New Metrics
Business Relevance of Natural Capital, Biodiversity and Ecosystem Services:
Assessing the Current State of Play

As natural capital, biodiversity and ecosystem services are terms that are increasingly bandied about, a few questions are increasingly being whispered by corporate colleagues that are worth answering:

• Why are they relevant to business?
• How can companies integrate these issues into decision-making processes?
• When and where are they most readily applicable?

Simply put, the conveners of the 2013 World Forum on Natural Capital explained that “natural capital can be defined as the world’s stocks of natural assets which include geology, soil, air, water and all living things. It is from this Natural Capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.”

The 2005 Millennium Ecosystem Assessment defined ecosystem services as “the benefits people obtain from ecosystems. These include provisioning services such as food and water; regulating services such as flood and disease control; cultural services such as spiritual, recreational, and cultural benefits; and supporting services, such as nutrient cycling, that maintain the conditions for life on Earth.”

And the Convention on Biological Diversity defines "biological diversity" as “the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.”

Perhaps surprisingly for such un-sticky terms, natural capital, biodiversity and ecosystem services (BES) are now a part of international best practice with considerable activity underway, including:

• Governments around the world: 68 national governments around the world are now engaged in work on ecosystem services — from research through task forces — and some are promulgating new policies on the issue. This includes implementing countries and donor governments that are engaged with the World Bank’s Wealth Accounting and the Valuation of Ecosystem Services (WAVES) partnership.
• Companies across most industries: 47 multinational businesses are publicly asserting that they are undertaking work on ecosystem services.
• Financial services sector trend- and standard-setters: As of January 2012, the International Finance Corporation (IFC) requires due diligence on all loans to include consideration of impacts and dependencies on biodiversity and ecosystem services, as part of Performance Standard 6. This requirement is also a part of the Equator Principles and applies to loan review within the 79 Equator Banks.
• Corporate disclosure and ranking entities: CDP is adding new indicators as well as expanding focus on commodities and how they affect ecosystem structure and function — such as work on corporate impacts on forests. The Dow Jones Sustainability Indices (DJSI) now consider ecosystem services for one sector (forestry), with potential for broader application in the coming years. And the Global Reporting Initiative (GRI) is considering broader inclusion of biodiversity and ecosystem services.
• NGOs: The majority of leading nonprofit organizations have ecosystem services initiatives.

Corporate leaders have the opportunity to proactively engage with these issues and integrate this thinking into business decision-making processes to identify and avert, or mitigate, ecosystem malfunction risk and related operational, reputational and regulatory risk.

In light of all of this activity, the question is: How can companies assess corporate risk associated with impacts and dependencies on biodiversity and ecosystem services? An assessment of BES risk is related to, but distinct from, a review of carbon emissions and water use. A BES assessment considers what a project or enterprise needs from natural systems in order to continue normal operations relative to total user demands and availability in the future — while factoring in cumulative effects of impacts and changes in ecosystem structure and function.

Ecosystem services assessments offer the context for understanding a wide range of individual corporate environmental impact metrics — within the broader functioning of ‘green infrastructure’ upon which projects, companies, communities, societies and economies rely. For example, if a company’s water use is headed downward, it is perceived as positive. But what if total water use in a region is significantly increasing? What if these water demands affected overall water availability within the region?

An ecosystem services assessment would reveal these dynamics, which elevate corporate risk, by laying bare an individual company’s demand relative to total demand and supply, such as through application of WRI’s Corporate Ecosystem Services Review (ESR) or a tailored process. Key components that leading practitioners have highlighted within BES applications include:

• Screen in order to determine whether or not there is a need for a detailed biodiversity and ecosystem services assessment, which would ideally include ‘trigger’ questions, general ‘rules of thumb,’ and guidelines for when a full assessment is needed of corporate impact and dependencies on ecosystem services.
• Scope to ensure that the assessment is focused on the most important issues and generates key insights on trade-offs associated with ecosystem dynamics and ecosystem services in environmental, social and economic contexts.
• Source, or gather, baseline data, both related to present and well as potential future scenarios of ecosystem structure and function, which could affect flow of ecosystem services.
• Assess corporate impacts and dependencies on ecosystem services over time, including review of relative importance and/or ranking of impacts as well as dependencies over time for various ecosystem services beneficiaries.
• Develop mitigation and management plans as well as an implementation plan.

The benefits of natural capital and BES approaches can be applied throughout a business. For example:

• Corporate strategy — Integrate considerations of natural capital and ecosystem services into strategy, and in the process support reputation and brand value, while also differentiating from competitors
• Corporate finance — Factor BES opportunities and risks into decisions about potential mergers, acquisitions, major investments, and new project development
• Supply chain management — Assess potential for supply chain disruption due to future changes in flows of ecosystem services, as a result of climate change, or cumulative effects from resource uses within a watershed; analyze parts of the supply chain to identify quantifiable impacts and dependencies on ecosystem services
• Product life-cycle assessment (LCA) — Assess how life-cycle stages could affect biodiversity and ecosystem services
• Real estate management — Assess “idle” lands in terms of which ecosystem services exist and can be restored, with conservation value used to communicate the value that can be realized; prioritize selection of lands for restoration and assess how to efficiently allocate resources

As more companies engage, the opportunity is simple and most easily explained, as laid out, by politician and diplomat Robert Strauss who was reported to have said, “When you see a parade form on an issue in Washington, you have two choices: You can throw your body in front of it and let them walk all over you, or you can jump in front of the parade and pretend it’s yours.”

A natural capital, biodiversity and ecosystem services parade is forming: Will companies join in, and even call it their own?