1xManaging vital natural assets such as oceans, forests and the atmosphere adequately will require a step change in levels of corporate activity – but research suggests there is potential to make real progress.
Financial capital, as a concept, is long established and is an essential economic resource that businesses depend on to grow and generate wealth. The concept of ‘natural capital’ is less well-known, but no less important. It refers to resources provided by nature such as clean air and water, fertile soil, and healthy oceans. These are integral for many industries, including agriculture, manufacturing and transport. As well as supporting economic productivity, such assets are also indispensable to wider global priorities like health, food security, and environmental sustainability.
But there is growing concern that human activity is putting our ‘natural capital’ at risk.
A report from the World Bank warned that the expansion of economic activity since the second world war has caused rapid changes in earth systems, with the result that nearly all types of natural capital are in decline. It added that this trend “may cast a long shadow into the future”.[1]
In 2023, researchers at Stockholm University analyzed the so-called “planetary boundaries” that are essential to providing a safe operating space for humanity. The quantitative study found that six of the nine boundaries had already been crossed, suggesting that Earth is now well outside this safety zone.[2]
As well as climate change, the boundaries exceeded included those concerning freshwater use, the loss of biodiversity, and levels of chemical and plastic pollution (such as pesticides, microplastics and nuclear waste).[3]
In an analysis using the same model in 2022, McKinsey identified the boundaries crossed in biodiversity loss and chemical pollution as being especially notable. The former, it said, was 1.4 times beyond levels seen in 1970 – a finding which was “particularly concerning because of feedback loops that exist between biodiversity and the other boundaries”.
The report also warned the world economy was emitting 2.6 times the amount of plastic into water sources than in 2010 — negatively affecting species, ecosystems, and food webs, and reducing the ability of oceans to sequester carbon.
Crop and livestock agriculture were found to be the industries having the largest impact on the planet – making the biggest contribution in five out of the nine variables assessed. Growing crops accounted for 72% of freshwater consumption and 61% of pollution from nitrogen runoff, as well as about a third (32%) of terrestrial biodiversity loss.
Meanwhile, the retail, sales and services sector accounted for 77% of chemical and plastic pollution.[4]
Planetary boundaries mark the potential tipping-points at which damage to our Earth’s planetary systems could spiral out of control, becoming sudden, significant, and irreversible. There are concerns, for example, that disruption of water flow patterns in the Atlantic Ocean caused by the melting Greenland ice sheet could impact rainfall in India, South America, and West Africa, as well as creating storms and lower temperatures in Europe.
Other issues that could lead to a climate change tipping point include deforestation in the Amazon, the die-off of coral reefs, and the shifting of monsoon patterns in West Africa and India. The impact of these could include the loss of biodiversity, rising sea levels, and the disruption of farming, the McKinsey analysis warns.
What’s more, such events could cause a domino effect in which one tipping point cascades into others, with the worst effects likely to be felt among vulnerable communities.
As professor Johan Rockström – one of the 2023 Stockholm study’s co-authors – has said, the research:
“Clearly depicts a patient that is unwell, as pressure on the planet increases and vital boundaries are being breached.
“We don’t know how long we can keep transgressing these key boundaries before combined pressures lead to irreversible change and harm.”
Economic benefits
Avoiding planetary degradation is not the only reason for managing natural capital better. There are also powerful economic arguments in its favor. An analysis by the World Bank in 2021 argued that standard economic models fail to account for “declining trends in nature’s services”, meaning they offer overly optimistic outlooks for economic growth.
The report estimates that if nature-dependent services such as wild pollination, timber from native forests, and the provision of food from marine fisheries were to fail, this could result in a fall of US$ 2.7 trillion in global GDP by 2030.
Low-income and lower-middle-income countries would likely see the worst impact, with GDP forecast to plummet by more than 10%.[5] The report concludes that economies, particularly in low-income countries, “cannot afford the risk of collapse in the services provided by nature”
Preserving our planet’s natural capital also ties in the wider ambitions of the UN Sustainable Development Goals (SDGs). Covering issues as diverse as power, partnerships, hunger, health, education, access to water, responsible production and climate action, these 17 objectives set out a blueprint for peace and prosperity, now and into the future. And safeguarding our planet is the ultimate ambition that lies at the heart of all of them.
What can businesses do?
