Biodiversity & ecosystem services - Food Ethics … · promoting biodiversity in UK farming. ... looked at the loss of biodiversity ecosystem services and the economic ... including

Biodiversity & ecosystem services The promise and pitfalls of putting a price on nature

A report of the Business Forum meeting on 17th May 2011

Contents

Introduction .......................................................... 1 Key points .............................................................. 1 Definitions ............................................................. 2 Pricing ecosystem services ............................. 2 Risks and opportunities ................................... 3 Business initiatives ............................................ 4 Barriers to action ................................................ 5 Policy options ....................................................... 6 Speaker biographies .......................................... 8

About the Business Forum Ethical questions around climate change, obesity and new technologies are becoming core concerns for food businesses. We have launched the Business Forum to help senior executives gain expert insights into the big issues of the day. Membership is by invitation only and numbers are strictly limited. The Business Forum meets six times a year for in-depth discussion over an early dinner at a London restaurant. The forum members shape the meeting agenda. To read reports of previous meetings, visit foodethicscouncil.org/businessforum.

For further information contact: Dr Tom MacMillan Executive Director Food Ethics Council 39-41 Surrey Street Brighton BN1 3PB Direct line: +44 1273 766651 [email protected] www.foodethicscouncil.org

© Food Ethics Council 2011 www.foodethicscouncil.org 1

Introduction Understanding the value that ecosystems contribute to the economy is central to efforts to promote sustainable business. Monetising the costs of biodiversity loss and climate change, for example, translates such issues into language that makes sense to corporate decision-makers, helping to justify investment and regulation. Global programmes such as the Natural Value Initiative are developing tools to enable this, and the UK National Ecosystem Assessment will give such approaches a boost in this country. Nowhere is the crucial part nature plays in production more apparent than in farming and the food sector, where talk of ‘environmental externalities’ and ‘ecosystem services’ is now commonplace. But do those of us working in this sector really understand the implications of these efforts to put a price on nature? What do they mean in practice for large and small food businesses? What are the potential problems and alternatives? Does putting a price on nature actually devalue it? The May 2011 meeting of the FEC Business Forum addressed these issues. We are very grateful to our speaker, Annelisa Grigg, project director for the Natural Value Initiative, Flora & Fauna International. Prof. David Pink, a member of the FEC, chaired the event. This report outlines points raised during the meeting.1 Contributions are not attributed. The report was prepared by Tom MacMillan. It does not represent the views of the FEC, the Business Forum or their members. 1 With additional material from Food Ethics 6 (2).

Key points � Biodiversity, ecosystems and ‘nature’ are

widely accepted to have intrinsic value, meaning that they matter in their own right, not only because they are useful.

� Nevertheless, they do also perform functions that are useful – indeed essential – to society and to the economy. These have become known as ‘ecosystem services’.

� Human activities including agriculture and food production are eroding the ecosystem services on which they depend, implying that we currently undervalue those services.

� A major study in 2010 concluded that a year’s worth of biodiversity loss could cost society US$2.5-4 trillion.

� Businesses are starting to recognise that this presents them with multiple risks, to resources, supply and operations, to reputation and from regulation.

� The World Business Council for Sustainable Development, the World Resources Institute and the United Nations Environment Programme (UNEP) have developed tools to help businesses address these risks.

� Barriers to business-led initiatives include the complexity of natural systems, concern over the efficacy of market-based environmental protection strategies, and the weak bargaining position of producers in supply chains.

� Subsidies and regulatory requirements under the Common Agricultural Policy are likely to remain crucial to supporting investment in ecosystem services and promoting biodiversity in UK farming.


