Why Dow is Putting Nature on the Balance Sheet

Today's announcement by Dow Chemical that it will launch a multi-year effort to measure and track the business value of ecosystem services represents a small step for a company, a giant leap for critters of all kinds.

Dow isn't the first company to make the link between the services nature provides and their value to a company's bottom line. But its new initiative -- a five-year partnership with The Nature Conservancy -- goes beyond the academic. Its aim is to create a set of tools and methodologies other companies can use to integrate the economics of ecosystem services in business decision-making.

For the uninitiated, ecosystem services refers to the $33 trillion or so worth of "free" deliverables provided to us by a healthy planet, including clean water, breathable air, pollination, recreation, habitat, soil formation, pest control, a livable climate, and a bunch of other things we generally take for granted. As I've written about for years (see here, here, here, and here), such benefits aren't valued by companies, since they don't directly pay for them; they don't appear on a company's balance sheet. But that doesn't mean they aren't critical to a company's financial future.

Ecosystems have value, when you consider what a company would have to pay to replicate their services if they weren't otherwise available. And as ecosystems get stretched and diminished -- whether by human activity, changes in climate, or natural cycles -- they can impinge not just on profits, but a company's very ability to operate.

Under the agreement announced today, Dow and TNC will work together to examine how Dow's operations rely on and affect nature. The aim is to advance the incorporation of the value of nature into business, and to take action to protect the earth's natural systems and the services they provide business and society. One key objective is to share all tools, lessons learned and results so that other companies, scientists and interested parties can test and apply them.

Dow and its foundation are committing $10 million to this collaboration over the next five years.

What's going on here? Why has this venerable chemical giant suddenly decided to put a price tag on nature?

"We have been on a sustainability journey for close to 20 years," Neil Hawkins, Dow's Vice President, Sustainability & EH&S, told me last week. "We had our first set of sustainability goals that ended in 2005. We're halfway through our 2015 sustainability goals. They're very focused on some of the areas you'd expect -- EH&S performance, the whole life-cycle of our products, and delivering products that actually help the world solve major challenges.

"But the one area that we don't explicitly address is ecosystem services and biodiversity. It's an area we felt we needed to get better in. We have a long history in conservation, and probably have done as much conservation as most companies. But we needed a thoughtful, economic approach that builds directly into our business decision-making the value of nature to Dow -- be it water, wetlands, forests, etc. And also the value we're providing, because we have a lot of land holdings and a lot of facilities worldwide."

For example, Hawkins explained, consider water. Dow uses a lot of water in the production of its materials and chemicals. "Most places in the world don't have a mechanism for understanding the value of the water from the point of view of pricing. But there are implications to Dow if we don't have the supply of water we need at the right time and the right place." If a plant is in a water-challenged region, finding ways to improve the water availability for everyone, including Dow's plant, can be a valuable opportunity. "There might be value in Dow's making investments far away from our plant in order to secure more reliable supplies of water," he said.

"Water supplies don't just come from rivers on site. They're also impacted by the ecosystems upstream, like forests," explained Michelle Lapinski, Director, Corporate Practices at TNC. "Forest cover in a watershed significantly influences water quality and quantity. Trees naturally hold back water during rain events and release it slowly, preventing flooding and providing water during dry periods – and regulating the supply and quality of water better than many facilities can. By evaluating ecosystem services, a company like Dow may decide to invest in forest restoration to ensure continued water flow for their business, and others who rely on it."

Of course, some of these decisions go beyond a single company's -- or even a group of companies' -- ability to control. It's a societal matter, not a corporate one. That's where a group like The Nature Conservancy comes in. "We work in a number of cities in water supply," Glenn Prickett, TNC's Chief External Affairs Officer, told me. "In Bogotá, Quito, and São Paulo, we've worked with combinations of bottling plants, hydroelectric facilities and local water utilities to help each of them understand the value of the water they're getting from the watershed in terms of what it would cost to install their own reservoir or filtration plant if they didn't have the water they need in the quantity and quality they're currently getting it. That becomes the benchmark. Then there's an economic case for them to provide some amount of money up to that value toward a common effort to protect and restore that watershed. So, we've set up water funds in those cities where different entities pay into the fund to work with upstream landowners to protect and restore forests in the riparian areas. That's an example of how a company can do a very clear valuation and be part of a larger societal effort to maintain the resources."

These are complex calculations, the stuff of doctoral dissertations, being applied to the down-and-dirty world of business activity in faraway places. As such, the Dow-TNC partnership will likely make only a small dent in understanding how to integrate the value of nature into business decisions, and in only a limited number of scenarios, let alone have the valuations appear on corporate balance sheets. But there's significant potential here to bring the scientists together with the bean counters -- and have them translate all of this complexity into a language meaningful to those who set corporate strategy. As Lapinski put it: "Businesses talk in dollars and numbers and scientists and conservationists talk about beetles and birds. We're trying to take beetles and birds and put them into dollar numbers so that companies can value nature just as any other asset."

Of course, the implications of this go well beyond accounting. I asked Hawkins how he would measure the success of this five-year collaboration.

Success, he said, would be, "if, at the end of this, we're able to fully integrate this into our business decision-making as we site facilities, as we make changes to existing facilities, as we look at our product development -- if we can build in an economic valuation of nature and how we touch nature. If we can create environments and markets where business naturally is doing valuations and reaching the best economic outcomes while still meeting their growth objectives -- I think that becomes a longer-term goal."

TNC's Prickett weighed in: "To me, most fundamentally, success comes if businesses start to see conservation -- that is, helping to restore healthy ecosystems -- as a source of cost reduction and revenue enhancement. This is business, not just a philanthropic exercise in corporate responsibility or regulatory compliance."

It's a first step, to be sure, but an important one. And it will take more than just one chemical company and one NGO, however well-funded, well-staffed, and well-intentioned, to bring this into the mainstream.

"You've got to have some companies that are willing to try this, to take it on, to partner and collaborate with another organization with similar interests," says Dow's Hawkins. "And that's really at the core of this agreement: How do you take that first step to make this a reality by building it into a company and into a business and, hopefully, into a broader economic approach?"