Eleven Questions (and Answers) about Corporate Ecosystem Valuation, Part I

Sports apparel company PUMA announced last month that it had developed its first “environmental profit & loss” statement. The company’s and CEO Jochen Zeitz justified the move saying that companies need to begin to “account for and, ultimately, integrate into business models the true costs of their reliance on ecosystem services.”

Only a month before this announcement, the World Business Council for Sustainable Development (WBCSD) published a Guide to Corporate Ecosystem Valuation, a document intended to help companies start down the path of doing just what Zeitz had advocated. PUMA recently joined the WBCSD.

What are ecosystem services, what do they have to do with corporate strategy and how are they valued?  As WBCSD puts it, “Ecosystem services are the benefits people gain from the environment and biodiversity (i.e. the benefits that flow from natural capital). They include, among many others, water, crops, timber, flood protection, waste assimilation, carbon sequestration, recreation and spiritual benefits.” Every person and every business depend on and affect ecosystem services in some way.

Some businesses are beginning to recognize the strategic importance of ecosystem services. The Coca-Cola Corporation and PepsiCo, for example, have identified the availability of clean water as an existential imperative, and have developed plans to reduce their water use and to enhance water systems in various parts of the globe. Confectioner Mars is focused on the global cocoa crop; it cites forecast of a shortage just five to 10 years in the future.

Scientific and economic research over decades has established the importance of ecosystem services to our way of life and the functioning of business and our economy. Only recently, though, have tools been developed to enable corporations to value ecosystem services in financial terms. That’s the purpose of the Guide recently published by the WBCSD.

Eva Zabey has a background in environmental management and engineering and works at the Council. I recently interviewed her to learn more about corporate ecosystem valuation (CEV) and its implications for business. Here’s an edited summary of our discussion.

Is CEV all about cost and risk? Or is there an upside?

There is definitely an upside. For example, forest products company Weyerhaeuser “road tested” the Guide to ecosystem valuation. Recognizing that forests provide not only timber but also other services such as biomass, carbon sequestration and recreational opportunities, Weyerhaeuser found they could quantify the value of those ancillary services, bundle them and potentially sell them. The same opportunities exist for water. Water services company Veolia, which was also involved in the road test, surmised that people may be willing to pay more for water if they recognize the value of the ancillary services good water and land management provides such as wetlands that can be used for recreation, or agricultural land for energy crops.

What is the relationship between CEV and another tool, the World Resources Institute Ecosystem Services Review?

The Corporate Ecosystem Services Review (ESR) is a screening tool that provides a structured means for companies to understand, in a matter of weeks or months, the risks and opportunities they face in relation to their ecosystem impacts and dependencies. ESR gives a company a rough idea of how significant their impacts and opportunities are and how these could be incorporated into their strategy. If warranted, they can opt to do a CEV study which enables them to value these risks and opportunities, often in quantitative or monetary terms.  WBCSD was the main contributor to the development of ESR, just as WRI was one of the four partners in the development of CEV. The two tools are complementary. If you’re wondering if your impacts or dependencies are significant enough for a CEV study, do an ESR to find out.

Adapted from Source: P. ten Brink, Workshop on the Economics of the Global Loss of Biological Diversity, 5-6 March 2008, Brussels

As cited in The Economics and Ecosystem and Biodiversity: An Interim Report (European Community)

Leading companies are already concerning themselves with tracking and moderating GHG emissions, water use and emissions, solid waste, hazardous chemicals, etc. How do those efforts relate to CEV?

Companies that have developed tracking and reporting methods for these environmental issues have a head start. They already have data and skills to understand the issues and have a feel for the scope of the impacts and opportunities. They can use that understanding and go to the next level and calculate the monetary value of those impacts and opportunities—if their existing data suggests it’s worth doing so. The data already gathered will make the subsequent work of CEV easier.

What is the relationship between CEV and lifecycle assessment (a topic I’ve written about here and here)?

CEV is not a standalone tool. Companies can draw on a range of environmental assessment tools that they may already be using to make conducting a CEV easier and more relevant. CEV can derive values directly from the quantitative outputs of a life cycle assessment (LCA), for example. A number of the road testing companies, including AkzoNobel, which has been conducting LCAs for many years, leveraged their LCA experience to develop their CEV. Expertise in LCA or other environmental management or accounting tools reduces the total time and cost required to perform a CEV.

In next week’s installment we’ll look at the link between carbon pricing and CEV, trends in adoption of the method, and what it means for smaller companies, and what to do if you’re interested but not ready to undertake a CEV today.

David Schatsky, principal of Green Research, is a consultant and adviser to businesses on a range of topics, from clean tech markets to corporate sustainability best practices to business strategy in the Internet and information technology markets. Having spent almost a decade as an analyst and senior executive at JupiterResearch, a leading research and advisory firm focused on Internet business, Schatsky is an expert in business strategy, industry analysis and market research.