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By putting a dollar sign on the services nature provides, conservationists and business are beginning to talk the same language
By putting a dollar sign on the services nature provides, conservationists and business are beginning to talk the same languageFive years ago, many investors still pooh-poohed climate change. Then came the UK’s Stern report and suddenly rising temperatures became much harder to discount.
In 700 pages, economist Nicholas Stern upturned the debate by phrasing it in dollar and cents terms. Suddenly climate change mitigation had a price. One per cent of global GDP to stabilise emissions at 500-550ppm CO2e, to be precise (later, revised to 2%).
Conservationists are now hoping to do the same for biodiversity. To that end, they can count a landmark in a two-year investigation published by the UN Environment Programme in July 2010.
The Economics of Ecosystem Services and Biodiversity Report, or Teeb as it is commonly known, estimates that the cost of environmental degradation could reach almost a fifth (18%) of global economic output by 2050.
The shift to monetising natural capital is “essential”, argues David Hillyard, international director of partnerships at the Earthwatch Institute, an international environment organisation.
“We live in a market economy so there is a need to do it [value natural capital] because that’s how we recognise value as society,” he says.
Many others of a realistic mindset echo the view. Biodiversity depletion is happening so fast, it’s a case of price it or lose it.
The business community is certainly of the same mind. Business works best with quantifiable data. Calculating the cost of soil erosion in Europe (€53 per hectare per annum) or economic losses due to agricultural pests ($100bn) gives companies the tools to work with.
The price is right
The challenge is developing the right valuation systems. Teeb made progress on that front, but the business and academic worlds remain a way off from a standardised approach.
“There is no generic set of tools that a company can pick up and use if it wants to take proper account of the … value of biodiversity and ecosystem services,” says Mike Rands, director of the cross-sectoral Cambridge conservation initiative at the Judge Business School.
Even defining the term “value” with respect to biodiversity is “complex and difficult”, Rands adds. Is it short-term or long-term value? Is it biodiversity being valued, or broader ecosystem services? Is it only intrinsic value or extrinsic too? All are questions awaiting answers.
That is not to say progress isn’t being made on several fronts. Where most attention is being focused is on ecosystem services.
Ecosystem services come in four basic formats: provisioning services (such as food, fresh water, fuel and wood); regulating services (such as flood regulation and water purification); supporting services (such as soil formation and photosynthesis); and cultural services (such as recreational use).
“Companies can relate ecosystem services better to their bottom line than biodiversity per se … as it’s a very utilitarian approach,” says Craig Hansen, director of the people and ecosystems programme at the non-profit World Resources Institute.
However, coming up with a single valuation for a company’s overall dependency on ecosystem services remains a long way off.
In that sense, carbon sequestration (itself an ecosystem service) is unique in being both a globally normative phenomenon and dealing with a single commodity (namely, carbon dioxide).
“Most ecosystem services are bound by individual watersheds … so the economic contributions in different locations vary, making it more of a place-based assessment of value,” Hansen adds.
At a site-level, not all valuations require advanced science-based finance models. In the case of grey-versus-green infrastructure projects, standard economics works fine.
So choosing between the construction of a wetland or a brick-and-mortar plant for tertiary water treatment is the sort of case where a straightforward cost analysis would suffice.
Companies can also turn to an increasing number of professional services firms with expertise in the valuation of ecosystem services. Environmental Resources Management and PricewaterhouseCoopers are notable examples, although niche players are also emerging.
As of April 2011, companies should also have access to some step-by-step directions to navigate the various valuation models already out there.
Still awaiting sign-off, the World Business Council for Sustainable Development’s (WBCSD) Guide to Corporate Ecosystem Valuation tool has so far been road tested by 15 companies.
“It’s not creating a valuation index or spreadsheet. Instead, it’s a guide on how to adapt and use existing valuation systems so that they make sense for business,” says James Griffiths, director of ecosystems, water and sustainable forest products industry at WBCSD.
Bigger than climate
As with the Stern report, many stakeholders other than companies are set to gain from a valuation-based approach.
Investors are one. The forward-thinking minority is aware that biodiversity is set to be increasingly material in a resource-constrained world. Indeed, some see it as a bigger issue than climate change because of its link to global issues such as food security and poverty.
“There is a lot of interest, but investors are still looking for a quantified, convincing business case,” says Annelisa Grigg, project director at the investor-focused Natural Value Initiative.
In the shape of valued ecosystem services, they have the origins of just such a case.
Policy makers also see valuation models as a useful tool for devising political responses. Offset schemes are the most obvious policy application. State-level wetland offset programmes in the US, Australia and South Africa are already in place.
If the political will exists, such valuation-based models could be expanded in the future. The initiative “reducing emissions from deforestation and forest degradation” (Redd), a UN-backed credit-based trading scheme, gives a taste of what’s possible.
Valuation models and trading mechanisms are also sparking early innovations from with the private sector, particularly the finance community.
Japanese finance group Sumitomo Trust and Banking, for instance, recently set up a biodiversity mutual fund. The fund targets investment at companies specialising in technologies that mitigate or secure biodiversity.
In France, meanwhile, CDC Biodiversité has set up a habitat banking project based on offset credits that are financed through voluntary corporate compensation. The initiative by the subsidiary of financial institution Caisse des Dépôts is the first of its kind in Europe.
Powerful though valuation models promise to be, many in the conservation world are hesitant about their take-up.
While conceding that the recognition of ecosystem services having a value is “useful” to the debate, valuation-based mechanisms are no “silver bullet” for biodiversity management, warns Craig Bennett, policy director at the environment group Friends of the Earth.
“Biodiversity cannot be traded in the same way as other goods and services. When you destroy it, you cannot replace it,” he argues.
Other concerns include the omission of biodiversity’s cultural and social value, which are the most difficult of all to put a dollar figure on.
“There are drawbacks having to default to something that has a monetary value to it because you lose understanding of the complexity and essential intrinsic values,” says Pippa Howard, director of the business and biodiversity programme at Fauna & Flora International.
A possible solution that could leave both sides happy is to bundle up ecosystem services together.
In practice, that would mean tying biodiversity into carbon-based market solutions. Given that these remain in their infancy, it could be a long time before such a compromise is reached.
The Economics of Ecosystem Services and Biodiversity Report, United Nations Environment Programme, 2010
Corporate Ecosystem Valuation: A Scoping Report, WBCSD, May 2009
For a podcast with Oliver Balch on this Briefing, click herebiodiversity