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Natural Capital AccountingHow Coca-Cola is putting theory into practice to advance water stewardship August 2016

Estimating the impact of a business or other activity on the quality or function of an ecosystem.

Translating impacts (or benefits) into monetary terms to allow their evaluation against project costs.

The benefits that people and economies derive from nature.

New opportunities to evaluate projects and inform business and investment decisions.

Contents

Introduction 1

What is natural capital 2

The natural capital pilot project 3

Methodological approach 4

Key assumptions 5

Outcomes 6

Conclusions 7

Proposals for further actions 8

AcknowledgementsThis report is a product of cooperation between partners. We’d like to thank our partners on water replenishment projects who provided us with invaluable local data.

> Our partners for the eight projects included in this report were: Fondacion ECODES (Spain), Natuurpunt (Belgium), SEO-Birdlife (Spain), University of Cordoba (Spain), WWF Danube-Carpathian Programme, WWF France, WWF Spain and WWF UK;

We’d also like to thank our partners who helped make this report possible:

> The Natural Capital Coalition;

> denkstatt.

1The Coca-Cola CompanyNatural Capital Accounting

Introduction

No resource is more precious to human life and the health of our global ecosystems and economies than water, which is under increasing stress due to rising demand and the effects of climate change. As the world’s largest beverage company and because we are dependant on good-quality water, The Coca-Cola Company (TCCC) has a responsibility to protect water resources and provide leadership on water stewardship. This is why, in 2007, we committed to safely return to communities and to nature the equivalent of all the water we use in our products and processes by 2020.

In August 2016, we announced that we had achieved our goal to be ‘water neutral’ in 2015, five years ahead of our original target.

In practice, we are returning about 192 billion litres of water to the environment each year through over 248 local community water projects worldwide. Each project has a specific objective, such as providing or improving access to safe water and sanitation, protecting watersheds, improving water quality and supporting water conservation. For each project type, we have developed a specific methodology to quantify the volume of water captured or made available (i.e. replenished1).

To further enhance our water stewardship, we are looking at new ways to create more value for nature and society. One of these draws on the pioneering work being done on accounting for and managing natural capital.

Natural capital encompasses all natural resources, such as water, as well as related ecosystem services that contribute to the well-being of people and the environment. In the case of water, these include flood protection, drinking water, sanitation, food production, transport, electricity and recreation.

To know how much these services contribute to the economy, we seek to quantify and measure the benefits of the Company’s replenishment projects on ecosystem services. This will raise awareness of the wider impact of investments in water projects and improve the outcome of future projects by optimising the benefits of replenishment on ecosystem services. Ultimately, it will help steer business decisions towards more impactful interventions.

I am delighted to share the first insight into evaluating the natural capital benefits of eight European replenish projects, led by The Coca-Cola Company in Europe in collaboration with sustainability consultancy denkstatt. This work has also been submitted to the Natural Capital Protocol pilot project, in which The Coca-Cola Company and denkstatt are global partners.

Ulrike SapiroDirector Sustainability, The Coca-Cola Company

1 http://www.coca-colacompany.com/water-stewardship-replenish-report

Example of a project before and after intervention

Top: The old ditch was completely straight and entrenched over a meter into the floodplain.

Bottom: The new stream crosses the line of the old ditch, but is one meter higher, looks like a stream again and has been reconnected with a functioning floodplain.

Natural capital defines the benefits that people and economies derive from nature. The concept of natural capital has emerged in recent years as a means to assess the net impact of a company or project on the environment, using a defined set of data. By enabling direct comparisons, it closes the gaps between:

a) different ecological metrics;

b) different ecological and monetary terms.

Natural capital accounting involves two basic steps. The first is estimating the impact of a business or other activity on the quality or function of an ecosystem. The second is to translate these impacts (or benefits) into monetary terms to allow their evaluation against other commonly used criteria, e.g profit.

All ecosystems have certain functions – biological, geochemical or physical. A project can deliver measurable or assessable improvements in many different ecosystem functions.

2 The Coca-Cola CompanyNatural Capital Accounting

What is natural capital?

What is natural capital? The stock of renewable and non-renewable natural resources (plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people.

