This section uses the results of the MA to identify how ecosystem changes will affect the competitiveness and profitability of businesses both directly and indirectly. Societal concerns about degraded ecosystem services could have implications for a business’s freedom to operate, its reputation and brand value, and the cost of capital and perceived investor risk. In addition, the loss of ecosystem services could affect a business’s production inputs and operations, thereby raising its costs. However, as solutions are sought and consumer preferences for ecosystem services change, business opportunities will arise based on new technologies and business models.
License to Operate
A company’s license or freedom to operate hinges on its ability to meet the expectations of a broad range of stakeholders, including affected communities, regulators, investors, employees, and society at large. The increasing pressure on ecosystem services will change the expectations of important constituencies. Failure to meet these expectations and to provide transparency in ecosystem management, including greater involvement of concerned stakeholders in decision-making, risks regulatory action, investor pressure, or public campaigns—all of which can affect a company’s, or even an industry’s, ability to conduct business in a successful manner. Situations where the license to operate has been challenged include agricultural biotechnology and tuna fishing practices.
However, experience has also shown that a small number of leading companies will address these business risks in a proactive manner in order to preserve future freedoms and to seek relative advantage over their peers through their ability to effect early change. Several large multinational companies have subscribed to the Global Compact Principles launched by the United Nations in 1999 and have committed to promote the use of technology that is friendly to the environment, adopt policies of environmental and social responsibility, and implement precautionary approaches to environmental issues. The private sector in general is showing a greater willingness to contribute to ecosystem conservation due to the influence of shareholders, customers, and government regulation. Many companies are already preparing their own action plans for such issues as biodiversity conservation.
Corporate Image, Reputation, and Brand Risk
In a fast-changing business and market environment, a firm’s image or reputation is one piece of certainty it can provide to customers, investors, employees, suppliers, and communities. In this way, reputation as signaled through its brand can help differentiate a firm in crowded product and capital markets. A tangible indicator of the value of reputation can be found in market shares and price premiums for otherwise similar products or higher price/earning multiples for companies in the same sector. The right reputation can attract the best employees and partners and thereby provide access to the most creative ideas. In this way, reputation has become a key corporate asset to be developed and protected.
Good reputations are built on trust, which is earned by delivering promised performance and communicating openly and honestly about that performance. Companies also earn trust and build strong reputations by reacting quickly to mistakes and recognizing responsibility. Some companies have done great harm to their reputations by not acting in this way.
The MA points to the growing use of independent third-party verification of performance as a way of increasing credibility, trust, and reputation. This trend, when coupled with changing customer preferences for products produced in environmentally and socially responsible ways, has led to the growing practice of certification. These schemes can be found in the energy, forest, marine, food, and tourism industries, and their application is set to expand.
Cost of Capital and Perceived Investor Risk
The case for businesses to take action in response to the MA findings will sometimes depend on making investments in the short term to relieve future operating constraints and avoid higher costs in the long term. The first hurdle that project proposals have to clear is usually an internal corporate capital review. Stringent application of discounted cash flow valuations in the review process can weaken the case for making such investments. However, the MA findings provide such an urgent call for action that to ignore them could jeopardize the future of some operations altogether and make a narrow application of traditional discounting techniques alone unwise in capital allocation decisions. (When conventional discounted cash flow analysis is conducted in the context of the potential for decrements to total enterprise value arising from strategic missteps or profound impacts to reputation, it may in fact indicate satisfactory returns). Future business success may be conditional on developing the technological and institutional capacity now to reduce detrimental impacts on ecosystems and dependence on ecosystem services.
All else being equal, investors of capital do not like uncertainty and detrimental surprises. Therefore, they steer away from sectors and firms within sectors whose risks and potential liabilities are not well understood. To attract capital, these sectors and firms must pay higher rates. Investors’ calculus increasingly reflects the uncertainties introduced by potential costs and liabilities associated with externalities, future regulatory constraints on products and operations, and restricted access to natural resources or sites. Businesses are increasingly aware of the impact that reputation for business practices that address these risks and uncertainties can have on their cost of capital and, in a similar way, on the premiums they pay for insurance policies.
