Jonathan Lau

Jan 9, 2021

11 min read

Quantify and Cooperate Nature Into Our Business Models

Over the past two decades, the environmental concerns have entered the mainstream discussion in the re-evaluation of our economic systems. Emphasis is being placed in concepts such as the circular economy such that future resources are secured for sustainable developments. While these visions for sustainable business models are widely supported, businesses still run as usual, continuing to contribute greenhouse gas emissions, environmental degradation, deforestation, and so on. This outcome results not because of a lack in environmental specialists or organizations, but because their visions are not aligned with the profit-driven multinational corporations that dominate the current global economy.

In dealing with this misalignment, a series of environmental schemes had been developed, targeting both the consumer and suppliers. They mostly come in a form of education or penalty, for instance, advertisements and annual workshops to increase people’s eco-awareness or legislative implementation like carbon tax. These schemes remain ineffective despite great intentions because there are minimal incentives created for cooperation to further develop “green” business cases.

Legislative penalties are not desirable behaviours modifier, because of the additional negative consequences come along with it, one that motivates counteractions towards the intended direction [1]. On the other hand, while the modification in consumer base (education) may provide incentives to corporations, hence the development of environmental certificates — social responsibility proofs available for corporations — these benefits are one-directional, meaning the corporation can only gain sales with the extra cost to facilitate those green infrastructures. As a result, corporations are incentivised to earn the certificate with the least effort like searching loopholes or merely ticking boxes in the application, instead of finding ways to maximize natural assets’ value in maximizing profits.

This phenomenon happens because public benefits are traditionally not associated with private profits. With common goods remains economically free in most cases, commonwealth is often ignored and exploited, thus explains our continuation in ecological destruction. Therefore, to account for natural assets in the same manner as private assets, we look into the natural capital approach to value natural assets as one of the business measurements. This approach is defined as “a means for identifying and quantifying the natural environment and associated ecosystem services leading to better decision-making for managing, preserving and restoring natural environments [2].” Keep in mind it is not suggesting giving nature itself a price, but the services it provides, hence it alters by case.

One may concern this addition accounting as a pure additional cost but boils down it is a very visible measurement in decision making to achieve profitable and sustainable business proposals. Take seafood market in Thailand as an example, because of the value difference between mangrove ($600) and shrimp ($9,600) over the course of nine years, more and more farmers convert their mangrove farms into shrimp farms. Yet, with more digging, you will find out approximately $8,000 profit of shrimp comes from the government subsidies, resulting in a difference of $1,200 and $600. We then further our evaluation by having nature assets into account. Considering the heavy input of salt and chemical deposition made to shrimp farms, if abandoned to restore it to productive use, approximately $12,000 is required. On the other hand, mangroves are natural barrier towards tsunami and cyclones, that protection it gives towards fisheries cost around $11,000. Result in a difference of -$10,800 (shrimp) and $11,600 (mangrove). In the case with natural capital in measure, mangroves are clearly more profitable [3]. Not only multi-seafood corporations can benefit from such, but self-sufficient farmers can also benefit by pitching to the government for a switch in subsidy.

Overview of the three natural capital approaches

How will us at Juniper engage such practice? With regards to the guideline published by UK Department of Environment, Food and Rural Affairs (DEFRA), there are in general three branches to operate natural capitals, including natural capital appraisal, accounting, and principles [4]. Within the three approaches, we focused on natural capital accounting, in an attempt to act as a third-party organization that helps to analyse, measure, and monitor natural assets of a certain territory. To provide an overview of the physical and monetary values of these assets through the ecosystem services they supply, before informing possible sustainable approaches to interested or relevant parties [4].

What are the challenges of this approach?

We focused on the role of analyser and adviser, and emphasised on the “outsider” state because the biggest challenge of natural capital accounting is valuing natural assets and the unfamiliar profiting scheme behind. As mentioned above, we are pricing the ecosystem services behind but not the natural capital itself, therefore there is no standardized table of market values to referenced from. With this partnering the fact the concept remains in infancy, valuation methodologies are often case or region-specific. Yet the procedures need not be universally set, only the characters of the framework should remain consistent– transparent, indicative, and revisable. Being transparent and indicative help clearly illustrate the ecosystem services focused for valuation, for instance in the case of the national park it can be valued via the regulative (air filtration) and cultural services (visitors attracted for mental welfare) it provides. This sets up a general idea of the monetary value available for comparison and discussion when building up the business case. Being revisable is important, because unlike artificial constructions, natural assets are interrelated and constantly changing, almost impossible or financially insurmountable to fully estimate every aspect and outcomes available. Hence, having assets subject to uncertainty allows corporations to revised represented values accordingly [4].

