Archive for the ‘Business’ Category

Sharing nature’s bounty or managing the services provided by natural capital?

Tuesday, August 7th, 2012

In an article in the Guardian, a UK newspaper, George Monbiot, takes a hit on ecosystem services and natural capital.

He finds the current shift in vocabulary very worrying:

  • Nature has become natural capital
  • Natural processes have become ecosystem services, as they exist only to serve us.
  • Ecosystems (hills, forests, river catchments, etc.) are now green infrastructure
  • Biodiversity and habitats are now asset classes within an ecosystem market
  • He basically argues that all the hype around these new terms and concepts carries with it the privatization of nature. He uses private ownership of land, exemplified by the enclosure of the commons, as an illustration of that privatization process.

    Enclosure Act for Shifnal, 1793

    Land ownership (…) has involved the gradual accumulation of exclusive rights, which were seized from commoners. Payments for ecosystem services extend this encroachment by appointing the landlord as the owner and instigator of the wildlife, the water flow, the carbon cycle, the natural processes that were previously deemed to belong to everyone and no one.

    His message is clearly stated, but it is not new. In fact, this has been a constant worry of all those involved in the growing incorporation of biodiversity, ecosystems, and ecosystem services into decisions affecting our environment. This includes both public bodies such as local governments involved in land planning, and private entities such as NGOs looking for extra funding or businesses trying to manage their dependency or impacts on natural resources and ecological processes.

    His critique focuses on the idea that only by giving a monetary value to the ecosystem services provided by natural capital can we internalize them into our decisions. This is one way forward, but because it assumes that natural capital is thus interchangeable with human or financial capital, it carries the risks outlined by the article. Another approach is to identify which bits of our natural capital are not exchangeable (fungible), and adopt a no net loss approach to their management.

    Managing our natural capital: No Net Loss vs. Monetization

    No net loss of natural capital has been one of the guiding principles of environmental legislation and is generally translated into regulations – such as the European Habitats Directive – than impose a sequence of steps aimed at avoiding, reducing, and offsetting impacts on natural capital.

    Concerning offsets, George Monbiot clearly does not trust environmental authorities to give priority to avoiding over reduction and offsetting of impacts.

    The government warns that these offsets should be used only to compensate for “genuinely unavoidable damage” and “must not become a licence to destroy”. But once the principle is established and the market is functioning, for how long do you reckon that line will hold? Nature, under this system, will become as fungible as everything else.

    He is probably right. Would impacts have been avoided if offsets had not been possible through this pilot scheme? Probably. Is that a good enough reason to give in? Maybe.

    George Monbiot takes the creation of the UK’s Natural Capital Commitee as a symbol of the worrying trend towards a gradual monetization, and thus privatization, of nature and natural processes. Let’s hope we can get a bit of no net loss principles in there…

    Biodiversity offsets: the most promising nature-based opportunity for UK businesses?!

    Monday, July 9th, 2012

    DEFRA (the UK government department responsible for policy and regulations on the environment, food and rural affairs) recently published a report on opportunities for UK business that value and/or protect nature’s services. What does it say?

    Well, the authors identified 12 promising opportunities for UK business to help protect and value nature. First among them is the development of biodiversity offsets and habitat banking. The report suggest they move from their current voluntary status to a mandatory regime.

    Rank 1=: BIODIVERSITY OFFSETS, INCLUDING THROUGH CONSERVATION BANKING – an opportunity to stimulate creation of new companies and new business models for existing companies to provide biodiversity offsets in the UK, by moving from the current voluntary approach to a (soft regulation) mandatory regime.

    The report mentions “soft regulation”, and describes (section 2.1, 1 of the final report) this as:

    regulation or unambiguous policy interpretation by government that clarifies that biodiversity offsets are necessary in defined circumstances, and that establishes a framework for implementation to a particular standard, including through conservation banks.

    The report also mentions the need to :

    support for a brokering system which can provide national, regional and local choice against desired spatial delivery, and can provide transparency and ease of purchase of credits and management of contracts with those providing offset sites, all of which would reduce risk

    To learn more about the business side of the report’s conclusions, dive in and read Attachment 1.

