Dipping their toes in

Some see carbon as merely the first of a whole range of markets for ecosystem services. But, as Sissel Waage and Emma Stewart found, the corporate world is approaching with caution

The creation of markets for carbon emissions is, some believe, just the first step in a journey that will ultimately see business and society paying the correct price for a whole range of environmental services. The thinking is that natural ecosystems provide services – such as water filtration, pollination, biodiversity or climate protection – that have a financial value. And markets can be harnessed to place a value on these services. Actors who destroy or degrade ecosystems can pay to restore them, thus providing a financial benefit to those who carry out such restoration.

In late 2006, Business for Social Responsibility (BSR) interviewed executives at 25 Fortune 1000 companies, to shed light on the private sector’s current view of markets for ecosystem services. The conversations also offered a glimpse of what the pathway may look like for increasing corporate engagement in environmental markets over the coming years.

The key finding is that few multinational businesses are jumping into the ecosystem marketplace with both feet. With the notable exception of markets for carbon, we predict that major corporations may dip their toes in these markets in the next few years, but formal engagement will not become the norm.

Simply put, few major companies understand why a business – which already pays to meet air and water pollution guidelines, as well as to gain services from a local or regional water utility – should suddenly start paying for ecosystem services. Why would individual businesses pay for the maintenance of well-functioning ecosystems when everyone relies upon them? Isn’t it the role of government to protect public goods? What is the assurance that funds spent would directly lead to enhancement of an ecosystem service? Is the functioning of services in carbon sequestration, water filtration, pollination, storm control and other services understood to the level of detail that is expected in other corporate transactions? If not, why shouldn’t companies wait until such a level of scientific rigour can be met?

A pollination broker?

The questions are many, yet resources within companies for exploring this new domain are few.

The premise that businesses have been drawing upon ‘natural capital’ without paying is an amorphous concept to many corporate decision-makers and often perceived as inaccurate, given that companies do pay for water filtration, waste treatment facilities, air pollution scrubbers and even species mitigation measures. While a number of corporate managers recognise the critical ecosystem services upon which they rely and do not pay for, recognition alone is an insufficient condition for voluntary action.

However, these markets will get a significant boost in the coming months as climate change concerns broaden discussions of both regulatory and voluntary carbon-focused action. Within certain industries, such as the food and agricultural sector, a market in carbon will focus greater attention on environmental risks and opportunities more broadly.

For example, as farmers begin to sell carbon credits in exchange for applying particular soil conservation techniques, a series of other options will emerge, such as transitioning to organic or less input-intensive forms of agriculture, which may offer other carbon opportunities.

In addition, the impacts of climate change, including more frequent severe storms and changes in habitat, will spur more companies to ensure their operations via natural flood protection barriers such as wetlands, or seek ways to maintain a consistent supply of water or species upon which their products rely.

However, our findings suggest that significant multinational corporate investments in environmental markets are not imminent. A sea-change may be slowly building, but it does not appear to be immediate. In other words, the mood could be more aptly allegorised as one of ‘toe-dipping’ rather than diving in head first.

Our conversations with 25 companies were prompted by BSR’s July 2006 report on environmental markets, to which interested companies responded. Thus, as a sample of companies, this one was skewed toward business people intrigued by the idea of environmental markets and who wanted to learn more. Given this, what was striking was the vast range of familiarity with environmental markets, as well as the extent to which companies were reluctant to dive in.

Some of the more engaged firms with which we spoke expressed concerns about the development of voluntary markets spawning new regulations, particularly given the growing momentum for regulated carbon markets. For example, a few of the respondents from oil and gas companies see a significant risk that discussions around water and biodiversity impacts could lead to additional regulations and/or liability. Other oil and gas companies want a sense of the return on investment they could expect. Should they consider this a philanthropic donation or an investment? They see few examples or tools to help them with such a calculation, let alone to assist in informing internal corporate strategy discussions.

A number of mining companies were positive about the concept of environmental markets, having dealt with mitigation and offsets at many of their operational sites.They even see the potential for enhanced real estate value, but find it hard to identify the opportunities.

Utility companies may well be the most advanced on the subject. One company sees environmental markets as simply the “next stage of corporate environmental strategy”. A number of firms have begun developing their own tools to assess the biodiversity value of their landholdings. But, again, the approach is one of internal assessment and development of a corporate point of view on the domain before launching into environmental markets in a significant way.

Of the food companies we spoke to, many are immersed in various corporate social responsibility programmes – from policies for sourcing in ecologically sensitive areas to increasing the percentage of organic ingredients in their products.The addition of another initiative requiring extensive new research and risk-taking seemed infeasible (from a staff and budgetary perspective) and possibly redundant (given a sense that these issues should already be covered in sustainable sourcing guidelines).