Definitions Biodiversity refers to variability among living organisms, including within and between ecosystems and species. Many people find the term confusing, as evidenced by 2010 survey that found a large number thought ‘biodiversity’ was a washing powder.2 Biodiversity, ecosystems and ‘nature’ in the broadest sense are widely accepted to have intrinsic value, meaning that they matter in their own right, not simply because they are of use to people. Indeed, many would argue that trying to tot up the value of biodiversity in terms of its utility, particularly by putting a price on it, actually risks devaluing it. Nevertheless biodiversity and other aspects of ecosystems are, in addition to their intrinsic value, essential to society and to the economy, providing the plants and animals that we eat, pollinating crops, stabilising the climate and performing countless other functions upon which people depend. These functions have come to be called ‘ecosystem services’. Since ecosystem services specifically describe the respects in which nature is useful to people, it is appropriate to consider their economic value. The Millennium Ecosystem Assessment (MA) defines four broad categories of ecosystem services:3 � Provisioning services (e.g. drinking

water, food, medicine) � Regulating services (e.g. climate

regulation, water purification) 2 http://bbc.in/9rCbAh 3 www.maweb.org

� Cultural services (those that give recreation or emotional inspiration)

� Supporting services (e.g. maintaining soil fertility and water cycles that underpin the other three services).4

The food and drink sectors – perhaps more than any other – depend immediately, directly and to a great degree on biodiversity. Yet human activities including agriculture and food production are eroding biodiversity at up to a thousand times the baseline rate of extinction that is evident from fossil records. In effect, we undervaluing the ecosystem services that depend on biodiversity and, it follows, paying too little for our food in spite of recent price rises. Pricing ecosystem services If ecosystem services are undervalued, what are they really worth? Their economic value can be assessed in various ways. For example, what would be the costs of sustainable practices? What are the actual and projected costs to the economy of repairing or replacing damaged ecosystem services, for instance cleaning polluted water? What price would we need to put on them in order to protect them? Some experts suggest the price of carbon would have to be ten times higher than its present level in order to encourage climate-friendly behaviour on a large scale. Efforts to put numbers on the economic value of ecosystems received a boost in 2010, the international year of biodiversity. A major study of the Economics of Ecosystems and Biodiversity 4 Taplin, J. (2011) Food Ethics 6(2): 9-11.


(TEEB) looked at the loss of biodiversity ecosystem services and the economic implications of that loss.5 It built on the MA, which had earlier reported that around 60% of the ecosystem services it evaluated were being degraded or used unsustainably. TEEB concluded that a single year’s worth of biodiversity loss could cost society US$2-4.5 trillion (based on 2008 figures). Many of these costs arise in the food and farming sectors. PwC, for example, estimated that flooding made worse by deforestation was responsible for US$23 billion crop losses in Asia, and that poor soil management practices have led to the abandonment of 1.5 billion hectares of cropland in Europe alone.6 Sometimes the effects are indirect, with overfishing by European fleets off the coast of Africa eroding livelihoods and fuelling piracy, in turn raising the price of shipping insurance. The immediate costs of eroding ecosystem services are huge and they are often borne by other people than those benefitting in the short-term from such activity. Furthermore, there are additional costs that are not immediate, but deferred to future years or generations. Risks and opportunities Businesses are beginning to recognise that the degradation of ecosystem services presents them with serious risks, including to their share value and licence to operate. In particular, they are becoming increasingly alert to the importance of the biodiversity 5 www.teebweb.org 6 PWC (2010) Biodiversity and business risk.

underpinning those services. In 2010, McKinsey asked 1,000 companies how much they cared about biodiversity and concluded that levels of concern were rising much as they had for climate change, but lagging several years behind.7 According to the World Economic Forum, biodiversity is now perceived by global businesses to be carry greater financial risks than terrorism, and to be on a par with flooding and food security.8 The risks facing businesses take several forms. The most direct are resource, supply and operational risks. It is crucial for businesses to understand how their activities depend on ecosystem services, to identify the impact they have on those services, and to put in place processes and practices to manage that impact and those dependencies. In addition to biodiversity, these risks relate to climate change, energy, water scarcity and the depletion of non-renewable resources such as phosphorous. The economic impact of this impending resource crunch would greatly exceed that of the recent credit crunch. Pressure from reinsurers is starting to see some sectors consider ecosystem services risks in their valuation approaches – developers, for example, being obliged to have sufficient reserves to cover one-in-several-hundred-year flooding events – but this trend must accelerate. A second area is reputational risk, including the effects of recent campaigns against unsustainable soya, palm oil, meat and leather production. For example, a Greenpeace campaign targeted Sinar Mas, a palm oil production company, highlighting the impact on forest 7 http://bit.ly/iooobR 8 WEF (2011) Global risks.