    Grasslands: are they all equivalent?

    Although the report’s overall outlook is positive, it doesn’t mean creating a market for biodiversity offsets will be straightforward. There are still many technical and institutional difficulties to overcome

  • how will the avoidance and reduction steps of the mitigation hierarchy be enforced?
  • how are “credits” constructed?
  • how will their prices be set?
  • how are liabilities defined?
  • who is in charge of controls and sanctions?
  • (…)
  • These questions are not new, but they deserve some detailed thinking, and transparent debates.

    Ecometrica’s Normative Biodiversity Metric: is it really a good idea?

    Sunday, February 12th, 2012

    Ecometrica, a Scottish consultancy, just wrote up guidelines for a new biodiversity metric. The Normative Biodiversity Metric (NBM) uses an interesting shortcut between “pristine” land and biodiversity to assess the overall land-holdings of the organization being assessed.

    Because the metric uses widely applicable classes of “pristiness”, it can itself be widely applied, at various spatial scales. In fact, NBM relies on existing mapped data concerning land-use and land-cover. This wide applicability is the metric’s main strength.

    In trying to apply concepts and ideas developed for green house gas emissions (GHG) to biodiversity, Ecometrica has chosen to simplify the later to a single easy to use metric. Why not? That choice does however raise the issue of over-simplification. When does “pristine” actually equate biodiversity and is that particular biodiversity the most relevant one to consider in assessing an corporation’s impact?

    The NBM is designed to provide an equivalent to corporate GHG assessment, for biodiversity impact.

    The documentation shows that the metric can incorporate additional field information, e.g. from surveys of the species or habitats that are actually present on-site. Yet, it is clear that the metric was developed to avoid field surveys as much as possible:

    the biodiversity assessment methodology cannot be wholly dependent on the use of ecological surveys carried out by experts

    Is that really a good idea? As usual, it depends what you use the metric for…

    Happy New Year, with new environmental regulations in France

    Monday, January 2nd, 2012

    At the close of 2011, the French government finally published its new regulations concerning environmental impact assessment and public consultations. It’s a nice Christmas present… and these changes will play a defining role in the new year.

  • Décret n° 2011-2018 du 29 décembre 2011 portant réforme de l’enquête publique relative aux opérations susceptibles d’affecter l’environnement
  • Décret n° 2011-2019 du 29 décembre 2011 portant réforme des études d’impact des projets de travaux, d’ouvrages ou d’aménagements
  • These regulations will be applicable as of June 1st. They are bringing about considerable change in the way biodiversity and ecosystems will be taken into account in development projects and land planning. We will discuss these changes here in the coming weeks.

    Nature films: are broadcasters free riders?

    Thursday, December 29th, 2011

    Earlier this month, Paul Jepson of Oxford and his colleagues published a short article in Science Magazine advocating that the media should pay for nature conservation… Why?

    Basically, they state that the industry extracts entertainment value from natural ecosystems and wild fauna and flora, but does not contribute to the cost of conserving these assets. Or at least not in an effective and transparent way.

    Today, the media funds nature conservation actions through separate, voluntary initiatives (and the payment of filming fees in some protected areas). Nature conservation projects funded by the media don’t necessarily target the same areas or species used in the films or photography. There is also no mechanism to determine how much funding would adequately reflect the industry’s take. How much is that take anyway?

    A key question is whether producers of wildlife content can afford to internalize the production costs of nature into their products.

    The authors argue that a better mechanism would be to set up a trust fund, with the money coming from broadcasters on the basis of viewing (e.g. per viewer, or DVD sold etc.) and not as a percentage of production costs. Using common-place ratings and sales data to size payments would lower the cost of setting up the scheme. The trust would also come with a international governing body and transparent certification mechanism for establishing payment rates and monitoring payments.

