The Nature of Business is Changing
A note of caution and opportunity for CFOs
I drafted this a few months ago as a rough editorial I was hoping to get out before Davos in a larger publication. That didn’t end up happening but I think it still has an unpolished but important message for business to hear…
For decades, the environmental movement’s engagement with the private sector has centered on how business impacts the environment. But in the past few years, we’ve started to see a role reversal that is driving a paradigm shift in our understanding of that relationship. One that moves nature from the responsibility of the CSO, squarely into the purview of the CFO.
From a sole focus how business impacts nature, we’re entering a new era getting to the bottom of the question, how does nature impact business?
Well? Perhaps more than you would think.
55% of global GDP—equivalent to about US$58 trillion—is moderately or highly dependent on nature[1]. Within the private sector, 100% of the economic value generated by direct operations across five core industries that represent US$12 trillion of global GDP exhibit a high dependence on nature.
Apologies for everyone who is tired of seeing this high-level stat that means everything and nothing at the same time. More to come on this below.
Eleven other industries, including automotive, retail, and consumer goods; real estate; and mining, have moderate or high nature dependence for at least 35% of the economic value from their direct operations and supply chains[2].
With tens of trillions of dollars dependent on nature, one would imagine that the private sector would be paying to ensure the ecosystem services they depend on continue to flow at least in the low trillions. Today, the current flows of capital from the private sector to nature represent only US$35B per year [3].
We’ve built businesses that are the foundation of our current global economy on the back of nature. But business don’t pay for nature cause they haven’t had to. Nature has provided its services to business for free and with little to no interruption of services. But since we haven’t paid for those services on a planet with limited space on many landscapes we’ve degraded ecosystems for production to the point where those services are starting to fail and our production along with it.
West Africa produces 70% of the worlds cacao, but production has recently collapsed in part due to disruptions in local rainfall exacerbated by deforestation [4]. Deforestation caused by the cocoa industry itself. Every year, the ecosystem services lost due to land degradation are worth US$10 trillion. Many of which provide critical inputs to or conditions for private sector operations.
On a landscape level, using land to produce goods for human consumption is far more economically attractive than protecting or restoring ecosystems. But the production of those goods is dependent on the services from ecosystems, like generating rainfall. We’ve gotten away without valuing nature’s services for centuries because we were at a smaller scale. But at current scale, if business doesn’t pay to protect and restore nature’s services, production will falter and the businesses that depend on that production will struggle to survive.
Half of global food production will be at risk of failure by the middle of the century due to a collapsing water cycle, largely driven by deforestation[5]. The food system industry today is worth US$14 trillion/yr, but what percentage of food system companies are investing in the protection and restoration of forests in and around their agricultural lands to ensure water for irrigation or rainfall[6]?
According to McKinsey analysis, almost 80% of corporates have a climate goal, less than 25% have goals related to water, forests or biodiversity.
But there is a path forward. Initiatives like the Taskforce for Nature-related Financial Disclosures are giving companies playbooks for how to assess nature dependencies and risks throughout their operations and supply chains and for investors to assess their nature risk exposure across their portfolio.
But disclosure means nothing unless it leads to action. It has taken decades for climate action to become a core pillar of business operations. Action on nature will be much quicker.
Where climate is global, nature is local
Action on climate has and continues to be an uphill battle because we face a global tragedy of the commons. While nature and climate are intertwined challenges, the acute impact on the financial bottom-line of companies will be felt not through the amount of greenhouse gases in the atmosphere, but how a changing climate affects the delivery of ecosystem services that business depends on to function. Nature is the key to building resiliency within supply chains.
The dependence of business on nature is a landscape level dynamic. Instead of millions of businesses around the world and hundreds of countries needing to come together to assume responsibility and take collective action, nature requires far fewer actors with more aligned incentives to take action together in specific regions. On any given landscape, there are likely a handful of companies with operations or sourcing from that region and the public sector that are dependent on nature within that landscape to sustain their operations and provide services to the general public. Creating new payment mechanisms that pay to keep nature and its services in those regions intact is not only possible, by profitable.
But businesses must get down to the landscape level to take action. And investors in those businesses must understand the nature risk their portfolio is exposed to, which will only happen if we bring the analysis down to earth. US$58 trillion of the global economy having a moderate or high dependence on nature is a great motivator, but where exactly are those acute nature dependencies and how much are they worth to each private sector actor present on a landscape? US$58 trillion catches headlines, but it does not deliver an internal business case for an individual corporate to change their activities or their investments.
Every corporate should be asking themselves, how much of my revenue is dependent on nature and where exactly is that dependence? How can I spend my dollars most wisely in specific landscapes to ensure that nature continues to provide those local and regional services that my business depends on. You may be tempted to constantly shift your sourcing to avoid risk, but this is a logical fallacy. You might be able to shift your supply chain, but have you done an analysis looking at how many other industries and companies are planning to shift their supply chains as well? What happens to the price of new land for production when everyone is competing for it?
My prediction is that companies who have made place-based investments in nature to ensure their existing productive lands continue to produce, will win.
Every bank and financial institution should be asking themselves, where is nature risk present in my portfolio, and how can I engage with my clients to incentivize them to manage that risk? You may be tempted to divest, but there is nowhere to hide. All portfolios and all investments are exposed to nature risk. Investors that incentivize their corporate borrowers to address that risk instead of divesting, will win in the long-run. It’s a resilience game now, and we’re already playing it whether we know it or not. Soon, there will be nowhere else to run, so invest in resiliency instead of divesting from risk.
It's worth noting that the burden of payments for nature does not fall entirely on the shoulders of the private sector. There are US$2.6 trillion annually in Environmentally Harmful Subsidies that you can encourage governments to repurpose for subsidizing production of goods produced using methods that benefit instead of hurt the environment. Public/private partnerships will be key to creating a blend of payers at a regional level to ensure both private and public entities that are benefitting from nature’s services are together paying to keep those services intact.
We’ve spent decades discussing how business impacts nature with minimal forward progress. The time has come to shift the conversation to how nature impacts business, or in other words, how business depends on nature. The time has come for companies and investors to pay nature for the services it provides to sustain business operations in landscapes and seascapes across the globe.
Humanity depends on nature. It’s time to value it.
Business depends on nature. It’s time to invest in it.
[1] https://www.pwc.com/gx/en/strategy-and-business/content/sbpwc-2023-04-19-Managing-nature-risks-v2.pdf
[2] https://www.pwc.com/gx/en/strategy-and-business/content/sbpwc-2023-04-19-Managing-nature-risks-v2.pdf
[3] https://www.unep.org/resources/state-finance-nature-2023
[4] https://www.globalforestwatch.org/blog/data-and-tools/data-resources-ending-deforestation-cocoa-west-africa/
[5] https://economicsofwater.watercommission.org/report/executive-summary-economics-of-water.pdf
[6] https://www.researchandmarkets.com/report/agriculture?srsltid=AfmBOor5_GtvN1aTGbaIuO_UEJs7BRK-X8rJEsldykYQlWxnPyBrZV_u