Shift Happens

The emergence of natural capital consciousness

Companies that put a price tag on natural resources will come out ahead.
Davey Tree
Companies that put a price tag on natural resources will come out ahead.

The rise of natural capital speaks to the broader critique of the traditional economic paradigm: there is such a thing as "uneconomic growth." While many physical symptoms of this reality have materialized, natural resource scarcity and climate change steal the limelight. Most economists uneasily have ignored this fundamental flaw for centuries; they have had the luxury to do so, because traditional economic thought operates smoothly in a resource-rich world. After all, what need would an economist of the Middle Ages have for considering the impact of forests on the water cycle or for trees’ ability to sequester atmospheric carbon dioxide?

On a more pragmatic level, economists historically have lacked the capability to measure many forms of natural capital. It is notoriously difficult to calculate ecosystem services, negative externalities and natural resource stocks, unlike calculating coins and widgets. But just as the troubling inadequacies of the prevailing economic paradigm begin to unfold, our capacity to address them has blossomed. Frameworks for measuring and analyzing natural capital dramatically have matured; some companies even have begun incorporating natural capital into their strategy.

Corporate pioneers of natural capital

Consider the Davey Tree Expert Company, a private company headquartered in Kent, Ohio, which provides a wide range of arboriculture, horticulture, environmental and consulting services. They identified natural capital as a strategic opportunity more than 15 years ago.

"Promoting the value of natural capital isn’t purely altruistic. There is a great business model supporting these efforts," said Greg Ina, vice president and general manager of the Davey Tree Institute. "Our business is at the intersection of trees and people, and we are de facto stewards for our clients’ greenspaces."

While the business case for investing resources to better understand natural capital followed naturally for Davey Tree’s internal audiences, external stakeholders had little understanding of the topic’s importance.

"Back in the '80s and '90s, times were tough for trees in many cities. Budgets struggled and municipalities were forced to defer tree maintenance and limit planting programs focused on tree replacement and offsetting new development," said Scott Maco, director of research and development at Davey Tree. "They didn’t understand the value of what they were losing."

In response, Davey Tree developed the i-Tree software suite in partnership with several other organizations to better quantify and understand trees as a form of natural capital. i-Tree provides urban and community forestry analysis and benefit assessment tools, enabling the valuation of a tree’s impact on air and water quality, energy use, human health and more. This in turn enables Davey Tree’s arborists to educate clients on the value of their natural capital.

"We’ve changed how clients talk about trees through i-Tree and the work we’ve done around quantification of ecosystem services. At a community level, the data is informing planning and management decisions," Ina said. For instance, i-Tree has been used to calculate tens of millions of dollars in ecosystem services provided by the urban canopies of cities such as Cleveland, Austin and London.

TD Bank Group (TD), another natural capital pioneer, recognized the potential of natural capital when it initially began employing natural capital accounting methodologies to understand the impact of its environmental work, thanks in part to its progressive economic research group, TD Economics.

"When TD published a paper on the natural capital valuation (PDF) of Toronto’s urban forests, it was one of TD Economics’ most widely read papers at the time," said Karen Clarke-Whistler, chief environment officer at TD. "From businesses to governments, we received positive responses from around the world."

TD’s quantification of its environmental efforts has yielded striking results. In 2015, TD estimates that it generated over $36 million in natural capital impact by reducing emissions and energy use and offering low-carbon products and services alone. Among industry-leading efforts, in 2014, TD became the first Canadian commercial financial institution to issue a green bond. Valued at $500 million, the bond allocates funds to renewable energy, energy efficiency, green infrastructure and sustainable land use management projects. TD also aspires to embed the valuation of natural capital into its business and accounting practices.

"As a concept, natural capital had been around in academia, but has not been brought into mainstream business and accounting practices. We see it as an opportunity to improve our business model," Clarke-Whistler said. "Our economists are excited because they see an opportunity to add natural capital into the productivity equation."

The path ahead

Despite the impressive progress made on frameworks for collecting and analyzing natural capital data, such frameworks struggle to match the decades-long advantage that frameworks for gray infrastructure enjoy.

"Part of the problem is that we don’t know the risks, benefits and long-term costs in the same way we know them for gray infrastructure," Maco said. "For gray infrastructure, we can say, 'X project has a 30-year lifespan.' Trees are different. There are unknown risks to their longevity, such as pests, development and climate change."

Even if the world’s innovation drivers solve natural capital’s "data problem" overnight, getting universal acceptance from companies and regulators would be a daunting challenge. Davey Tree has experienced this first hand.

"There is no uniformly accepted framework from states and environmental protection agencies on how to meet regulatory requirements with natural capital," Maco said. "We have the Clean Water Act, but in terms of controlling stormwater, trees are not a widely understood or adopted storm water control measure. How do trees compare through time in terms of costs and risks to storage tanks and sewer pipes? We don’t have that direct comparison and regulatory approval for trees."

Achieving universal acceptance of natural capital accounting as a practice by both businesses and regulators undoubtedly would be an enormous victory. Armed with improved knowledge of the true costs and benefits of business activity, many companies significantly would change the way they conduct business and governments would regulate public goods such as the atmosphere through a carbon tax, cap and trade, or some other measure (and some have).

Given the business case that leaders such as TD and Davey Tree have put forth and the well-defined barriers that deny natural capital full entry into standard business practice, why aren’t others as eager to expedite the development of natural capital accounting? Perhaps because some companies fear what negative externalities or natural capital impacts they might find. Yet, leaving natural capital unaccounted for clearly presents greater challenges. Companies (and public sector organizations) that wait to discover such assets and fail to integrate natural capital approaches into their operational strategies inadvertently may overlook considerable assets. It’s time for the exploration to begin.

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