The proportion of the total equities markets in leading exchanges that are managed using some criteria of social responsibility is growing. For companies in the investment portfolios of leading fund managers and other institutional investors, it is increasingly common to be assessed for company risk on a whole range of issues, including biodiversity management and other ecosystem services. This mirrors the changes in corporate governance legislation, which increasingly requires the disclosure of material non-financial risks. Examples include the surveys of biodiversity risk management in key industrial sectors that were published in 2004 by Insight Investment and Isis Asset Management, both London-based fund managers. Two recent reports produced under UNEP’s Finance Initiative and endorsed by a wide range of financial institutions have drawn attention to the need for brokers, fund managers, and analysts to factor corporate governance and threats into their assessments.
The need for leading finance providers to screen projects for environmental and social risk was recognized in the launch of the Equator Principles in 2003. These are a set of voluntary principles adopted by 27 private financial institutions to assess and manage the environmental and social risks of their project finance activities. While the Equator Principles are not yet binding, companies that do not have the capacity to recognize, evaluate, and manage risks to their projects arising from, among other pressures, society’s expectations will find finance increasingly difficult and expensive to arrange.
Access to Raw Materials
Businesses depend on ecosystem services directly for inputs to their operations, including water, timber, fiber, fuel, genetic materials, and food. The consumption of ecosystem services, which is already unsustainable in many cases, will continue to grow even while population growth is expected to level off mid-century. For example, during the next 50 years, demand for food is projected to grow by 70–80% in the four MA scenarios.
As the pressure on ecosystem services grows, businesses may find either access to these inputs impaired or the costs of securing them increased. The best example of this may be fresh water. The availability and access to clean water is likely to change the way private enterprises in the developing world and industrial countries conduct business in the twenty-first century. For industries as different as food and agriculture to high technology (such as semiconductor plants requiring enormous amounts of water for chip production), water will increasingly be a factor in determining where, how, and with whom companies conduct their business.
In addition, many businesses rely on natural resources that are extracted from sensitive ecological areas (through, for instance, mining, forestry, aquaculture, or oil and gas development), and they come into conflict with other users of the affected ecosystem services. This will continue to affect the access of these businesses to raw material inputs. While ecological degradation is often portrayed as a conflict between public environmental interests and private business goals, different types of business conflicts are likely to emerge in the future. With tourism becoming the world’s largest employer and an important economic factor in many developing countries, native forestlands, coral reefs, and other natural resources will be increasingly perceived as vital business assets of many private companies.
The diversity of living things, down to the level of the gene, is the fundamental resource for “bioprospecting.” (See Table 2.) While environments rich in species such as the tropics are expected to yield the majority of pharmaceuticals and other useful compounds or models in the long term, bioprospecting has already yielded valuable products from a wide variety of environments including temperate forests and grasslands, arid and semiarid lands, freshwater ecosystems, mountain and polar regions, and cold and warm oceans. The continued improvements of agricultural yields through plant breeding, and the adaptation of crops to new and changing environments and emerging pests and diseases, requires the conservation of genetic diversity in both the wild relatives of domestic species and productive agricultural landscapes.
Operational Impacts and Efficiencies
Growth in the use of ecosystem services over the past five decades was generally much less than growth in gross domestic product. This decoupling of the consumption of ecosystem services from economic growth reflects structural changes in economies and the impact of new technologies and management practices that have increased the efficiency of use of ecosystem services and provided substitutes for some services.
In general, changes in the operating efficiencies (that is, the value per unit input) of companies in the use of land, energy, and water resources will result as access to ecosystem services becomes more regulated. Projects and existing operations that are unable to minimize, for either technical or economic reasons, their use of ecosystem services will be discouraged. Demand-side management options will become an increasingly attractive response strategy when compared with supply-side alternatives.
