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

Ecosystem services are the benefits people gain from the environment and biodiversity such as water, crops, timber, flood protection, waste assimilation, carbon sequestration and recreation. Every person and every business depend on and affect ecosystem services in some way. And today, there is growing interest among corporations in understanding how to value ecosystem services and incorporate those valuations into business decision making.

This article looks at a new tool called Corporate Ecosystem Valuation (CEV), recently introduced by the World Business Council for Sustainable Development. It’s based on my conversation with Eva Zabey, an expert staffer at the Council.

This is part II of a two-part series. Part I can be read here.

What is the link between how carbon is priced and how carbon-related ecosystems are valued?

The prices established for carbon in markets such as the EU Emissions Trading Scheme are a ready source of pricing data, even if some argue that the value of avoided carbon emissions is not fully reflected in today’s market prices. Carbon market prices constitute a conservative input into corporate ecosystem valuation.

What are the trends in adoption of CEV?

Fourteen members of WBCSD road tested the CEV method. Their feedback was positive. Indeed, the CEOs of those companies signed a statement attesting “We see that CEV can strengthen business performance by considering social benefits, sustaining revenues, reducing costs, revaluing company assets and determining levels of liability and compensation. We see the value of ecosystem valuation.”

These companies represent a range of industries, from extractive (Eni, EDP, Holcim, Lafarge, RioTinto), to agriculture (Syngenta, Weyerhaeuser) to chemicals (AkzoNobel, Hitachi Chemical). The extractive and agri/forestry industries are likely to be early adopters but the applicability of CEV is broad. The WRI reports that more than 300 companies have already used the Ecosystem Services Review described above.

When it comes to CEV, Eva divides companies into leaders, learners and laggards. Leaders are more likely found in Europe these days than elsewhere (but not exclusively there as many US and Japanese companies are demonstrating). They see CEV as an opportunity. They want to stay ahead of the curve. They see regulation getting stricter and don’t want to wait for a regulator to tell them what their financial liability is; they want to be able to anticipate it and plan for it. Learners are companies that are new to the topic and open to it. WBCSD started a help desk in May to support its learner members. The help desk hosts a monthly call focusing on various issues to build CEV understanding and capability among these companies. Laggards, the third segment of companies, refuse to see the value of ecosystems thinking. And they see a downside to it: if I start carrying out analysis like this, such companies think, then people will know how much I’m impacting, how much it’s worth, how much I should be paying. They’d rather sweep it under the rug. Advocates of ecosystem thinking and CEV, like the WBCSD, believe such thinking comes with a cost, and laggards will pay a price in time. WBCSD also believes that not only will CEV help you make better decisions, it’s better to know the value yourself – and have enough background to have an informed discussion about it – than waiting for someone to tell you.

What impacts, if any, has the adoption of CEV had to date?

The guide to CEV was just published in April this year. So far, anecdotal evidence is positive and supportive. Some of the road testers said they intend to include the concept in their training programs or biodiversity handbooks. Reactions from non-business sectors events have been positive. And, as previously noted, some companies have already surmised that understanding and protecting ecosystem services is an existential matter and have adapted their strategy accordingly, even before a standard valuation methodology was available. This new approach, which enables companies to bring ecosystem services into the same analytical framework as other financial assets and opportunities, should foster significant adoption over time.

What related markets, such as ecosystem markets, consulting and tools, may be influenced by the adoption of corporate ecosystem valuation?

The adoption of corporate ecosystem valuation should increase the need for environmental economists and consultants practiced in these methods! It may also foster the development of ecosystem markets such as deforestation mitigation credits and wetland mitigation banks. (In one widely publicized case, Chevron could reap up to $150 million in credits by restoring and preserving the Paradis wetlands in Louisiana, an area where oil companies drilled for decades.)

Mark Laska, president of ecology consultant Great Ecology and Environments, (and a friend of mine) helps companies understand corporate impacts on ecosystems, financially quantify those impacts, and develops strategies for restoring ecosystems such as wetlands. His business is driven by compliance with environmental regulations today, but believes that greater adoption of frameworks like CEV would be good for his business and the environment.

What does it cost to perform a CEV?

The WBCSD Web site has some resources that review various valuation techniques. Some can take days to weeks and cost a few hundreds or thousands of dollars (like benefit transfer). Others might entail weeks or months of work and involve costs of tens or hundreds of thousands of dollars (like willingness to pay surveys). Out of pocket costs are lower if you have an available environmental economist on hand. Some expert advice will be required to choose an appropriate valuation technique. But whichever course is taken, the total costs are often much less than what companies tend to pay for studies from major strategy consulting firms.

What is the relevance of CEV for smaller companies?

Since there are low-cost paths to CEV, the overall approach is available to companies of nearly every size – but some of the resource-intensive techniques might not be appropriate. The results of a CEV analysis can help executives make better decisions and be better informed when negotiating with customers, suppliers and governments as well, where tax incentives related to ecosystem impacts may apply.

My company doesn’t have an appetite for doing a CEV but wants to keep this on my radar. What should we do?

There are plenty of free resources available on the WBCSD Web site and elsewhere. Companies should read those materials and follow the news on ecosystem services. PUMA’s announcement will not be the last. Dow has also recently publicly announced its partnership with TNC around water-related ecosystem values. Members of WBCSD members can join special monthly help desk calls through December which address issues and questions that member companies have on the topic. And companies should broaden their thinking beyond compliance to the risks and opportunities presented by ecosystem services.

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.

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