These benefits can be: > Ecosystem services: ways in which ecosystems benefit people. These are commonly classified into four major categories:

- provisioning - regulating - supporting - cultural

The quality and quantity of ecosystem services are influenced by the underlying diversity of genes, species and ecosystems, otherwise known as biodiversity.

> Abiotic services: benefits that rely on fundamental geological processes, such as the supply of minerals, metals, oil and gas, geothermal heat, wind, tides and the annual seasons.

Natural capital assessment The process of measuring and valuing relevant (‘material’) natural capital impacts and/or dependencies, using appropriate methods (Natural Capital Protocol).

Additionally, these functions deliver benefits to people. In economic terms, we call these ‘services’. Typical ecosystem services include direct benefits such as: food; water; timber; climate regulation; air and water purification; habitats for wildlife and opportunities for recreation.

The contribution of these services can be expressed in financial terms using metrics such as net present value and a project’s return on investment. Using economic metrics to evaluate the net impact of a replenishment project could allow The Coca-Cola Company to communicate its total value creation more easily to internal and external audiences and help managers to evaluate and choose different projects and form new partnerships. In a nutshell, natural capital offers a new opportunity to evaluate projects and inform business and investment decisions. To put the concept into action, a global coalition of organisations has drafted the Natural Capital Protocol2, a standard approach to help businesses generate timely, trusted, credible, and actionable information and assessments to guide their decisions.

2 http://naturalcapitalcoalition.org/protocol/


The Coca-Cola Company, together with denkstatt, used its broad range of water replenishment projects to pilot the evaluation methodology outlined in the Natural Capital Protocol and to provide recommendations on how to maximise ecosystem benefits from water-related interventions.

Until now, natural capital has for the most part been excluded from decisions and, when included, has been largely inconsistent, open to interpretation, or limited to moral arguments. The Protocol responds by offering a standardised framework to identify, measure, and value impacts and dependencies on natural capital.

By evaluating eight selected European projects affecting numerous ecosystem types in five different countries, the primary objective of this project was to help Coca-Cola better understand the wider ecosystem benefits of our replenishment projects. The work employed the methodology set out in the Natural Capital Protocol, including collection of feedback from relevant stakeholders. A related objective of the pilot project was to provide feedback on the draft Natural Capital Protocol.

The first phase of the project involved establishing valuation methodologies and creating a practical valuation tool as well as applying the tool to three wetland restoration projects in Europe. The second phase consisted of evaluating additional

The natural capital pilot project

projects, covering a broader array of geographic regions and types of ecosystems and interventions, refining the methodology in phase I. Consequently, the methodology and the tool were upgraded and phase I projects were re-evaluated.

The impact of the pilot project on natural capital was derived from the value of ecosystem services only. Abiotic services were not considered in the calculations as changes due to interventions were deemed insignificant.

Projects and their ecosystem types:

> Coastal wetland

> Inland wetland

> River / grassland

> Woodland / grassland

Water replenishment projects in the following countries were included:

> Belgium

> France

> Romania

> Spain

> UK

Case studyStrawberry farming in SpainSpain is one of the world’s biggest exporters of strawberries. The bulk of the strawberries are grown in south-east Spain, in an arid region that is also an important source of water for a large coastal wetland nearby. The Doñana National Park is a World Heritage Site supporting millions of migratory birds and wildlife such as the endangered Iberian lynx.

In a typical water replenishment project that illustrates our approach, we helped the farmers that supply strawberries for innocent juices to use less water for irrigation. Support from innocent drinks and Coca-Cola enabled a local university to develop the ‘Irri-fresa’ app that calculates the optimum time each day to irrigate. When used by local strawberry farmers, it cut their water consumption by 40%. The project covers 3,600 ha of agricultural land and delivers 1,732 million litres of replenished water each year.

With the additional water flowing into the wetland, its ecosystems can function better and provide local communities with fish, a habitat for birds and tourism opportunities. The monetary value of these services is evaluated in comparison to costs and the results are compared to other projects.

