Our thinking Quick reads Biodiversity & natural capital – the next value creator
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January 2023
6 min read

Biodiversity & natural capital – the next value creator

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Biodiversity refers to the abundance and variation among all life on earth at the genetic, species and ecosystem levels. We humans are directly dependent on rich biodiversity and the resources provided by the natural environment. These resources, known as natural capital, provide us with essentials, such as freshwater and land, as well as services, including crop pollination and carbon absorption.

Our previous article summarised the importance of biodiversity to the economy and its impact on asset managers and owners. However, the unprecedented decline in global biological diversity [1] and natural capital do not solely pose risks to companies. Strategic, smart, and sustainable management of impacts and dependencies on biodiversity and natural capital offer an opportunity for long-term value creation. Despite these opportunities, action remains predominantly driven by regulation. This article looks at three simple ways to view natural capital through the lens of value creation.

Reconciling economic and strategic value with natural capital

The examples, below, look at value creation through supply chain resilience, land valuation, and strategic positioning.

Strategic, smart, and sustainable management of impacts and dependencies on biodiversity and natural capital offer an opportunity for long-term value creation.

Supply chain resilience

Material biodiversity impacts typically originate from the upstream activities of suppliers (for example: wood procurement for office furniture; mining materials for electronics; and livestock feed for food production). In today’s world, these activities are often not managed sustainably, and natural capital is sacrificed at the altar of production optimisation. Sustainable management of upstream activities, however, provides significant opportunities for value creation. For example, collaborating with suppliers, such as forest managers, miners, and livestock farmers, can lead the way to resilient and future-proof positioning on biodiversity and natural capital management.

The case of electric vehicles (EVs) further substantiates the value creation opportunities that arise from sustainably managing biodiversity and natural capital in the supply chain. Although EVs are part of the solution to fight climate change, the impacts on biodiversity upstream are quite severe, predominantly driven by battery production and mining. Most batteries are produced and mined using a traditional ‘linear’ business model approach with a focus on price/quality optimisation. With this approach, EV producers tend to leave out the biodiversity impacts and dependencies associated with mining in their decision-making, creating a significant contrast with the intention and rationale of EVs to be a means of transport with a lower environmental impact.

In Sweden, however, Northvolt is taking a different approach with the mission to create the most sustainable and low-impact battery. If sufficient materials are mined from nature to build batteries for the world to drive on, then why should we keep mining virgin materials to produce more? Northvolt contends that we can just as well recycle and reuse the materials in the batteries already produced. Besides, if designed carefully, in the future it may be cheaper to repair old batteries than mine for virgin material, thereby making the supply chain less dependable and more circular. Both Northvolt and its customers, such as Volvo Group, acknowledge this and focus on a business approach that is more in harmony with nature and, as a result, increasing value through improving the security of the supply of raw materials.

Land valuation

Opportunities from natural capital may also be seized by sustainably managing land. As most economic activity directly depends on raw materials for operation and supply chain, land management is essential for many companies. With many products, such as beef and soy, being linked to deforestation, land use-related risks (e.g. reputational and financial risks) are on the rise for organisations. Sustainable land management, where the long-term productivity of resources and the maintenance of environmental functions is ensured, helps mitigate land-related risks, yet also creates room for value creation [2]. Sustainably managing land requires companies to price land used across the value chain. Putting a price on land and embedding that into decision-making preserves nature, secures economic growth, and benefits stakeholders.

A coffee wholesaler, Moyee, accounts for the value of land in business decisions. Based on the value of land, Moyee decided to move away from monoculture coffee crops as well as the use of fertilizers and pesticides, upstream in the value chain. The company works with its farmers to promote better organic practices in agriculture. Whilst monoculture coffee generates the highest yield, it also drives biodiversity loss. By moving away from monoculture crops and using various species that act as natural fertilisers and pesticides, Moyee improves the soil fertility of its land and improves coffee growth. As a result, the company secures the quality and quantity of coffee beans to sustain economic growth. In addition, the company enhances the life of local communities by realising more resilient farms that enrich, rather than deplete, biodiversity.

Strategic positioning

Though most companies publicly pride themselves on their climate actions, few market their biodiversity efforts. It is increasingly acknowledged in the economy that climate action alone is not sufficient and biodiversity impacts and dependencies require active management. A few financial institutions, including ASN Bank, Robeco and Lombard Odier, have been at the forefront of strategically positioning themselves as organisations that prioritise biodiversity, alongside climate change. Positioning without due action is greenwashing. However, if your organisation can showcase efforts that work towards living in harmony with nature, this can create value, by attracting and retaining customers that increasingly have sustainability, top of mind [3].

Our services

At MJ Hudson ESG & Sustainability, we help our clients identify and capture biodiversity-related opportunities. Our approach is designed to help your organisation manage impacts and dependencies on biodiversity and natural capital and translate that into long-term value creation. To support you in this, we have a team of in-house biodiversity specialists, supported by academics, to measure, manage and improve biodiversity and natural capital within your organisation, its value chain, and the investment portfolio.

Note that we are not affiliated with any organisation in the above-mentioned examples, and these are listed purely for illustrative purposes.

[1] – https://onlinelibrary.wiley.com/doi/full/10.1111/brv.12816

[2] – https://www.fao.org/land-water/land/sustainable-land-management/en/

[3] – https://www.oecd-ilibrary.org/sites/35195c41-en/index.html?itemId=/content/component/35195c41-en

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