Why the definition of a 'value chain' is critical to get right for nature-positive & climate action.
Another opportunity to inform the design of nature positive mechanisms with our learnings from climate.
I recently watched the webinar presenting the release of the Science-based Targets Initiative guidance on Beyond Value Chain Mitigation. One of the most common critiques of SBTi’s netzero guidance is that it gives no recognition nor incentive for corporates to take action to mitigate the impacts of climate change outside of their value chain. Let’s first take a look at how this has played out in climate mitigation and then we’ll loop back to look at the pure nature context and it’s implications in the second half of this article.
How SBTi defines a value chain
The aspect of SBTi’s netzero guidance that is most directly linked to nature is the Forestry, Land and Agriculture (FLAG) guidance . I’ve read through the full document and the most clear definition of “value chain” in the document I found in the section on carbon removals and storage:
”only removals on land owned or operated by a company or within a company's supply chain can be included in FLAG pathways and count toward achieving a FLAG target.”
My understanding is that this definition applied to all other use cases where the value chain delineation guides the extent of corporate accountability. Based on my conversations with corporates and understanding how it is defined in practice, “within a company’s supply chain”, only pertains to the land owned or operated by companies/entities that are supplying inputs for that corporate.
Why does this matter for private sector climate action? Let’s look at coffee.
I was recently catching up with a colleague who is a senior leader in sustainability at one of the world’s largest coffee companies. This is a company, that because of SBTi guidance and the negative press recently surrounding the integrity of carbon credits, has decided to only focus on reducing their own emissions. My friend shared a fascinating anecdote that has continued to keep me up at night:
Their company wants to do reforestation in the areas immediately adjacent to the fields where they source coffee from smallholder farmers, but SBTi will not include any carbon removals that occur in those areas towards their emission reductions and achieving their FLAG netzero target.
So as it pertains to their achieving the SBTi stamp of approval on their netzero target, they have zero incentive to do reforestation in areas **immediately adjacent to their coffee sourcing**.
Does this seem like the right approach?
If yes, help me understand because I think it is doing more harm to climate progress than good. My sense is that this is a misguided, and perhaps unintentional, design flaw in SBTi’s corporate accounting methodology.
Disclaimer: My position is based on anecdotal evidence from my conversations with corporates and my working understanding of how this accounting has played out in practice. I very much so could be wrong and welcome reflections from anyone that has this does not align with their experience with the SBTi process.
Why does this matter even more for private sector nature positive action?
So let’s assume that the Taskforce for Nature-related Financial Disclosures (TNFD) and the Science based Targets for Nature (SBTN) continue with the definition of value chain from TCFD and SBTi (climate corollary) for measuring corporate impact on nature.
And let’s assume that we do **not** take an offsetting approach to nature, which I agree with and I think most experts do as well.
The interesting aspect of nature (ie biodiversity and ecosystem services) as compared to climate, is that nature risks, dependencies and impact from a corporate’s perspective are even more localized and focused on the value chain than that of climate. I think we can all agree (and corporate materiality does as well) that a ton of CO2 emitted in New York has the same impact on climate as a ton of CO2 emitted in the middle of the Mata Atlantica in Brazil. But, from a corporate (and really anyone else’s perspective) restoring a forest that is an a watershed that provides drinking water to New York City is quite different from restoring a forest in Mata Atlantica that is within Sau Paulo’s watershed.
All to say, that there is even less of an argument for corporates to contribute to *beyond value chain mitigation* for nature than there is in the climate context.
Take a second and think about that sentence, does that make sense to you?
Yes, it doesn’t make sense for a corporate that has a value chain in New York to invest in restoring a watershed in Brazil. But for a corporate that owns a beverage processing plant in Sau Paulo, does it make sense that their value chain be restricted to the cement and buildings for their beverage processing plan and not include the forests that provide the water they use as an input for their beverages?
All of a sudden, how we define a “value chain” becomes incredibly important.
How to think about “value chains” in the nature context
While nature dependencies and impacts are more regional/localized than climate, they very much so aren’t “hyper-local”. Let’s take a look at the Amazon rainforest as an example. The trees in the Amazon rainforest release around 20 billion tonnes of water into the atmosphere daily—this is more water than the Mississippi River discharges in 13 months. Because only around 6% of cropland in Brazil is irrigated, the region relies heavily on this rainfall as a primary water source to support crop growth that feeds both local and global communities (Visual Capitalist). And here’s a quick reminder of how large the Amazon is:
According to NASA research, the cumulative effects of climate change, accelerated by deforestation, may result in the loss of up to 11 million hectares of agricultural land in Brazil by the 2030s (Visual Capitalist).
So if I’m a corporate growing soy in Brazil that is dependent on rainfall from the Amazon rainforest to sustain my production, does it make sense to limit my “value chain” to the only the area of production (ie farms)?
Or should we define the value chain as the farms and the surrounding, say, 100km area?
Or should the value chain should be defined as the entirety of the Brazilian Amazon?
Let’s take a step back for a second before I get ahead of myself.
Regarding the accounting of corporate negative nature impact, I’m not suggesting that a corporate that has agricultural activities at the edge of the Amazon should be responsible for all of the deforestation happening within the Amazon. They should just be responsible (accountable) for the deforestation that is linked to their direct landowning and landowning/operating of their scope 3 suppliers.
But in terms of where we incentivize (and in the future regulate) corporates to have positive nature impact, I am introducing the idea that this geographic area should extend beyond the traditional “limits” of their value chain.
Essentially, measuring negative impact should happen within the traditional extent of a value chain - the land owned or operated by companies/entities that are supplying inputs for that corporate. But my recommendation is that contributing to positive impact that counts toward corporate core nature positive targets and claims, should have a much broader geographic area that incorporates the fact that acute biodiversity and ecosystem services often depend on very large areas for their overall health and integrity.
I don’t have a specific answer today for how exactly we should define the value chain, ie the geographic scope for reducing negative impact and increasing positive impact for nature by the private sector. I just share this reflection to highlight the fact that it is a critical design feature for the nature positive movement that requires some serious thought/reflection and likely should not follow the path we have taken for climate/carbon accounting.
How would you define it?