destruction and the orangutan population. After a widely-viewed YouTube clip showed an office worker eating a KitKat that morphed into an orangutan finger, the manufacturers, Nestlé, ceased supplying from Sinar Mas. Nestlé’s share price dipped while the campaign was running. Greenpeace then targeted HSBC, financers of the production company, who also pulled out. As governments realise that they are footing part of the bill for the loss of ecosystem services, they are increasing regulatory efforts to protect biodiversity and natural resources. Regulation is a third area of risk for businesses. Regulatory protection for biodiversity is currently weak, but the focus of growing attention. Various tools have been developed to help businesses quantify the risks they face. The World Business Council for Sustainable Development has published a ‘Guide to Corporate Ecosystem Valuation’, which aims to help users “make better-informed business decisions by explicitly valuing both ecosystem degradation and the benefits provided by ecosystem services”.9 Other help available includes the World Resources Institute’s Corporate Ecosystem Services Review and the UNEP World Conservation Monitoring Centre’s Integrated Biodiversity Assessment Tool. UNEP’s report ‘Are you a green leader?’ lists initiatives and approaches that can assist businesses. Inasmuch as businesses that address these risks are still the exception not the rule, efforts to recognise the value of ecosystem services also present some opportunities. 9 http://bit.ly/hKrgW9

These include the growth in sustainable products and opportunities for businesses to differentiate themselves at a brand level, as Marks & Spencer have done with their ‘Plan A’ sustainability strategy. Are companies that recognise the importance of ecosystem services likely to remain a niche, in global terms? Will their efforts remain marginal compared with the activities of fast-growing businesses in emerging markets, where sustainability may not be so high on the agenda? Some would say so. Others contend that some of the fastest growing food businesses in China, India and Latin America are retail giants such as Wal-Mart and Tesco, and manufacturers such as PepsiCo and Unilever, which are making strategic commitments to sustainability. Business initiatives What is already being done to make ecosystem services count in the marketplace? The Natural Value Initiative (NVI) – a collaboration led by international environmental NGO, Fauna & Flora International in conjunction with the UNEP Finance Initiative, two business schools and Dutch socially responsible investor – works to build understanding among the investment community and the companies in which they invest of the potential and existing links between shareholder value, biodiversity and ecosystem services. In 2009, NVI evaluated biodiversity and ecosystem services management in 31 companies across the food, beverage and tobacco sectors. Although this review found that many businesses were already actively managing this issue, most were addressing it reactively, tracking and


responding to campaigns, rather than taking the initiative to map their main areas of impact and risks. Those that NVI identified as taking a more strategic approach included: M&S, not only through ‘Plan A’ but also through its partnership with WWF and its efforts to look beyond the most prominent products such as palm oil; SAB Miller for its work on water stewardship and exploring ecosystem payment approaches; and Unilever, for its approach to sustainable agriculture and its involvement in the roundtables intended to manage commodities sustainably, though these are controversial among environmental groups. For businesses and other organisations addressing this issue for the first time, it is important to adopt a simple approach – trying to identify the economic value of all the ecosystem services you depend on is a daunting prospect. One strategy is to try to work out which ecosystem services your business relies upon or affects the most, and develop measures that will help to safeguard those. For farming and food manufacturing businesses, clean water and well-managed soils might be considered crucial. They may then, for example, be able to secure investment in agricultural practices that improve water quality from water supply companies, who currently carry a recurring clean-up cost. A radically different approach is to identify good production practices from first principles, and develop a business model around those. An example from the field of animal welfare is Ahimsa slaughter-free milk, a Hindu initiative committed to respecting the intrinsic value of animals including cows. All the cattle are looked after until the end of their natural lives,