Pilot projects

1 Constructed wetland to remove pollutants from municipal wastewater Tancat de la Pipa, Spain

2 Restoration of coastal wetlands to increase water storage and habitats Camargue, France

3 Reconstruction of large-scale wetland to increase water storage and flood protection Garla Mare, Romania

4 Reducing water withdrawal from high-value wetland by working with farmers and reforestation Upper Guadiana, Spain

5 Improving irrigation efficiency of strawberry farming Doñana, Spain

6 Restoration and erosion control by working with farmers to reduce run-off of into rare chalk streams River Nar, United Kingdom

7 Removal of invasive vegetation from shallow wetland to increase water storage and habitats Stappersven, Belgium

8 Reforestation of up-river mountain sides to increase water retention, reduce run-off and reduce risk of wildfires Plantando Agua, Spain


Methodological approach

3 De Groot‚ et al., 2012. Global estimates of the value of ecosystems and their services in monetary units. Ecosystem services‚ 1(1)‚ pp.50-61: http://www.sciencedirect.com/science/article/pii/S2212041612000101

In this pilot, we applied scientific methodologies to real projects. We went through the following steps:

Phase I Developing the methodology and an ecosystem services valuation (ESV) tool

> Reviewed scientific literature, including the NCP, to develop the methodology for selecting 10 main global ecosystem types and 22 ecosystem services.

> Selected values for benefit transfer from a database of 1,350 valuation factors3. These include single-study values as well as global minimum, maximum, mean and median.

> Established five pre-defined categories for the level of ecosystem services provided. This enables a qualitative assessment based on a combination of scarce data and expert opinion.

> Established three key project performance indicators: - Total ecosystem change (TEC) - Net present value (NPV) - Total investment multiplier (TIM)

Benefit transfer A technique that takes a value determined in one context and applies it to another. Benefit transfer can be used with all valuation approaches and is most commonly used to estimate the economic value of ecosystem services that are not usually bought or sold, but which have been valued in other contexts using cost- and time-intensive stated preference techniques. (Natural Capital Protocol)

Key performance indicators Total ecosystem change: a single value showing how the entire ecosystem has improved due to our replenishment intervention. It represents the difference between the quality of ecosystem services at the site’s baseline state and post-project. There are four categories: low, moderate, significant and high.

Net present value: This is the ‘profit and loss’ account for the project, showing the net ecosystem profit generated by our replenishment intervention in monetary terms ($). It represents the difference between the increase in the value of ecosystem services (benefits to nature) and project costs (company costs).

Total investment multiplier: shows “how well the money was spent”. It represents the ratio of NPV divided by project costs or NPV generated per dollar of investment (number).

Phase II Integrating project-specific data and assessing project performance

> Selected suitable projects for natural capital accounting and sourced specific project information (i.e. area, affected ecosystems, replenishment volumes, other activities and impacts, timeframe, project costs, etc.).

> Established the baseline and post-intervention state based on available data and expert assessment (ecosystem change).

> Calculated the key performance indicators for the selected projects.

> Validated the results by means of a site visit to one of the projects (sensitivity testing).

> Interpreted and analysed the results. > Engaged with key stakeholders and incorporated feedback.

In summary, each project was assessed in two basic steps in line with the requirements of the Natural Capital Protocol:

> Measure the change in the state of ecosystem services (before and after);

> Evaluate the net gain in ecosystem services in monetary terms.


The developed methodology relies on several critical assumptions, which are largely driven by the pioneering nature of this work and the lack of readily available data. As businesses and stakeholders firm up their understanding of natural capital, the collaborative way of evaluating and testing these assumptions and their influence on potential outcomes will be critical:

> The quality of ecosystem services is determined on the basis of five categories used to evaluate the baseline state and post-intervention state of a particular service: These categories are:

- Non-existent - Very degraded / undeveloped - Moderately degraded / developed - Sub-optimal - Optimal The evaluation is provided by expert opinion. The

assignment of each of the five levels reflects a conservative representation.

> Valuation factors based on secondary data are used to assess projects.

Key assumptions

Sensitivity testingVisiting the River Nar project

The River Nar in Norfolk is one of England’s unique chalk streams and a natural habitat for wildlife such as otters, water voles, trout and kingfishers. It flows through an area from where Coca-Cola sources 80% of the British sugar beet we use in our drinks. The project to restore the river to its natural state involved improving groundwater recharge by changing the way the land is managed, constructing silt traps and small wetlands and re-meandering and re-wilding the river shores along a total area of 400 ha.

