The Quiet Revolution: The Changing Expectations of Corporate Environmental Performance

March 27, 2012
  • Linda Hwang

    Former Manager, Research, BSR

  • Sissel Waage

    Former Manager, BSR

Note: This article is the first piece in a two-part series on the uptake of ecosystem services. Read part two of our series, on the increasing integration of ecosystem services within government, the investor community, and business sectors.

In today’s complex operating environment, it is becoming more important for companies to scrutinize how they manage corporate processes that affect the natural infrastructure upon which business and society rely. This infrastructure supplies ecosystem services—the flows from systems that provide raw materials for business—such as fertile topsoil (providing timber and crops), a relatively predictable climate, and coastal protection from storms.

Companies are beginning to take this broader view in part because trend-setting financial institutions, NGOs, academics, and public agencies are asking more questions about the role that different sectors can play to stop the downward trend of ecosystem services, placing the issue squarely on the corporate agenda.

While this indicates progress, scientists in this field have spent years arguing that business must take a systems approach to understanding ecological function and outcomes. No longer is it enough to track the upward or downward direction of a particular parameter such as water consumption or nitrogen-dioxide emissions. Instead, the ecosystem services approach asks how individual parameters interact within a dynamic system in order to enable (or undercut) the functioning of that system itself.

BSR’s upcoming report on ecosystem services examines how far we have come in our approach to ecosystem services. While we are well beyond the “exploratory” phase of this concept—underscored by the broad range of activity on ecosystem services across multiple sectors—there is more progress to be made.

This article, the first of a two-part series, looks at the progress we have made; the challenges faced by government, investors, and companies in adopting an ecosystem services approach; and the questions that still need to be answered in order to build more acceptance and application of ecosystem services concepts. The second article will highlight how some leading companies have chosen to approach ecosystem services, and what’s working (and what’s not).

Increasing Uptake of Ecosystem Services

Based on our research of ecosystem services issues across academic, NGO, and public and private sectors since 2007, it is clear that engagement with the concept is on the rise. There is now a large body of peer-reviewed material—including the Millennium Ecosystem Assessment, The Economics of Ecosystems and Biodiversity report, and the European Environment Agency’s classification of ecosystem services—that has helped establish clear categories and an overall definition for ecosystem services.

In addition, some national governments, including those of Colombia, Costa Rica, Spain, the U.K., United States, and Vietnam, are exploring policy mechanisms to restore and maintain ecosystem services and natural capital.

There is also a small but influential set of financial institutions that is exploring how ecosystem services considerations can be integrated into financial due diligence processes. Furthermore, more questions are being asked to evaluate impacts, dependencies, and risks associated with natural infrastructure. For example, when considering a large, capital investment, is the company factoring in risks such as the shifting availability of water, timber, or specific crops? Alternatively, when looking at existing supply chain management strategies, is the company taking into account the cumulative environmental effects in important sourcing areas?

Taking the lead, the International Finance Corporation’s (IFC) newly updated Environmental and Social Sustainability Performance Standards now include ecosystems services. Since January 2012, the IFC has required that the projects it funds routinely consider ecosystem services in environmental and social impact assessments. Given the link between the IFC’s performance standards and the Equator Principles, which have been adopted by 76 banks, these guidelines have set a new bar for financial and risk-management due diligence, as well as by European Export Credit Agencies.

Last (but not least), a growing number of companies are exploring ecosystem services and testing decision-making aids.

Some businesses are starting to track and assess the concept for purposes of potential integration into corporate performance and management, while others have created internal mandates that all new projects within sensitive areas should conduct ecosystem services issue-identification exercises. Our next article will explore the broad range of activities companies are pursuing to factor ecosystem services into their decisions.

The Emerging Business Case

At this stage in the evolution of corporate environmental management, the business case for applying ecosystem services is emerging gradually. The availability of external funding clearly is a significant driver for many industries. But for industries whose flows of capital do not require the integration of ecosystem services, there is very little incentive to change existing environmental-management protocols.

For those companies that are engaging—whether driven by the new IFC standards, questions from national governments, increasing scrutiny from NGOs, or simply the desire to maintain a leadership position within their industry—an ecosystem services perspective offers new insights that are not addressed through existing approaches to environmental and social impact management:

  • Operational dependencies on ecosystem services.
  • How the supply and demand of ecosystem services affects business operations, including risks associated with cumulative impacts.
  • The relationship between livelihoods and the environment.

Ideally, companies would draw from corporate examples of how systematic consideration of ecosystem services can spark more appropriate and effective mitigation strategies that address environmental and social impacts, dependencies and risks, and capture any opportunities to address these issues proactively.

Looking Forward

Clearly, the challenge for companies today is how to take action. The set of corporate experiences tells us that there are still many unanswered questions related to practical application of ecosystem services across the wide range of business activities and decision-making processes. For instance, there are currently no guidelines for how to manage the transaction costs of measuring and monitoring ecosystem services over time. Likewise, companies lack direction on how to prioritize some ecosystem services over others. Most documents published in recent years have provided conceptual approaches but not specific operational guidance.

In response to this gap, various players have stepped in. The oil and gas industry has developed detailed checklists for ecosystem services issues in various stages of the project lifecycle, and the World Resources Institute is creating a tool specifically for integrating ecosystem services into impact assessments.

Ultimately, the key to getting companies to adopt an ecosystem services approach is to demonstrate clearly how work on ecosystem services will contribute to project managers’ goals of delivering projects on time and in budget. The easier it is for companies to integrate new measures into existing processes, the more likely that integration will be.

All of these issues contribute to a tone of caution among business representatives who discuss ecosystem services, especially given the challenge of working in multiple global locations with poor ecosystem services data and diverse stakeholders with a wide range of values and interests.

To achieve greater progress faster, BSR has identified three priority areas for development:

  1. Communications: We need more examples of how to communicate the importance of ecosystem services clearly and simply, and how to apply the concept in corporate settings.
  2. Lessons learned: Given the range of activity within government agencies, the investor community, and the private sector, we need to share examples of how ecosystem services are being integrated into decision-making across sectors.
  3. Knowledge management: Advancements in the theory and practice associated with ecosystem services should be tracked collectively to identify credible ecosystem services data for specific geographies, and to capture which concepts, tools, and valuation approaches have worked for specific contexts.

Put in the simplest way, the key question for a company evaluating its impacts on ecosystem services is this: If we pursue a given project, will a specific ecosystem still be able to produce the services people and businesses have come to rely on?

Simple as it may seem, that question is actually revolutionary in terms of its effect on corporate responsibility. An ecosystem services approach could shift discussions around responsibility from discrete actions on specific lands to the cumulative effects of multiple actors across wide geographic areas.

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