Former Manager, Research, BSR
Two events took place within three months of each other that could fundamentally reshape the digital and physical world around us. On March 18, Facebook filed paperwork for its initial public offering, and on June 16, the Natural Capital Declaration was launched at the Rio+20 Conference in Brazil. What's interesting is what these two events have in common: Both are grappling with the definition of value.
The Facebook IPO put a US$104 billion value on customer data. The investors who pumped this record-breaking amount of cash into the Facebook IPO hope to capitalize on the company's ability to reach into one-in-seven people's lives.
The Natural Capital Declaration is a commitment by the financial sector to integrate natural capital--the Earth's lands, waters, and their biodiversity--into financial products and services, and to incentivize other organizations to report on their use of natural capital.
These systems are valued for their intangibles--the connections within them. Facebook is a social ecosystem; one that is important to its users because it allows them to connect with their friends. Just like the intangible value of friends, the value of the connections taking place within natural systems--that is, the connections between the depth of water, type of soil, the movement of sediment, and predator-prey relationships--is difficult to accurately measure.
There is a need to ensure that the value of ecosystems--the productive potential and employment potential, for example--is not ignored by governments and business. Companies should understand when they're making trade-offs. But is valuation enough?
How Environmental Economists Value Nature
Environmental economists have been struggling with the idea of value for decades. Is the natural environment priceless? Well, yes. But tell a treasury official that a tropical reef, forest, or river is priceless, and he or she is going to enter a zero in the balance sheet. In no time, this will pave the way for damming, digging, or cutting to extract "value" in a way that quickly makes this priceless natural resource become worthless.
To remedy this, environmental economists assign "market values" and "non-market values" to natural resources. Market values involve dollars-and-cents transactions, such as the ticket price to enter a national park, or the cost of a fishing license. Non-market values represent the many benefits the natural environment provides that are not bought or sold with cash. These include providing habitat for animals, cleaning the air we breathe, filtering our water, storing greenhouse gases, the spiritual and cultural values associated with a place--even the value humans gain simply by knowing it exists (imagine how you would feel if you heard the Great Barrier Reef or the Grand Canyon was wiped out overnight).
Environmental economists add these values together to arrive at a figure that quantifies how much we value nature.
A scenario playing out in New York's Catskill Mountains illustrates the importance of assigning this value. Recently, the "value" attached to that impressive ecosystem has been defined solely by the natural gas beneath the land. The result? There is a controversy in the region, where many people feel the environmental benefits provided by the Catskills--from the filtration of water to the region's productive soils--are being disregarded in favor of the market value for natural gas.
Are Monetary Values of Ecosystems Enough?
International discussions and publications have long promoted the measurement of monetary values that reflect the social importance of ecosystem services as a critical factor for better decision-making. But there are reasons to consider moving beyond these monetization efforts:
Too often, the results may be inaccurate. Valuation methods and techniques have to be improved so that results can be verified and replicated.
The measurements don't align well with the context in which decisions are made. The things being measured--disruption due to floods and droughts, loss of waterway value--do not represent the broader set of issues at stake (like addressing stakeholder concerns or meeting regulatory requirements) when policymakers or corporate managers are making decisions about managing natural resources.
There is little evidence that valuation results in better decisions. There are few public examples of how ecosystem services values are used in decision-making, across multiple sectors. Thus, there is little to show for the relationship between monetary values of ecosystem services and conservation outcomes.
We're stuck in the "commodification of nature" debate. The Natural Capital Declaration reinvigorated an ongoing fear that monetization reduces conservation decisions to financial cost-benefit analyses that take control of natural capital away from governments and citizens who depend on them.
A Closer Look at Facebook's 100 Billion Connections
So if placing a monetary value on ecosystems and the services they provide is not enough, what more do we need?
Here, Facebook provides an interesting lesson. The social network's investors don't seem to care about the distinction between market and non-market value. After all, Facebook does not currently make a great deal of money. It has a price-to-earnings ratio (an indicator of the attractiveness of a company's stock price) of 100:1, instead of the average company's 15:1. It had sales last year of only US$3.7 billion. By contrast, PepsiCo, with identical market value, had revenue of US$66.5 billion and more than six times more profit.
The real value of Facebook lies in the 100 billion individual connections that exist between its users. Likewise, in a natural ecosystem, billions of complex interactions are taking place between living and non-living things. These interactions are driving natural processes that give us benefits like clean air and water, protection from coastal storms, and a relatively predictable climate. And as with Facebook, its value is based on the strength of the 100 billion connections to drive additional sets of benefits (like more clicks-thrus to purchases of online products).
Fortunately, there are ways to model and quantify changes within an ecosystem that allow people to see the positive or negative effects of different activities on these complex interactions. In a best case scenario, companies can characterize ecosystem functions in the areas where they operate, analyze the difference between those baseline conditions and anticipated future conditions stemming from their activities, and focus on specific impacts or benefits based on their own analyses and with input from their stakeholders. By doing this, they can identify how the impacts may be avoided or minimized or how to optimize the benefits both ecologically and socially.
For companies interested in responsibly managing their environmental and social footprints, having the ability to quantify changes within an ecosystem means they might be able to answer some important questions:
- How could I design my facility or site to reduce impacts, benefit the ecosystem, and improve operational efficiencies?
- Will I be able to work more effectively with local communities and stakeholders if I have a better understanding of impacts and alternatives?
- Can I calculate the benefits provided to society by my conservation projects?
Making Decisions for the Long Term
The correct valuation of Facebook will be an ongoing question. At this stage, we know enough to say that defining what a Facebook customer is worth is not the right question. Defining how and the degree to which the customer is engaged is a more important query.
In terms of valuing ecosystems and the services they provide, the momentum around measuring ecosystem services in monetary terms will not subside any time soon, despite the lack of replicable and auditable data and methodology. In the meantime, corporate managers need practical approaches to help them take into consideration the importance of ecosystem services.
We do need to address the "economic invisibility" of nature so that the many benefits it provides are not ignored. But until we have that solution, it may be that having the ability to anticipate change in ecosystem performance from proposed activities, as measured by the change in ecosystem function, will allow corporate practitioners to make more informed decisions about how they interact with and manage land for the long term.
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