with females providing milk and males draught power. The price of milk produced under this model is currently £2 a pint. Certification systems, such as organic and fairtrade, have developed comparable environmental and social principles into a set of production standards that a wide range of businesses can adopt. If a premium attached to certified products is invested in measures to protect ecosystem services, then certification offers a way of paying the environmental costs of production. However, this strategy presents several difficulties, including that: only a small share of the market can attract a premium, so the approach is better placed to advance good practice than to eliminate unsustainable behaviour across the whole market; only a minority of individual and institutional consumers may be aware of the issues, and an even smaller share are willing to pay more for sustainable products; and only a small proportion of the premium consumers pay may reach producers, and it may be insufficient to meet the full environmental costs. Overall, strategic initiatives at a brand level, and ‘choice editing’, are likely to be more effective in protecting ecosystem services than offering consumers certified ‘sustainable’ choices alongside ‘unsustainable’ ones. Barriers to action Market-led approaches to valuing and protecting ecosystem services face many barriers. First, natural systems are complex, meaning that the services they provide are difficult to identify fully, let alone quantify, and seeking to do so may have unintended consequences. Our social


and economic relationships with the environment are also complex and vaguely defined, raising issues of ownership and property rights: where businesses or consumers are willing to pay to protect nature, who should they pay? Many of the concepts used in efforts to place a value on ecosystem services have been developed in mining and other extractive industries, and may need to be refined substantially to suit arguably more complex agricultural systems. A second barrier is legitimate concern about the efficacy of efforts to create markets that are supposed to protect ecosystem services, for example through biodiversity offsets. Carbon markets have arguably done little to reduce greenhouse gas emissions or address climate change, but have provided windfall profits to participating businesses and supported questionable offset projects.10 The precedent is inauspicious. Third, even if producers were to meet the full environmental costs of production, and to invest substantially in sustainable practices, their weak bargaining position means they may be unable to pass these costs down the supply chain to retailers and consumers. The question then arises of who should carry these costs – should it be retailers, accepting a squeeze on their margins, or should it be consumers? Presuming that consumers should bear these costs because it would encourage sustainable behaviour ignores the fact that many aspects of food purchasing are fairly inelastic to changes in price. Furthermore, despite food accounting for a low share of household spending in the UK by historic 10 Lohman, L. (2011) Food Ethics 6(2): 17-19.

standards, in assessing whether consumers could bear higher food prices we should consider that other household costs such as energy bills have been rising and are set to rise further. In the pharmaceuticals sector, major global businesses are now engaging in a conversation about value for money and fair prices, for example through the PharmaFutures initiative.11 Perhaps a similar conversation about value and cost-sharing needs to take place among food retailers and manufacturers, potentially broaching the topic of their margins. But could that conversation happen without infringing competition law? Furthermore, what pressures would drive it? In pharmaceuticals it has been large institutional customers – national health services and insurers – who have pushed this dialogue. Policy options If policy makers want to encourage businesses and consumers to value ecosystem services, what can they do? Their options include allowances, taxation, subsidy and regulation. Allowances are designed to offer businesses and individuals some autonomy within a framework that protects ecosystem services. For example, a total number of greenhouse gas emissions allowances can be set at a level consistent with greenhouse gas reduction targets, and businesses or individuals can trade those quotas. This is the approach underpinning the European Emissions Trading Scheme, proposals for personal carbon credits, fishing quotas, wetlands 11 http://pharmafutures.org/