Businesses that can support better management of natural capital will ultimately benefit themselves, as well as society and the planet. According to research by McKinsey[6], there are a range of plausible ways they can do this. Its report argues that, if supported by wider enabling activity, “specific actions taken by companies using current technologies . . . could not only reverse the trend but also generate positive return on investment (ROI) in a substantial number of cases”.
If businesses take action, says McKinsey, they can put the world on a much better trajectory by 2050. The report’s analysis suggests that 47 corporate actions could bring us back within planetary boundaries for forest cover loss, freshwater consumption, and nutrient pollution. And they could reduce by around half the amount that the 2022 levels exceeded the boundaries for biodiversity (48%) and chemical and plastic pollution (60%).
The agriculture industry, for example, could implement regenerative practices such as planting cover crops and using no-till farming. This approach alone could improve natural capital in relation to three planetary boundaries – reducing the projected 2050 levels by 8% in biodiversity loss, 5% in freshwater consumption, and 16% in nutrient pollution. What’s more, the analysis indicates that regenerative agriculture has the potential to add US$ 65 billion in value annually by reducing operational and input costs.
Another recommended action is introducing water-efficient agriculture practices, such as new irrigation techniques and seeds. As well as reducing the forecast excess in freshwater consumption by 19%, this approach could lead to US$ 40 billion of added net value each year globally from reduced water use. The activities suggested for non-agricultural businesses include switching to solar and wind power. According to the report, this could close the gap to the planetary boundary in freshwater consumption by 12%, and to the nutrient pollution boundary by 4%, while adding US$ 95 billion annually through lower operating costs.
It’s clear that there is a significant amount of ‘win-win’ activity that would support better management of natural capital while also contributing to businesses’ bottom lines. In the analysis, about half of the recommended natural capital mitigation (45%) could be achieved through 12 levers, with a net ROI of about US$ 700 billion. However, the situation is trickier for the remaining 55% of mitigation, which would have a total net cost of US$ 1.5 trillion.
This divided picture becomes clearer when we look at the recommended actions to reduce plastic pollution. By cutting down on the amount of plastic in packaging and bringing in new delivery models (such as returnable and reusable container programs), the retail, sales and services sector could save around US$ 35 billion a year through lower usage, says the report. In contrast, the other suggested measures – expanding recycling and using compostable bioplastics – would cost US$ 40 billion a year from increased capital and operational costs. So although these measures in total could tackle more than half (52%) of the plastic pollution boundary excess, they would come at an overall cost.
What’s more, while some of the suggested actions could be implemented directly by industries, others would be less straightforward. The report lists four levers that together could be used by agriculture to tackle large chunks of the gaps to the planetary boundaries, including 100% of the forest cover loss gap, and 55% for nutrient pollution. These are plant-based alternatives for meat and dairy, advanced seed technology (such as genetically modified seeds), and cutting both food loss and food waste through supply optimization. But these levers would require close partnership between the agriculture sector and downstream sectors, the report says, making them more complicated to deploy. To realize the full benefits, some recommended measures – such as switching to plant-based food options – would also need to take place as part of “whole of society” action that is beyond the scope of corporations alone.
Progress so far
Challenges such as these may be contributing to the relatively low level of commitment made by businesses so far. A separate McKinsey report from 2023, found that while about four out of five (79%) of companies in the Fortune Global 500 had targets for reducing their carbon footprint, corporate action on natural capital more broadly was far less pronounced[7].
Only about a quarter (26%) had a target on water, while 22% had a target on chemicals and plastics. The proportions with targets on forest (13%), biodiversity (6%), and nutrients and nitrogen oxides (5%), were even lower. Larger proportions of businesses were at least acknowledging their impact in these areas, with about half (46%) making an acknowledgement on water, for example. McKinsey also found that the nature and stringency of corporate commitments varied. Some businesses were aiming for zero loss of biodiversity across all sites with clear criteria to track progress, for example, while other targets were less comprehensive.
There are signs that the picture is improving, however, with the analysis finding that about one in five companies now track their impact in three or more dimensions of nature.