A few beverage companies see environmental markets as aligned with their current supply-chain work. One company foresees significant risk in the increasing scarcity of certain natural ingredients, some of which are signature to its brand. Another company is considering paying neighbouring farmers to protect soils as a possible community engagement innovation. Others are coming to terms with the fact that the siting of operations will only become more complicated in light of climate change impacts on water and soil quality.

High-tech companies expressed a primary focus on positioning themselves for a carbon-constrained world. Despite the need for reliable flows of pure water, consistent supply of metals, significant waste assimilation capacity and concerns about a social licence to operate, environmental markets (other than carbon) are not seen as core to the business. However, there is a desire for better, sector-specific intelligence to help companies keep tabs on market developments – again, a wait-and-see approach.

For the most part, pharmaceutical companies view ecosystem services as insufficient for dealing with their industry’s core environmental issues: contamination of water effluent with drugs; high levels of water purity necessary for drug manufacture; and bioprospecting. It is assumed that natural water filtration systems could not clean drugs out of effluent or filter water to the level of purity necessary for drug manufacturing. With the advances of synthetic compounds, bioprospecting now accounts for only a very small percentage of drug inputs.

Many companies across multiple industries are frustrated by the ‘messiness’ of the field. While they accept that any market must evolve in a somewhat disorderly fashion at first, they feel that the complicated landscape of markets – including disparate one-off transactions, a patchwork of regulatory drivers, and overlapping efforts by NGOs – mean extra work for their teams tasked with tracking trends. For many, this frustration leads directly to a ‘wait-and-see’ attitude.

Based on our conversations with corporate leaders, we have identified two primary pathways toward fuller engagement by the private sector in environmental markets.

The first involves building trusting relationships with individuals within companies to address their particular (and often unique) needs as they become familiar with, and assess the risks and opportunities of, environmental markets. The reason is simple. More prominent corporate advocates for ecosystem service investments are needed. One way to develop strong advocates is by helping to address a ‘burr under the saddle’ concern that a particular corporate decision-maker and/or company may feel.

But it doesn’t end there. Even if we build a relationship with one corporate advocate, it is often hard for the advocate to identify who within the company may help forward their efforts. For example, in our conversations it became clear that companies are staffing up to respond to climate change, but they are not connecting these individuals with other staff working on water or biodiversity. While many aspects of the carbon markets will not apply to other environmental markets, the experience in trading as well as interacting with relevant international networks will become important institutional knowledge as environmental markets develop.Helping one advocate to connect with those who have gone before is an important step to advance organisational learning in general, and in regard to environmental markets in particular.

"Companies want to hear about ways in which they can become sellers and financial beneficiaries of ecosystem services"

The second pathway forward is to provide the ‘proof of concept’ that equips these corporate advocates to make their cases. Most needed are large-scale, on-the-ground pilots in key sourcing or sales regions that represent the intersection between a business-critical operation and a key area of ecosystem services.To accomplish this, facilitators are needed to bring together the neighbouring communities that manage the land, ecologists who have the technical capacities to assess critical land uses that will foster ecosystem services, and natural resource contract specialists who can help to craft agreements that clearly lay out what is expected of land users and how these commitments will be measured. All of these elements will need to be developed in ways that meet the rigour and expectations of other corporate agreements.

Perhaps surprisingly, a number of companies with which we spoke would prefer to enter into these pilots with other companies that have interests in complementary ecosystem services.This approach can help a company minimise reputational as well as financial risk, while learning from its peers.

Together, these two pathways have the potential to initiate within companies more proactive discussions that are not only focused on regulatory responses and carbon, but are also focused on innovation and entrepreneurship.

This shift – from a regulatory perspective to one of innovative entrepreneurship and potentially top-line growth – tracks with another key shift that needs to happen: no longer seeing the private sector as ‘buyers’ – and only buyers – of ecosystem services. Companies want to hear about ways in which they can become sellers and financial beneficiaries, too: by investing in their landholdings and selling credits on the market; by enhancing natural systems to substitute for costly technological fixes; by improving the quality and consistency of their natural resource inputs; by rebuilding natural flood and storm barriers to lower insurance premiums; and by enhancing their brands by telling good product stories.

Indeed, it is only when companies start seeing the potential beyond their roles as buyers that environmental markets will attract more voluntary engagement from the private sector. Environmental markets will then have the potential to become drivers for innovation and entrepreneurship. Only then will these markets have the potential to become, as some prescient corporate leaders predict, the “next stage of corporate environmental strategy”.

Sissel Waage and Emma Stewart manage environmental strategy at Business for Social Responsibility, a San Francisco-based business membership organisation.

E-mails: swaage@bsr.org and estewart@bsr.org