mitigation banking and biodiversity offsets. Many such schemes, including the ETS, have been criticised for being ineffective, costly and unfair. Taxation penalises environmentally harmful behaviour and generates revenue to cover the costs of remedial or protective measures. Examples include taxes on fuel and other non-renewable resources, on landfill and on pollution. Taxes can be effective in driving innovation and raising standards, but are politically unpopular. The dominant approach to protecting ecosystem services in UK agriculture at present is a combination of subsidy and regulatory compliance. Support for rural development and environmental stewardship under the Common Agricultural Policy (CAP) recognises that agriculture produces goods and services besides food that are not paid for in the market place. Many farmers find the subsidy system bureaucratic and dislike receiving state handouts yet, without the CAP, farmers would not be able to invest as much as they do in protecting biodiversity. A farmer present at the meeting argued that efforts to simplify the CAP, while welcome in principle, could erode the level of protection that it affords to the environment – when it comes to

crop rotations, for example, the detailed checks and balances required by the current rules matter to long-term sustainability. Recent moves to scrap set-aside, which had benefited biodiversity, illustrate that the rolling programme of reforms to the CAP leaves it vulnerable to short-term political expediency. All these measures face political barriers, which vary from country to country. Allowances are particularly popular among UK policy makers, with their logic appealing to economists at HM Treasury, and enjoying support from influential finance and management consultancy sectors that would stand to benefit from their introduction. However, the costs of implementing such schemes can be high. Furthermore, any country that unilaterally implements any effective scheme to pay the full environmental costs of production may put itself at a competitive disadvantage. Just as regulation can lead to economic activity and environmental problems being off-shored, so too can market-based approaches to protecting ecosystem services.


Speaker biographies

David Pink is Professor of Crop Improvement at Harper Adams University College, and a member of the Food Ethics Council. David Pink is an expert in plant breeding and crop genetics with 29 years experience of breeding research. Until September 2010 he led the crop improvement group at Warwick HRI in multidisciplinary research in field vegetables, narcissus and oil seed rape, funded by Defra, the Biotechnology and Biological Sciences Research Council and breeding companies. He is a member of BBC Rural Affairs Committee, the Production subgroup of the Defra Fruit and Vegetable task force, and a scientific advisor to the Field Vegetable Panel, Horticultural Development Company. Annelisa Grigg is an independent consultant and project director for the Natural Value Initiative (NVI). The NVI aims to raise awareness within the private sector on the risks associated with corporate impacts and dependence and ecosystem services and to catalyse action to address them. A collaboration between Fauna & Flora International (FFI), UNEP Finance Initiative and Brazilian business school FGV, a key output of the NVI is the Ecosystem Services Benchmark. Developed in conjunction with Aviva Investments, Insight Investment, F&C Asset Management, VicSuper and Grupo Santander Brazil, the ESB is a tool to evaluate corporate practice in the management of biodiversity and ecosystem services risk. Previously, Annelisa was a manager within KPMG's Global Sustainability Services team for eight years. Sophia Tickell is the Founder and Director of Meteos Ltd, a globally networked non-profit company that specialises in strategic dialogues and networks on healthcare, energy and urban sustainability. These dialogues include the long-running PharmaFutures series, www.pharmafutures.org and the more recently formed EnergyFutures and UrbanFutures. Sophia is a trustee of Green Alliance; an independent external adviser to the Corporate Social Responsibility Committee of GSK’s Board; a member of the Aviva SRI Advisory Committee, a member of Vodafone’s External Experts Forum and is a member of the European Healthcare Innovation Leadership Network. Sophia previously worked as Board Chair at SustainAbility Ltd, and as Oxfam's Senior Policy Advisor on the private sector, leading a team which specialised in food, pharmaceuticals, retail and energy.

Food Ethics Council 39-41 Surrey Street Brighton BN1 3PB +44 1273 766651 [email protected] www.foodethicscouncil.org

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Biodiversity & ecosystem services - Food Ethics … · promoting biodiversity in UK farming. ... looked at the loss of biodiversity ecosystem services and the economic ... including