An impressive array of new technologies and practices is now available in the food, forest, energy, and waste management sectors for businesses willing to look ahead. Conservation tillage and technologies for using irrigation water more efficiently are bound to attract attention in water-scarce continents. In situ approaches such as agroforestry are effective ways of integrating biodiversity issues into agriculture and forest management. Reducing greenhouse gas emissions necessary to mitigate climate change will require businesses to provide and use energy efficiently and to do so while minimizing environmental impacts. Environmental awareness and educational programs have been successful in allowing consumers and resource users to make well-informed choices for minimizing waste in their purchasing decisions. Employers have introduced programs to encourage and recognize initiatives by communities to reduce waste.
New Business Opportunities
There are many examples of how pressures on ecosystems and their services are giving rise to new business opportunities. There are also examples of consumer preferences shifting to value different ecosystem services and of new businesses springing forth to satisfy these changing demands.
Markets and market mechanisms are being used more widely to help reduce the cost of complying with environmental constraints. Markets for carbon reduction credits are growing rapidly and have already created significant new investment and trading opportunities. The total value of the carbon market for 2003 topped $300 million (see Figure 16). And, depending on international regulation, some observers project that it will increase to $10–40 billion by 2010. Markets are also being created for more diverse commodities ranging from aquifer recharge credits, renewable energy credits, wasteload allocations for point and non-point source pollutants, and mitigation credits for wetlands, biodiversity, and riparian buffer zones. Water exchanges, water banks, and water leasing have all emerged as arrangements for promoting market activity.
In addition, there are increasing numbers of governmental incentive programs that pay for ecosystem services by compensating land-owning companies for revenues foregone when protecting the ecosystem services provided by their holdings. These can open up new revenue streams and radically different business models.
Low-input systems such as organic farming can contribute to enhancing sustainability of production systems and agricultural biodiversity. Consumers in affluent countries are increasingly shifting their preferences to agricultural products produced in this way, and organic agriculture contributes a growing portion of the food system.
Demand for seafood is likely to continue to grow explosively, providing even greater opportunities in aquaculture. However, many forms of aquaculture are accompanied by serious impacts on ecosystems, including loss of habitat, deterioration of water and soil quality, depletion of wild fish and shellfish populations, introduction of invasive species and disease, and loss of biodiversity (including genetic diversity). Increased public attention to these problems and possible governmental regulation will likely result in an environment in which there will be a distinct competitive advantage for businesses that devise novel ways of farming marine and freshwater species in a sustainable fashion.
In a number of countries, “industry clusters” are planned where the waste of one industry becomes the resource of another. In Japan, for example, recycling and take-back requirements have encouraged industrial reuse of wastes. The sale of products from waste, whether by simple reuse, recycling, and recovery or by more complex technological processing, has helped create whole new industries, including those that are developing the technologies needed to support these activities.
The growing business of ecotourism provides another example of shifting consumer preference for different ecosystem services and the opportunities this can provide. A challenge of conservation in the twenty-first century is for it to take place outside parks and other protected areas and become integrated into agricultural, marine, and urban systems. Thus conservation outside parks should open significant new business opportunities. An example is agrotourism that could help conserve cultural landscapes, add value to farming and fishing systems, and address economic needs. Cultural tourism can serve to educate people about the importance of cultural diversity, as well as the importance of the latter for the conservation of biodiversity.
New Technologies for New Opportunities
Increased pressures on the resource base—on land, water, fisheries, biodiversity, and so on—and the potentially serious effects of climate change add to the importance of the role technology can play and the business opportunities that this presents.
It is in business’s self-interest to promote and invest in technologies that can augment the availability of ecosystem services or reduce pressures on ecosystems. The challenge is to avoid technologies that trigger adverse consequences, and this requires a comprehensive understanding of the dynamics of ecosystems and the services they provide. However, it is also important to recognize that new technologies do not offer a panacea. Technology innovation is a difficult and expensive process that will only ever provide substitutes for some, but not all, ecosystem services. The effectiveness of new technologies will be determined by the social, economic, cultural, and policy context in which they are developed and deployed. Therefore, technologies effective in one country or region may need to be modified or may not be effective when introduced elsewhere. Technology has contributed greatly to increased food and fiber production from cultivated ecosystems. Development, assessment, and diffusion of technologies that could increase the production of food per unit area sustainably would significantly lessen pressure on other ecosystem services. New agricultural sciences will be needed to support a future agricultural revolution to meet worldwide food needs in the twenty-first century.