    The authors state that their scheme would ensure that:

  • Films that attract a large audience pay more than those who attract less viewers
  • Costs would be modest, and easy to set-up and monitor using common-place ratings and sales data
  • Sector leaders would have the opportunity to enhance their reputation or brand value
  • Deposits are linked to conservation actions targeting specific areas or species, where entertainment value is sourced
  • Payments are made by end-user broadcasters rather than less wealthy wildlife filming companies
  • Sends out the message that “by watching this, you are paying for conservation”
  • Unfortunately, the paper gives no details as to who would be involved in the governing body. It mentions an “international coalition of mass-membership NGOs, wildlife filmmaker associations, and the IUCN” but do not explain their choice. It is also unclear on what basis the certification process would establish the base rates (e.g. per viewer) for paying into the trust fund. The authors mention the need for “careful pricing” and “fair prices” but do not provide applicable solutions. Rather, they leave that difficult task to the NGOs (again!).

    leading environmental NGOs need to (…) introduce a PES-style mechanism

    Rather surprisingly, the paper has yet to receive the attention of the media outside academic circles. The authors are probably expecting responses. So should you.

    Biodiversity: you can only manage what you can measure!

    Sunday, June 19th, 2011

    Francis Vorhies, the Green Mind columnist in Forbes Magazine, recently published a short piece on biodiversity.

    His article emphasizes the various definitions of biodiversity, highlighting two alternatives: (1) a focus on wild species and their habitat requirements (as in the USA) or (2) “the integrity and diversity of natural environments and processes” (more akin to the CBD‘s definition).

    He states that for companies, the second approach is probably more useful. He doesn’t however explain why… and I would tend to think the opposite.

    The integrity and diversity of environments and processes is much harder to pin-down, and hence measure, monitor and manage, than the presence, absence or abundance of a species in a given area of land.

    The issue of biodiversity, in terms of impacts, responsibilities and opportunities, can only be dealt with if it can be properly managed. Some say you can only manage what you can measure…

    The knowledge base for identifying and measuring species and their habitats is stronger than that of complex interacting ecological processes, let alone “integrity” which requires setting a reference (which one?).

    What do you think?

    The nature of ecosystem service risks for business

    Wednesday, June 15th, 2011

    KMPG, a consultancy, recently published a report on ecosystem service related risks to business. The 20-pages report is available for free on the web (pdf here) and it provides some interesting insights into the business point of view.

    A complex issue that needs to be made more palatable
    The report mentions the need to demystify biodiversity and ecosystem services for business. This is probably central to any further consideration of these issues in the corporate world yet the report starts by mingling the complex and varied issues of biodiversity and ecosystem services into a single handy acronym “BES”. This is certainly helpful but such over-simplification could also generate confusion. Business leaders and decision-makers will be tempted to look for all-in-one solutions to all their “BES issues”, with little regard to differences in the specific issues they have to consider: land degradation, dynamics of species and natural habitats, natural resources (water, timber etc.), access to land…

    Risks : exposure x preparedness
    The report offers a nice summary of BES-related risks for businesses. These 5 risks are the same as those of the TEEB report but they come in handy:

  • Reputational risk, especially concerning access to funding
  • Regulatory risk, such as the expansion of protected areas or the strengthening of protected species legislation
  • Operational risk, concerning the sustained provision of key inputs (e.g. clean water) or ecosystem services
  • Legal liability risk, for example in the case of accidental damage to ecosystems or protected species
  • Systemic risk, when a business is overly dependent on a particular ecosystem service
  • The authors reviewed 11 published reports (which they claim to be “authoritative”) and consulted 5 experts to make a cross-sectoral analysis of business exposure to BES risks (exposure to each of the 5 risks above was rated on a scale of 1 to 3 and an average calculated) and their preparedness (which is a weighted average of scores given on a scale of 1 to 3 for the role of BES in a business’s competitive advantage, governance, policy/strategy and management/implementation). The report identifies three sectors as facing particularly high risk: food & beverages, mining and oil & gas. They also mention the banking sector because it is very unprepared.

