could be taken to mitigate the risks. When undertaking this step, it is important to understand today’s demands on natural capital and how supply and demand may change in the future due to natural and anthropogenic factors. Ultimately, it is also important to recognize that developing a balanced approach to mitigating risk that avoids an unexpected shift in the monetary or environmental cost to the public may be crucial for maintaining the social “license to operate.”
4. Defining the Real Cost of Goods and Services
What ecosystem services such as freshwater availability and wastewater filtering does your company receive from nature for free or at a reduced price? Defining the real cost of goods and service requires an understanding of externalities—the positive and negative effects that are not properly priced in the market. This can include inputs into the production process such as freshwater and energy as well as residuals of production including air emissions, wastewater discharges and solid waste, where the cost to business does not include the full cost to society. For example, generating electricity increases greenhouse gas emissions, but the costs of climate change are not reflected in the price of electricity. PUMA is a leader in this area, establishing an environmental profit and loss statement that takes externalities into account. This step was taken for a number of reasons: to reduce negative impact on the environment, to demonstrate business as a force for good, to illustrate the potentially negative impact that depleted ecosystems can have on the future performance of a business, and to become a truly sustainable business.
Of the four forms of natural capital analysis, this is the newest and is not embraced by all in the business community, because it is perceived as shining a light on a potential liability. While it is certainly “leading edge” from an environmental stewardship perspective, it is easy to argue that, at a minimum, identifying these externalities is important for every business. Regulations may change tomorrow, and these ecosystem services may no longer be free. The business that plans for such eventualities may gain a competitive advantage over less forward-thinking companies. Considering such externalities today can afford companies ample time to make adjustments to reduce impact and reliance.
As indicated in the title of this article, there are many options for companies to integrate natural capital into their business operations, and such efforts can improve the bottom line. An initial step would be to consider which of the four forms of natural capital analysis reviewed here might be most beneficial for your business. Also remember that, for each of the forms, the approach and level of effort can easily be tailored to meet the needs and available investment on a company-specific basis. So, get into the game and start improving the health of your company and the planet!