Areas focused for EP&L analysis (adapted from Kering’s EP&L methodology)

For the profiting scheme, the challenge natural capital accounting has is the ambiguity and the interrelated nature of natural capital values, interrelated meaning the cost and benefits estimated does not always associate directly with the industry. Take the Environmental Profit & Loss (EP&L) scheme developed by Kering, a world-class accessories branding group, as an example. Recognising their reliance on natural capitals, they initiated environmental measures across the entire supply chain of their brands, including measures of the assets consumed, possible environmental changes and the damages to human welfare because of those changes [5]. The focused elements of the analysis are summarized in the table above.

Revenue results in relation to EP&L intensity (reprinted from Kering’s EP&L 2019 results)

In Kering’s 2019 financial report, they have earned a profit of €6 billion (EBITDA) with a self-calculated environmental cost of €524 million [6][7]. Although after reducing the environmental cost, they still earned a respectable profit of €5.5 billion, which seems to be a small investment made to natural capital, the same cannot be said for many other corporations. On one hand, as illustrated in the graph above, the low ratio of environmental cost to profit achieved by Kering was a culmination of years of effort in optimizing natural capitals. Meaning for many others, the portion of environmental cost remain too huge to bear and discourages corporations to kickstarts such scheme. On the other hand, without clear illustrations on how natural capital investments initiate financial benefits, they will just appear as external cost, and no corporations will be incentivized to participate, especially when it is considered “free” all this time. This is explained by the concept of the tragedy of the commons, which describes human selfish nature in a shared-resource system. Because commons goods are shared, is often neglected from what one considers its own property, as a result despite knowing the act on self-interest spoils the sustainability of the common good, one continues the act regardless of the public good being the lifeline of the private good [8]. In other terms, for corporations to invest in public good or natural capitals that benefit everyone in the long-term are not considers as profits to them, but merely a liability.

Cow leather’s EP&L index across impacted countries in 2019 (reprinted from Kering material intensities in € EP&L/kg)
EP&L impacts across supply chain tiers (reprinted from Kering’s EP&L 2019 results)

Regarding the interrelated nature, it is challenging because the mismatch between capital’s accrued benefits and corporation desired profit utterly diminishes its value as a business’s measurement. In the case of Kering, the identified loss in natural capital and human wellbeing suggested leather production in Europe is cheaper than Brazil, differing from what labour cost suggested. However, unlike the case of mangrove and shrimps, from a financial perspective, it is irrational to switch leather production from Brazil to Europe, because this capital loss mostly situates at the far end of the supply chain (see supply tier diagram above) and is directed to the Brazilians. It has minimal effects on Kering’s financial results and hence insufficient to be considered as a financial liability for them. While this analysis may not alter Kering’s business decision, we acting as a third party could utilize these data to pitch to Brazil government in subsidizing alternative goods, encourage local business to change business that adopts new land use, strengthen green infrastructure as well as securing future resource for other multinational corporations. The subsidize funds can come from the cost saved from waste and pollution treatments and national healthcare. This may sound too ideal, yet such explains how we being a stand-alone advisor allows us to maximize seemingly useless data by shifting them to directly affected parties. This not only gives us the leverage to actively seek for clients, but we can also establish uncommon networks and partnerships between different parties in achieving unusual win-win situations.

This section explained our focus and our ways to utilize our organization’s features to flip the common challenge to our advantage. The next section will explain the basics of our capital accounting methodology.

How will this work in the context of construction?

Before we go global and branch out to different disciplines, we as architects would like to start with the building and construction industry. The industry that accounts for 39% of worldwide carbon emissions [9], and act at the frontline in formulating urban fabrics. An ideal start in both the terms of environmental emergencies and to make this infant concept habitual in practice.

Having the collaborated accounting model of Office of National Statistics (ONS) and DEFRA as references, we will value natural capitals in the aspects of physical and monetary accounts, and focus on analysing abiotic assets like lands or sites. Physical accounting involves annual classification and recording of natural assets in their extent of service and conditions, allowing us to compare assets’ quality in different periods, and thus estimate its capacity in continuing to provide services. The measured services include regulative, cultural and provision ecosystem services, as well as other abiotic services. To measure asset’s conditions, it can be analysed in seven dimensions — vegetation, biodiversity, soil, water, ecological connectivity, access and management practices. For example, in quantifiable indications, we can visualize wetland’s quality through its timber biomass, mean species richness, carbon content, number of invasive species, degree of fragmentation, proximity to human habitat and the degree of protection with respect to the seven dimensions [10].

Furthermore, to established clear values to compare with conventional infrastructures or have it embeds in business models, only the final ecosystem services will be accounted and not the fluctuating intermediate services, unless it is requested by clients or it acts as the focus of the project like pollination. Such constraints also help to maintain consistency in valuing assets and avoids double counting benefits [10]. Physical accounting may not visualize assets monetarily, but it helps to provide information on the type of available resource, the available capacity, and their typically associated services as accounting reference. All being core data to prosper sustainable developments.

