Prepared for Corporate Ecosystem Valuation?

This article highlights the need and business case for Corporate Ecosystem Evaluation based on a recently released guidelines by the World Business Council for Sustainable Development (WBCSD).

The biodiversity loss and the continuing ecosystem degradation are putting businesses at risk. The ecosystem degradation impacts corporate profits, production levels and market opportunities. Land use change, resources over-exploitation, pollution, invasive species and climate change have all undermined the functioning of natural ecosystems[1] These changes are being exacerbated further through factors such as rapid population growth and escalating consumption. This threat to the ecosystem has led to The Economics of Ecosystem and Biodiversity (TEEB) study which emphasises the concept of ecosystem valuation as a practical and influential tool for decision-making. These risks, if managed properly, can be transformed into new opportunities. The World Business Council for Sustainable Development (WBCSD) recognized the imminent fall-out of the biodiversity loss and in response developed a guide to Corporate Ecosystem Valuation (CEV). This guide will encourage and assist all businesses to integrate ecosystem values in their decision-making.

What are the business consequences of ecosystem degradation?
Valuable services are being compromised because of the severe ecosystem degradation that has been taking place across the globe. The Millennium Ecosystem Assessment (MA) found that 60% of the world’s ecosystem services have been degraded over the past 50 years.[2] A number of global initiatives have highlighted these issues over recent years, and are beginning to shed light on the value of ecosystem services and the cost of their degradation and loss. The clear message to businesses is that the status and functioning of ecosystems is not just a biological or ecological concern but has major implications for economic growth, human wellbeing and business performance. Stage is set for us to not only understand the necessity of ecosystem services but also understand the linkages that exist between the ecosystem services and business performance.

How valuable are ecosystem services?
According to the TEEB Study
- Through deforestation alone, the world loses ecosystem services worth between US$ 2-5 trillion each year.
- The global carbon market grew from virtually nothing in 2004 to over US$ 140 billion in 2009.
- The current global biodiversity offset market is worth a minimum US$ 3 billion and is expected to grow rapidly.
- Sustainability-related global business opportunities in natural resources may be in the order of US$ 2-6 trillion by 2050.
- The cost of global environmental externalities (includes externalities to ecosystems and ecosystem services, but also include impacts upon people, buildings and infrastructure and other economic activities). was nearly US$ 7 trillion (11% of the value of the global economy) in 2008, with the largest 3,000 companies causing around 35% of them.[3]
- 55% of corporate executives believe biodiversity should be among the top ten items on the corporate agenda, and 59% believe biodiversity is more of an opportunity than a risk for their companies.

Keeping in mind the immense business potential and the intangible benefits which businesses can leverage from ecosystem valuation, the Corporate Ecosystem Valuation (CEV) can be used as a clinical decision-making tool to identify and mitigate such risks.

What is Corporate Ecosystem Valuation (CEV)?
As per the definition provided by WBCSD, Corporate Ecosystem Valuation (CEV) is a process to make better-informed business decisions by explicitly valuing both ecosystem degradation and the benefits provided by ecosystem services. By including ecosystem values, the company’s aim is to improve corporate performance in relation to social and environmental goals and the financial bottom-line. Valuation can make decision making around ecosystems more compelling and practical, thereby enhancing sustainable development strategies and outcomes.

What is the need for CEV?
The fact that CEV allows companies to factor ecosystem values into business decision-making is making it an ever-more pressing need because:
• There is increasing evidence that ongoing ecosystem degradation has a material impact on companies – undermining performance, profits, their social license to operate and access to new markets.
• New opportunities are emerging that are linked to restoring and managing ecosystems. According to WBCSD’s Vision 2050, sustainability-related global business opportunities in natural resources may be in the order of US$ 2-6 trillion per annum by 2050.
•  Communities, NGOs, customers, consumers and shareholders are becoming increasingly conscious of the interrelationship between business operations and the state of ecosystems, and are demanding that these issues be addressed, reported and accounted for.
• In many parts of the World, the regulatory and legal requirements for companies to minimize and mitigate their ecosystem impacts, and to fully compensate any damages caused, are becoming more stringent.

All of these changing circumstances indicate that its essential to integrate ecosystem values into business decision- making. CEV provides companies with a strategic advantage, because it offers a process for dealing with these external and internal demands. It allows businesses to recognize, manage and capture the value of ecosystem service risks and opportunities through understanding more fully the nature and magnitude of the parameters, and incorporating those values within business decisions.

How is this valuation shaped up?
CEV offers a “value-based” lens through which associated environmental, social, economic and financial issues can be quantified, and the complex trade-offs between them compared. CEV can be applied to any aspect related to a business, such as a product, a service, a project, an asset or an incident and generally falls within one of the following four generic applications:
1. Calculate the change in value of ecosystem services associated with trade-offs between alternative scenarios and their related impacts
2. Value the total benefit of ecosystem
3. Assess the distribution of ecosystem service costs and benefits across different stakeholder groups
4. Determine sources of revenues and compensation packages relating to ecosystem service benefits and losses to stakeholders

What is the business case for CEV?
The underlying business case for undertaking CEV is that it enables companies to improve decision making and thereby increase revenue, save costs and boost the value of their assets and potentially share prices. This is achieved through managing a range of ecosystem risks and opportunities both internally and externally. An underlying benefit of CEV analysis is that decision-making is improved by shaping a more informed mindset, behaviour and actions among stakeholders and employees. For example, raising awareness on ecosystem values can help when negotiating prices and costs – e.g. accounting for ecosystem values might justify price premiums on products.

The inclusion of ecosystem values can give rise to external benefits including but not limited to compliance with external requirements, enable assessment of liability and compensation; quantify environmental performance to better measure company value; and allow more complete disclosure of environmental issues and activities to assist with performance reporting.
In turn these can also result in internal benefits which directly enhance business performance and the bottom line; for example, by helping to sustain and enhance revenues as also cost reduction and revaluation of assets.

The concept of ecosystem valuation is new to most businesses and as companies start to show an interest in CEV, it is essential to provide an approach that they can follow and rely upon, that is accepted by planners and decision makers, and which has been developed through a process of close collaboration with businesses themselves. WBCSD has undertaken such and effort leading to the formation of the Corporate Ecosystem Valuation guide.

Ecosystem Valuation is coming – are you ready for it?
Companies must anticipate that ecosystem valuation will be more consistently incorporated into public policies, regulations, and political decisions. Ecosystem values will be increasingly considered by the finance sector and business-to-business customers as they assess the biodiversity and ecosystem-related risks and opportunities of investments and supply chains.

In this respect, this Guide to Corporate Ecosystem Valuation “operationalizes” TEEB’s key messages and recommendations by providing a practical approach for effective application at the company level. There is, however, still work to be done and areas that need improvement; for example, the availability of ecosystem service values in databases, standardization of values and valuation techniques, and the development of more robust and user-friendly valuation tools.

The author Sandeep Roy works for cKinetics, a sustainability consulting firm.

Image(s) Courtesy:
Foreign and Commonwealth Office
Markus Rodder

1.WBCSD, IUCN, WRI and Earthwatch. 2006. Business and Ecosystems: Ecosystem Challenges and BusinessImplications. Geneva: WBCSD
2.Millennium Ecosystem Assessment. 2005. Ecosystems and human wellbeing. Biodiversity Synthesis Washington DC: Island Press
3.UNEP Finance Initiative - Principles for Responsible Investment. 2010. Universal ownership: Why environmental externalities matter to institutional investors.


Author: Sandeep Roy