And some companies have made clear commitments. The multinational beauty business L’Oreal, for example, in 2020, set a range of sustainability targets for 2030, focusing on biodiversity, water management and the circular use of resources as well as climate change.[8] These include the goal that 95% of its ingredients in formula will be bio-based, derived from abundant minerals or circular processes. The company is two thirds (65%) of the way towards reaching this target. But for other goals, such as its ambition that 100% of the plastic used in packaging will be from recycled or biobased sources (32% attained), there is still a long way to go.[9]
Similarly, the US retailer Walmart aims to become a ‘regenerative company’, which places “nature and humanity at the center of [its] business practices”[10]. Together with the Walmart Foundation, it has set a goal to help protect, more sustainably manage, or restore at least 50 million acres of land by 2030, as well as 1 million square miles of ocean. Other ambitions include encouraging suppliers to support on nature goals, and sourcing commodities such as cotton, beef and soy from certified sustainable origins. Initiatives include a US$ 120m collaboration with PepsiCo to help US and Canadian farmers improve soil health and water quality.
Frameworks and guidance
In order to be credible, corporate efforts like these must incorporate clearly defined criteria and robust measurement – but this presents considerable challenges. As McKinsey highlights, “there is no single accepted metric for measuring nature”[11] – and while data on natural capital does exist, it is frequently spread across sources and can be difficult to aggregate and use. In this light, the consultants’ 2022 report noted that governments can support action from businesses by setting clear guidance on what is expected and which outcomes to target.[12]
One potentially useful approach is known as natural capital accounting (NCA), which the World Bank says can help bring nature into the center of economic decision making[13]. The idea is that by assigning monetary values to the contributions that nature makes to economies and human wellbeing, NCA can be used to establish an economic case for protecting and restoring it. Since 2016, for example, Zambia has been developing a system to account for the value of its natural resources, which are seen as vital for its long-term economic growth. From 2019 the country has been publishing accounts for forest, water and land that have highlighted a range of concerns and opportunities.
The country’s forest accounts have demonstrated that forests are shrinking, with agriculture responsible for about two thirds of the loss (64%) and the rest caused by unplanned settlements. Another problem is growing demand for exporting timber, which is leading to the uncontrolled exploitation of some tree species. More positively, the work found a huge potential market for honey and beeswax in properly managed forest areas, which could benefit community producers. The water accounts, meanwhile, have informed work on policies in areas such as managing demand, improving regulation and increasing supply, as well as underlining an urgent need to harness water’s value for social and economic development.[14]
Zambia’s natural capital accounts have also influenced its current National Development Plan, which includes sustainability and managing natural resources among its key priorities. The country’s finance ministry is convinced that despite its ambitions for growth, a narrow focus on GDP alone “will not guarantee the sustainable world creation and development that we, as a country, desire”.[15]
The growing global consensus on the importance of considering and quantifying natural capital was demonstrated at the 2022 COP15 UN Conference on Biodiversity in Montreal, where the agreements included a target for large businesses to disclose their biodiversity risks, dependencies and impacts by 2030.[16] A key element in achieving this goal is expected to be the recommendations of the Taskforce on Nature-related Financial Disclosures (TFND), a global initiative backed by two UN programs as well as several major non-governmental organizations, and the national governments of countries including the US, the UK, Norway and Switzerland.
The UN Environment Programme’s Finance Initiative describes the TFND’s final recommendations[17], published in 2023, as a groundbreaking framework that will allow businesses to “assess, disclose and manage nature-related risks and impacts” and support consistent reporting worldwide on these issues.[18]
The EU has integrated aspects of the recommendations into its regulatory reporting requirements, and a number of countries, such as the UK, have indicated an intention to consider enshrining them in domestic laws[19]. The significance of the recommendations is underlined by the fact that more than four hundred companies[20], including Bank of America, GSK, IKEA, and Sony[21], have already voluntarily decided to adopt them.
Future trends
The momentum behind the TFND recommendations suggests that businesses will increasingly be expected to consider, measure and report on a wide range of natural capital issues in the coming years. In the EU, the direction of travel is evident in initiatives such as new deforestation regulation. Applicable from December 2024, this will require companies trading in commodities such as cattle, coffee, oil palm and wood to ensure their products do result from recent deforestation or related infringements.[22] Meanwhile, the EU’s Nature Restoration Law, adopted in 2024, will set legally binding targets with the aim of restoring 20% of the continent’s degraded ecosystems by 2030, and all of them by 2050.[23]
According to the World Bank, the current explosion of interest in natural capital will bring opportunities as well as obligations. The bank’s 2023 report argued that nearly every country in the world has inefficiencies in areas such as biodiversity, carbon storage, and agriculture. [24] Addressing these “can account for many of the world’s pressing economic and environmental problems”. The report, for example, found that better management of land, water and other resources could provide an annual boost of US$ 329 billion to income from agriculture, grazing, and forestry. Similarly, adopting more efficient air pollution policies could have saved significantly more lives with the same level of spending.[25]
The risks and opportunities are shown in stark relief in a 2024 from Deloitte. [26] It estimated that US banks have at least US$ 1.7 trillion of loan exposure to sectors potentially facing natural capital losses, with the potential for these risks to ripple through the global banking system and compromise its stability. But at the same time, the report also highlights the chance for banks to contribute to “nature-positive outcomes” through new financial markets and products.