The project was chosen to check if the results of a desk-based natural capital assessment will be impacted significantly from inputs obtained during a physical site visit (sensitivity testing).

The values of the final assessment did not change significantly (see graph in chapter 6 Outcomes). The field trip revealed that replenishment volumes alone do not capture many of the benefits to nature and shows we do not know enough yet about the value of the ecosystem services of rivers. The data available doesn’t reflect the full value of river ecosystems in comparison to wetlands and presents a major limitation to our methodology.

> Based on the fact that different valuation factors are available from scientific studies, the valuation factors are best and most conservatively represented by median values; under certain conditions, mean values might be applicable.

> In the absence of aerial information, water depth is used to approximate the equivalent aerial footprint.

> Each project is analysed over a similar time-frame: from start-year 2013-2015 until 2020.

> Project costs can be allocated during the first three years of the project; if there are further costs, these are also allocated in the first three years.

> Each project may have an impact on up to three different biomes or ecosystems, which are ultimately summed up using a single output value for NPV and TIM.

> The discount rate is 5% for all projects and the inflation rate is set at 1.5%.

The River Nar is restored to its natural state.

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Using our methodology, we assessed all eight European water replenishment projects by:

> Measuring the change in the state of ecosystem services (before and after);

> Evaluating the net gain in ecosystem services.

Outcomes

ECOSYSTEM SERVICE CHANGE

Ecosystem service category Baseline state Post-intervention state Net change

Provisioning services Sub-optimal ● Optimal ● Moderate ●

Regulating services Sub-optimal ● Optimal ● Moderate ●

Supporting services Sub-optimal ● Sub-optimal ● None / low ●

Cultural services Sub-optimal ● Optimal ● Moderate ●

Total ecosystem change Moderate ●

CALCULATING THE ECOSYSTEM SERVICE BENEFITS OF PROJECT 5 ($)

Ecosystem service benefits Note 2014 2015 2016 2017 2018 2019 2020

Total provisioning services 1 12,933 57,854 58,722 59,603 60,497 61,405 62,326

Total regulating services 2 107,137 479,250 486,439 493,735 501,142 508,659 516,289

Total supporting services 3 0 0 0 0 0 0 0

Total cultural services 4 30,368 135,841 137,878 139,946 142,045 144,176 146,338

Total ecosystem benefits 150,438 672,945 683,039 693,284 703,684 714,240 724,953

Economic costs

Project financial costs 100,000 99,211 0 0 0 0 0

Total costs 100,000 99,211 0 0 0 0 0

Net economic flows 50,438 573,734 683,039 693,284 703,684 714,239 724,953

1. Provisioning services: for project 5 these relate to food, water, raw materials, genetic and medicinal resources2. Regulating services: for project 5 these relate to climate regulation, disturbance regulation, erosion prevention, nutrient cycling, waste regulation3. Supporting services: none for this project4. Cultural services: recreation

The graph below provides an example of the methodology being applied to project 5.

BENCHMARKING INDICATORS

Project level indicators

Total ecosystem change Moderate

Project NPV $ 3,328,372

Total investment multiplier: 16.71

The final outcome of the pilot project is presented in the next graph, which shows the results (TEC and TIM) of all eight replenishment projects. Clearly, projects 1 and 3 are outstanding from an environmental change and return on investment perspective, as both ecosystem change and investment multiplier are high. Most projects led to high ecosystem change but generated a lower return on investment for the environment (lower right quadrant).

TOTAL ECOSYSTEM CHANGE & TOTAL INVESTMENT MULTIPLIER

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Total ecosystem change

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6 post-visit6 pre-visit


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The Coca-Cola replenishment programme aims to address locally relevant environmental and social issues by improving access, availability and quality of water resources. By designing these projects, we always work with local stakeholders and communities and include aspects that help achieve wider environmental improvements. The natural capital approach, however, provides a new opportunity to quantify the wider ecosystem benefits of replenish work and to provide a clearer understanding on the value and investment needs to secure these services for the future.