“Ecomagnination is about the future. We will focus our unique energy, technology, manufacturing, and infrastructure capabilities to develop tomorrow’s solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger materials, efficient lighting, and water purification technology.” —Jeffrey Immelt, Chairman and CEO of General Electric Company
Technology has made possible a rapid rate of “development” of water resources with a view toward maximizing freshwater provisioning services (such as water supply, irrigation, hydropower, and transport) to meet rising populations and human needs. However, we will need to find ways to stretch water supplies further as well as to reach populations that are often far from freshwater sources. The development and deployment of efficient and cost-effective desalination technology offers such an opportunity.
Significantreductions in net greenhouse gas emissions
will require technological solutions that could include a mix of fuel switching (coal
/oil to gas), increased power plant efficiency, renewables (biomass, solar, wind, run-of-the river, and large hydropower, geothermal, and so on), and nuclear power. This portfolio would be complemented by more efficient use of energy in the transportation, buildings, and industry sectors. In addition, technologies for carbon dioxide capture and sequestration pre- and post-combustion
can add to the toolkit needed to address the substantial challenge of stabilizing greenhouse gas concentrations in the atmosphere. While these technologies exist, they need to be improved to make them economical and environmentally friendly.
Technologies already exist for the reduction of nutrient overuse at reasonable costs. For example, precision agriculture techniques help control the application of fertilizers to a field through a combination of monitoring systems, sensors, and field-level ecological knowledge. However, new policies and management techniques are needed before these and other tools will be applied on a sufficient scale to slow and ultimately reverse the increase in nutrient loading.
Taking the Next Steps
This synthesis examines the findings and implications of the MA for businesses in general. However, to take these ideas forward a business should determine what ecosystem changes mean for its company both today and in the future. The following list of questions might be helpful when starting that evaluation process.
Identifying Ecosystem Services
- On which ecosystem goods and services does my business depend directly or indirectly? To what extent?
- What ecosystems are providing those services? Where?
- What ecosystem services do our suppliers, partners and customers rely on?
- Do our operations have an impact on ecosystem services on which other groups depend? How? Where?
- Have we assessed our reliance on ecosystem services, whether these demands are sustainable, and potential alternatives?
- Do we have adequate information on the current and projected state of these ecosystem services over the time frames relevant to our business?
- Have we evaluated the potential for nonlinear changes in services on which our business or suppliers depend?
- Do we have any programs or plans to minimize impacts on ecosystems or contribute to maintenance and enhancement of ecosystem services?
- Do we have the diversity of expertise that we need to manage these issues?
- Are policy changes likely in response to changes in ecosystem services?
- Are our customers, employees, investors, shareholders, or other key stakeholders concerned about changes in ecosystems and our role in these changes?
- How could their concerns affect our business?
- What are our competitors doing?
- Are there new opportunities for our business?
- What short- and medium-term actions can we take to address critical changes in ecosystem services? Are there groups with whom we should partner?
- How can we take an integrated approach that addresses these changes to ecosystems?
- How will we monitor and evaluate the effectiveness of our actions?
- What performance indicators should we report publicly to build transparency, trust, and help “raise the bar” for competition?
- What are the risks of inaction for our freedom to operate and for our reputation?
Disclaimer: This chapter is taken wholly from, or contains information that was originally written for the Millennium Ecosystem Assessment as published by the World Resources Institute. The content has not been modified by the Encyclopedia of Earth.
This is a chapter from Ecosystems and Human Well-being: Opportunities and Challenges for Business and Industry (full report).
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