KPI of the Planet: Integrating Sustainability into Corporate Decision-Making

by   |   November 14, 2012 1:24 pm   |   0 Comments

Eva Zabey of World Business Council for Social Development

Eva Zabey of World Business Council for Social Development

Doing well by doing good is an admirable goal. But business decisions are built on the bottom line.

While corporate sustainability efforts are increasing, every company tracks, measures and reports differently. So the World Business Council for Social Development (WBCSD), a coalition of 200 member companies, has developed a Guide to Corporate Ecosystem Valuation (CEV). The CEV enables companies to put a value on sustainability choices to make better decisions for the environment, society, and the corporation.

Most enterprises today focus their sustainability efforts on the assessing and controlling the impact the enterprise has on the planet. But businesses must look at their environmental dependencies as well, says Eva Zabey. As ecosystems program manager at the Council, she has been leading the organization’s work on using ecosystem valuation in a business context. Only by putting a value on both sides of the sustainability balance sheet can business come up with a realistic return on sustainability investments.

Data Informed talked to Zabey about the valuation framework, the challenges in creating tools for sustainability decision-making, and what processes corporations can put in place to include the KPIs of the planet in business planning.

Data Informed: You use the term ecosystem services to describe the benefits that the planet provides to corporations. Why?

Eva Zabey: It’s a term that came out of the 2005 Millennium Ecosystem Assessment. Ecosystem services are the benefits that nature provides to people, including business—not just obvious things like water and food, but also water purification, crop pollination, and erosion control. We’ve got mountains and wetlands and forests that provide services that aren’t accounted for on anyone’s balance sheet because people take them for granted. And as these are services, they have a value.

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Compared to things like biodiversity, which can be misunderstood or considered fluffy, when some companies hear about ecosystem services, they say, ‘Aha! That makes sense. I understand a service.’ The next step is to get people thinking about ‘natural capital’ as stocks and flows—a whole lot of assets that business aren’t optimizing their returns on.

What was the impetus for creating the Corporate Ecosystem Valuation framework?

Zabey: When you enter the “environmental economics” space, it appears very complex. But it’s not as complex as it seems. There are ways to quantify a company’s impact and dependencies on nature. If you incorporate the value of nature and consider a distributional analysis about how different stakeholders are affected by different scenarios, you can make better decisions.

But the first step—before you even get to the CEV framework—is simply to understand, in a qualitative way, how you impact and depend on nature. Together with the World Resources Institute, we developed the Ecosystems Services Review in 2008 that takes you through 24 ecosystem services to discover which you have an impact on and which you depend on and what risks and opportunities those present.

Did anything like this exist before?

Zabey:  There are frameworks for NGOs and governments, but nothing existed for business, which is starting from an entirely different premise. A business wants to make a profit. They’re not just looking out for the well-being of society. There was no framework or standard process for companies to use for valuation.

Our goal in creating this was to help business navigate the jargon around environmental economics. The field has been around for more than 50 years, but it’s new to business. We want companies to be informed, to learn how to have these conversations and to understand what the numbers mean.

Is this valuation framework applicable across companies and industries?

Zabey: It is. We want to make it clear that CEV is a process. It’s not a price list of biodiversity and ecosystem services. It’s not a calculator. It’s not a standalone methodology.

You need an environmental economist who’s studied this stuff to do that. It can be very tempting to put a number on something, and doing so can be extremely powerful. But there are assumptions and uncertainty that need to be taken into account.

Can you share an example of how this works?

Zabey: We worked with Holcim, a supplier of cement and building materials, to figure out the scenarios around rehabilitating a quarry. Should they turn it into agricultural land or a wetland? The wetland would provide more value, but all of that value would accrue to society. Then you have to translate that into financial flows. The company pays for something, such as the rehabilitation of the quarry, that benefits society. But they can then negotiate with the local government to get a better deal on the next quarry or a more favorable tax rate.

We’d like to see that kind of valuation be internalized into everything business does.

What are the obstacles to institutionalizing sustainability valuation processes into business planning?

Zabey: One of the biggest issues is reporting. Corporate finance reporting, for example, is rigorous and rules-based. It works very well, and it means all companies are comparable. Sustainability reporting is not. One company may decide their main issue is waste and won’t report on anything else. Another may decide to report on water use simply as volume as opposed to where they use it.

We’d like to make it so environment and social reporting are structured, too. That will force companies to address this because then they can benchmark themselves.

Are there instances where the valuation process results in the business making a decision that doesn’t benefit the environment or society?

Zabey: I have never come across a case where knowing the ecosystem valuation was a disincentive to doing what was best for nature and the business. I think we are at a stage where we need to encourage more companies to try it out. A number of companies are still quite uncomfortable with putting a price on nature because that means they may have to pay for something they were already getting for free. But sooner or later the KPIs of the planet are doing to catch up with them.

One thing that is a real headache for lots of companies is that they want a standard methodology to use to value their environmental impact and dependence. That doesn’t exist, and it would be very dangerous to use some kind of black box tool. You need to understand the assumptions we’re making that are often based on contingent valuation studies. Everyone wants to simplify it, and we would like to get to that stage. But you have to be careful to use the results within the right context.

Is it possible, though, to create tools to help companies evaluate their risks related to a specific ecosystem services?

Zabey: Yes. For example, we have developed the WBCSD Global Water Tool. More than 300 companies are using it to map their water use and assess related risks to their global operations and supply chains.

What’s been most surprising to you during the eight years you have been doing this work?

Zabey: One thing that has been surprising is the importance of individuals in leading positions.  They can give a huge sustainability push in a company following only a few conversations..  Like the CEO of Unilever sitting down with OXFAM and deciding then and there to carry out a massive project on global poverty. Or the head of Coca-Cola deciding the company is going to be water neutral. It’s such a powerful force, that then triggers quick action underneath those decisions—but that action has to be rigorous and make sense.

What companies really get it, in terms of making business decision based on sustainability valuation?

Zabey: There are an increasing number of these. For example, 14 companies road tested the CEV. Often it’s the companies that have a very big direct impact on the environment that really get it. They’ve been in the spotlight so much over the years that they take it very seriously. Some really good examples are forest products company Weyerhaeuser and mining company Rio Tinto, but there are others.

Weyerhaeuser made the decision to assess the impact of various ecosystem services and report on them in a more consistent way. They looked at what services forests provide and how that could be a potential new business for them. The created Weyerhaeuser Solutions to leverage those ecological assets that they have been benefitting from.

Rio Tinto has been a leader in the concept of net positive impact on biodiversity. They understand that certain impacts are inevitable and have developed a biodiversity action to identify biological features both on and off-site, evaluate the company’s impact on those features, and develop a plan to avoid, mitigate or offset those impacts.

When do you think ecosystem valuation processes will be ingrained in business decision making?

Zabey: WBCSD developed Vision 2050. It’s a pathway to get to the world we want to live in with nine-plus billion people living well and also within the limits of the planet. There are some must-haves we need sooner to get there like understanding the true cost and true value of ecosystems services and integrating that into things like GDP. I think we need to get consistent reporting in place by 2020 to reach that vision.

We just began a coalition with the Stockholm Resilience Centre, where a group of 28 scientists identified and quantified a set of nine planetary boundaries within which humanity can continue to develop and thrive. We want to develop a dashboard of the planet so we can see which areas are approaching a tipping point so we don’t exceed those boundaries.

Stephanie Overby is a Boston-based freelance writer. Follow her on Twitter: @stephanieoverby.

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