At this point, the conclusions from this work have to be preliminary. What we can see, however, is that except for large-scale wetland restoration projects, replenishment volumes – our main key performance indicator – do not fully reflect the total ecosystem change, total investment multiplier, or net present value. This is to be expected, as water quantity is not the only contributor to ecosystem health, and many projects include conservation measures (such as returning the river into natural meanders, lowering siltation, restoring vegetation and natural habitats, etc.) that are not reflected by water volumes, but have significant positive impacts on the environment. These additional measures need to be systematically monitored and their benefit quantified to ensure a proper evaluation and, ultimately, investment behind them.

For the moment, our practical insight is that an attractive project (higher value of the total ecosystem change, total investment multiplier or the net present value) typically has the following features:

> Increased scale (larger aerial footprint and larger water replenishment volume)

> Occurs in a site with high conservation value (e.g. national park or World Heritage Site)

> Involves large-scale wetlands (due to a lack of data on grasslands, woodlands and rivers)

> Leads to a significant positive impact on the state of ecosystem services (improvement in at least two categories)

> Occurs in lower-income countries or incurs lower overall costs.

Conclusions

Stakeholder perspective Stakeholder engagement is not currently evaluated but must be part of the bigger picture. Certain projects, particularly those with lower net present value or total investment multipliers, may be extremely valuable for stakeholders and ultimately generate added value for the company. Such projects may be undervalued by natural capital accounting. Additional aspects such as local water risks and the scalability of replenishment projects also need to be considered when making investment decisions.

As discussed, the presented methodology has certain limitations. These limitations affect two major dimensions:

a) high uncertainty in the final outcome; and

b) lack of comparability among projects affecting different ecosystem types.

Given the high potential of natural capital thinking, we are proposing to address these limitations through a set of further actions, both by ourselves and by other interested parties, including conservationists, academia and technology partners.

Proposals for further actions

ADDRESSING LIMITATIONS

No. Current limitation Potential solution

1 Insufficient project data, as implementation partners were not required to monitor changes in ecosystem services but concentrated on water replenishment volumes.

Produce a guide on how to design, implement and monitor our future projects to maximise the available ecosystem service data. However, ecosystem monitoring and reporting need to be built into all conservation projects.

2 Assessment of total ecosystem change made by experts on a qualitative basis.

See proposed solution no. 1

3 Using only secondary data for valuation factors. The use of primary data for numerous projects is only possible with enormous time efforts. A potential well-balanced approach is the use of secondary data from valuation studies in the region in cases where such are available.

4 Dependence on the availability of benefit transfer factors. See potential solution no. 3

5 Time-bound, discrete logic that does not calculate ecosystem service quality in a continuous manner.

Additional scientific research is needed.

6 Very limited availability of valuation factors for ecosystem services of rivers, woodlands and grasslands.

Additional scientific research to develop valuation factors for different ecosystems is needed.

7 Use of minimum, median, mean and maximum values for valuation factors is based on a set of soft rules and strongly depends on expert opinion.

More stringent rules for the assessment can be applied.

8 The importance to stakeholders or the company (supply chain) is not considered.

Additional weighting for such variables can be applied.

This document proposes an approach for assessing natural capital in terms of our water replenishment projects and helps TCCC to define its responses. It is far from being the final answer, serving more as a starting point for a wider discussion.



The Coca-Cola Company is committed to continuing its work on natural capital both globally and locally in collaboration with partners and other stakeholders with an interest in advancing the dialogue.

Specifically, we will undertake the following steps in the near future:

> Draft a natural capital guide Set out how to design and implement water replenishment projects

so that ecosystem service benefits can be better planned, measured and valued.

> Share best practice There seem to be further opportunities to increase cooperation and

share experience on natural capital. There is a clear willingness among stakeholders to share knowledge to achieve a more balanced and truthful evaluation.

We are at the beginning of a journey on natural capital. Every business wants to create greater value, be more efficient and make better decisions. As more organisations start to take natural capital into consideration in their business decisions, the agenda will be driven by many different contributors. There is opportunity to collaborate on improvements to the methodology and the application of the Natural Capital Protocol.

Further information, please contact:

Ulrike SapiroDirector Sustainability

S.A. Coca-Cola Services N.V.Chaussee de Mons 1424 Steenweg op Bergen1070 BrusselsBelgium

Email: [email protected]

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