Monetary account, on the other hand, makes annual financial valuation towards selected ecosystem services and evaluate natural capitals through its overall ability to generate ecosystem services in the future. In general, there are four genres of service accounting method to accommodate services with varying degree of marketability. Including market-based methods, revealed preference methods, cost-based methods, and state preference methods [10].

Market-based method accounts directly marketed services, especially provision services, like timber, crops, water et cetera. Besides the goods, it can also be valued through the supports contributed, like pollinators that contribute to the fruit production. Allowing the natural capital to be valued via its capacity to accommodate these market-ready services [10].

Revealed preference methods are most appropriate for services that lack defined market price but still have clear associated markets, which focused on accounting the cost consumers willing to pay in different circumstances. First off, services can be valued by the surplus other markets made due to natural capital existence. For instance, the hedonic price difference between residential units with and without views of nature. Secondly, for regulative services they can be accounted with the markets of artificial substitutes, such as estimating capital’s filtration value through markets of air filters or air cleaners. In addition, capitals can also be valued by consumer consumption on complementary goods, a typical example being the travel cost one willing to pay to reach certain environmental goods (parks) [10].

Similar to the revealed preference method, cost-based methods also account capital values with its artificial counterparts, but usually bigger in scale and focused on the avoided cost made possible with the ecosystem service’s presence. Example being a coastal habitat, where it can be valued by the construction cost of building equivalently defensive sea walls [10].

Last but not least, for cases remained highly detached from traditional markets, capitals can be monetary accounted through state preference method. A method that assesses public willingness to pay via surveys, methods such as contingent valuation or choice experiments. In this way, because the value objectivity is achieved by the abundance of subjectivity, it usually results in less consistent and less robust pricing. However, it remains crucial because it covers a wide range of non-market values, especially non-use values. Values that are highly significant in estimating cultural services’ economic value, which can subclassify into altruistic, bequest and existence values. In more defined terms, the three subclassifications refer to the acknowledgement in nature importance in human welfare, the importance in securing future generation sustainability, and the importance of its existence for nature’s ecosystem respectively [4].

To summarize, we have adopted natural capital accounting as a mean to quantify natural assets as business’s measurements, to ultimately developed a sustainable circular economy. We acknowledge that challenges in adapting natural capital accounting are the inconsistencies in the valuation and the indirect character in the accrued benefits. To address these challenges, we at Juniper focus on quantifying the framework of natural capital with characters that are transparent, indicative, and revisable. Additionally, we have set up various methodologies to accommodate various dimensions of natural capital in relation to the marketable degree of their associated services. At Juniper, we are committed to cross-disciplinary data collection and specialized analysis so that we can develop standardized schemes for different genres of capitals and create partnerships between different parties concerning their dependent natural capitals. With the fact that the natural capital accounting is still a nascent approach, we believe it is best to work as a standalone third-party organization to maximize our potential to develop standardized valuation methodologies and matchmaking services.

[1] Bolderdijk, Jan, Philip Lehman, and E. Scott Geller. 2012. “Encouraging Pro‐Environmental Behaviour with Rewards and Penalties.” In Environmental Psychology: An Introduction, 233–42. https://doi.org/10.1002/9781119241072.ch27.

[2] Dillow, Robin K. 2008. “International Institute for Sustainable Development (IISD).” In Encyclopedia of Global Warming and Climate Change, by S. Philander. 2455 Teller Road, Thousand Oaks California 91320 United States: SAGE Publications, Inc. https://doi.org/10.4135/9781412963893.n343.

[3] TED. 2011. Pavan Sukhdev: Put a Value on Nature! https://www.youtube.com/watch?v=A-QpKiU-NHo&ab_channel=TED.

[4] DEFRA, “Enabling a Natural Capital Approach: Guidance.” 2020. Department for Environment, Food & Rural Affairs, March, 76.

[5] Kering. n.d. “Methodology — Kering.” Accessed December 23, 2020. https://kering-group.opendatasoft.com/pages/methodology/.

[6] Kering. 2020. “ENVIRONMENTAL PROFIT & LOSS (EP&L) 2019 Group Results.”

[7] Kering. 2020. “Group and Brands’ Key Figures.” June 19, 2020. http://www.kering.com/en/finance/about-kering/.

[8] Hardin, Garrett. 1968. “The Tragedy of the Commons.” Science 162 (3859): 1243–48. https://doi.org/10.1126/science.162.3859.1243.

[9] “New Report: The Building and Construction Sector Can Reach Net Zero Carbon Emissions by 2050,” World Green Building Council, September 23, 2019, https://www.worldgbc.org/news-media/WorldGBC-embodied-carbon-report-published.

[10] Jack Philips. 2017. “Principles of Natural Capital Accounting.” Office for National Statistics, February, 52.