    The report concludes by identifying three main areas for companies to focus on:

  • Their dependence on water
  • Their reputational risk, especially if their operations are associated with land conversion (= habitat destruction) or carbon (= green-house gas emissions)
  • Their dependence and impacts on BES throughout their value chain – why dependence on water was singled out as distinct from this broader issue is not explained.
  • Recommended actions and new opportunities (?)
    The report does not provide a new set of suggested actions for increasing a business preparedness regarding BES but instead lists those of the TEEB report. Among these is the recommendation to take action to “avoid, minimize and mitigate BES risks, including in-kind compensation (‘offsets’) where appropriate”. In this regard, it is interesting to note that the report mentions environmental markets as an opportunity for land intensive industries (i.e. extractive industries), if they make the effort to value ecosystem services within their land holdings to “identify potential assets as well as risk”.

    This recommendation, together with a widespread push in favour of payment for ecosystem services schemes and “conservation banking” (the latter is also mentioned in the report) is bound to stir concern in the nature conservation community : should a business be rewarded for owning land that harbours biodiversity or provides ecosystem services or should it be rewarded for actually acting in favour of BES, e.g. through proactive restoration or enhancement efforts?

    Biodiversity: the new carbon?

    Tuesday, February 8th, 2011

    The Guardian, a leading UK newspaper, recently published an interesting analysis of biodiversity as the new “carbon”. After discussing how biodiversity has emerged as a new issue for companies to incorporate in their business strategies, the article details the main motivations for this.

    The first motivation mentioned is reputational risk but the most interesting is the one concerning a company’s liability in case of impacts or damages on biodiversity. The Deepwater Horizon oil spill (BP) is used as an example. This underlies two things:

  • That the “business case” for incorporating biodiversity in business decisions and strategies is strongly dependant on an appropriate institutional context where companies are liable for impacts on biodiversity. The requirement to avoid, reduce and offset impacts is one such context.
  • That anticipating possible impacts and the potential financial losses that could result from such impacts requires the development of impact assessment procedures and methods that can be parametrized in advance.
  • The USA have developed assessment methods to be applied in the context of Natural Resource Damage Assessment procedures (NRDA), such as Habitat Equivalency Analysis and Resource Equivalency Analysis. In Europe, the 2004 Environmental Liability Directive will certainly make governments and environmental authorities push for the development of such methods.

    Discounting?

    Friday, December 10th, 2010

    In a paper in press in the journal Environmental Impact Assessment Review, Erhun Kula and David Evans discuss how long term impacts on the environment (and environmental gains) should be taken into account in cost-benefit assessments of projects. Their discussion mainly focuses on the tricky question of the discount rate which is used to calculate the net present value of future gains and losses.

    The authors’ main argument is that different discount rates should be used for economic and social costs and benefits and for environmental costs and benefits, because man-made capital (i.e. the former) is not finite and is – largely – substitutable while natural capital (i.e. the latter) is finite and not substitutable (because it is being degraded beyond its capacity to sustain ecosystem goods and services).

    (…) economic and social costs and benefits should be streamed separately from environmental costs and benefits within a cost-benefit analysis. Indeed, each stream should have its own set of objectives and constraints, costs and benefits, risks and uncertainties.

    Business accounting for biodiversity

    Sunday, October 24th, 2010

    In a recent report published by the OREE organisation, Joël Houdet summarizes the findings of his PhD on the incorporation of biodiversity and ecosystem services (BES) in business accounting systems. He defended his PhD on October 18th.

    BES accounting can be used for management purposes, in companies that are heavily dependent on ecosystem services or biological resources or that operate in a heavily regulated environment concerning their impacts on BES. For the general public however, it is through Corporate Social Responsibility (CSR) reporting that BES accounting systems are best known.

    CSR reporting on BES targets external stakeholders. Joël Houdet has identified three main approaches to this reporting:

  • EFA: Environmental Financial Acounting
  • DEE: Disclosure of environmental externalities
  • EEFR: Environmental Extra-Financial Reporting
  • He discusses each one of these options in the report, and in a policy-statement that will be communicated through a side-event at the CBD conference in Nagoya. We summarize it below.