The issues involved may be complex, but the overriding message from these studies is clear: decisive global action is urgently needed. The necessary policy reforms will undoubtedly be expensive and demanding. But the costs of inaction will be far higher.
[1] https://openknowledge.worldbank.org/entities/publication/855c2e15-c88b-4c04-a2e5-2d98c25b8eca
[2] https://www.science.org/doi/10.1126/sciadv.adh2458
[3] https://www.stockholmresilience.org/research/research-news/2023-09-13-all-planetary-boundaries-mapped-out-for-the-first-time-six-of-nine-crossed.html
[4] https://www.mckinsey.com/capabilities/sustainability/our-insights/nature-in-the-balance-what-companies-can-do-to-restore-natural-capital
[5] https://openknowledge.worldbank.org/server/api/core/bitstreams/9f0d9a3a-83ca-5c96-bd59-9b16f4e936d8/content
[6] https://www.mckinsey.com/capabilities/sustainability/our-insights/nature-in-the-balance-what-companies-can-do-to-restore-natural-capital
[7] https://www.mckinsey.com/industries/agriculture/how-we-help-clients/natural-capital-and-nature/our-insights/companies-are-broadening-their-commitments-to-nature-beyond-carbon
[8] https://www.loreal.com/-/media/project/loreal/brand-sites/corp/master/lcorp/documents-media/publications/l4f/loreal-for-the-future–booklet.pdf?rev=265bdbc0ded24a95b3aae0aba278b8bd&hash=81C863AF659C16D7C5550B0F4976B910
[9] https://www.loreal-finance.com/en/annual-report-2023/social-environmental-performance/
[10] https://corporate.walmart.com/purpose/esgreport/environmental/regeneration-of-natural-resources-forests-land-oceans
[11] https://www.mckinsey.com/industries/agriculture/how-we-help-clients/natural-capital-and-nature/our-insights/companies-are-broadening-their-commitments-to-nature-beyond-carbon
[12] https://www.mckinsey.com/capabilities/sustainability/our-insights/nature-in-the-balance-what-companies-can-do-to-restore-natural-capital
[13] https://www.worldbank.org/en/topic/natural-capital
[14] https://thedocs.worldbank.org/en/doc/715311a974bb3e6d778110c8cfbdce0d-0320052023/original/zambia.pdf
[15] https://www.worldbank.org/en/news/feature/2022/11/18/in-zambia-natural-capital-accounts-ensure-future-prosperity-for-all
[16] https://www.cbd.int/article/cop15-final-text-kunming-montreal-gbf-221222
[17] https://tnfd.global/recommendations-of-the-tnfd/
[18] https://www.unepfi.org/themes/ecosystems/tnfd-final-recommendations/
[19] https://www.whitecase.com/insight-alert/eight-things-know-about-taskforce-nature-related-financial-disclosures
[20] https://www.edie.net/more-than-400-firms-adopt-tnfd-recommendations-for-nature-disclosure
[21] https://www.edie.net/hundreds-of-businesses-to-adopt-taskforce-on-nature-related-financial-disclosures-recommendations/
[22] https://www.whitecase.com/insight-alert/10-key-things-know-about-new-eu-deforestation-regulation
[23] https://www.iucn.org/news/202406/eu-adopts-its-new-nature-restoration-law
[24] https://openknowledge.worldbank.org/entities/publication/855c2e15-c88b-4c04-a2e5-2d98c25b8eca
[25] https://openknowledge.worldbank.org/entities/publication/855c2e15-c88b-4c04-a2e5-2d98c25b8eca
[26] https://www2.deloitte.com/us/en/insights/industry/financial-services/sustainable-banking-for-nature-positive-outcomes.html
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