    Environmental Financial Accounting
    EFA is an extension of standard financial accounting, which follows strict reporting rules (set by regulators) for reporting on a company’s financial health or performance to investors, tax authorities etc. In EFA, BES issues are included as financial provisions and liabilities related to the environment, such as provisioning funds for paying for damages and restoration actions in the case of a pollution event. Expenses and revenues related to environmental management (e.g. wastewater treatment) can also be reported through EFA.

    The main advantage of EFA for reporting on BES is that it is included in standard financial accounting standards, that has a true impact on corporate strategies and their bottom-line. Reporting of expenses and revenues or provisions and liabilities does not however give any indication of environmental performance – on the ground. Is the company’s impact on biodiversity increasing or decreasing? Which is the most cost-efficient tool or process for decreasing it?

    Disclosing environmental externalities
    Environmental externalities are the costs or losses supported by others because of the effects or impacts of a business on biodiversity or ecosystem services. These can be assessed using a variety of economic valuation methods (reviewed in TEEB).

    Using these valuations for accounting purposes has several important flaws:

  • Many of the methods used to value externalities are not reliable (e.g. contingent valuation techniques)
  • The company does not actually pay for these externalities, making their reporting symbolic
  • Disclosing environmental externalities does not allow the company’s environmental performance to be properly assessed
  • Environmental Extra-Financial Reporting
    EEFA is not linked to legal financial accounting standards but fits into corporate CSR reporting choices and strategies. It reports on a company’s management of environmental issues, including BES. A limited number of non-financial indicators are used for this, such as progress towards the implementation of environmental management systems, changes in resource-use efficiency (e.g. water consumption in production processes) or carbon emissions.

    The Global Reporting Initiative proposes a variety of environment performance indicators for CSR reporting. These include (1) the presence of remarkable species or habitats on or near business assets (e.g. factories, land holdings or concessions), (2) impacts on these biodiversity elements and (3) the company’s actions to mitigate these impacts. The main advantage of this albeit limited approach is that it truly falls within the company’s responsibilities to avoid and reduce the impacts of its activities on biodiversity and ecosystems (and offset any residual impacts).

    The main disadvantages of the EEFR approach is that

  • There are no standardized set of indicators for BES
  • In many cases, BES impacts are only assessed for new projects but not required for on-going activities
  • Supply-chain impacts on BES are rarely accounted for
  • It has no link to financial accounting and business performance (both short and long term)
  • Image found on http://www.celsias.com/article/green-lifeline/

    After reviewing the three approaches above, Joëll Houdet came up with a Biodiversity Accountability Framework (BAF) that aims to mix the best of EFA (bottom-line effect) and EEFR (on-the-ground environmental performance).

    Biodiversity Accountability Framework
    The aim of Houdet’s BAF is to report both on a company’s financial dependence on BES and its impacts on BES. Concerning the former, he suggests that companies assess (1) the share of their revenues that stream from material flows from biodiversity and/or the appropriation of ecosystem services, (2) the financial dependence of their expenses / revenues and assets / liabilities to these flows and (3) how ES benefits are shared with other stakeholders along these biodiversity resource and ecosystem service flows.

    In reporting a company’s impacts on BES, Joël Houdet suggests that they be assessed beyond the company’s business assets to include the indirect effects of its activities (including its supply-chain) on ecosystems and the company’s actions to mitigate these effects. Such reporting would involve assessing (1) the trends in BES used or impacted by the company, (2) the impacts of its activities and threats posed by them to BES (e.g. location of business assets relative to key BES) and (3) mitigation action by the company and its suppliers (e.g. costs incurred for restoring impacted BES) and (4) the outcome of these actions (e.g. success / failure of restoration operations).

    Developing such an accounting framework requires considerable involvement by businesses (until it becomes a legal obligation that is…) as well as close collaboration between the BES science community and business. Good luck!