Sustainability: Eco-Assets Can Add to Your Bottom Line

Sheryl Law, Nicholas Gard, Ph.D. and Pieter Booth

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Sustainability encompasses the idea that a company can successfully operate currently and in the future by integrating economics, the environment, and social values (also known as the triple bottom line). But, how do you translate this concept into something that makes a difference to a company’s bottom line? The term sustainability has become a buzz word for companies and lately, has captivated Wall Street. Analysts are viewing businesses with sustainable practices as indicators of successful future performance. The attractiveness of sustainable companies is reflected in many ways. For example, mutual funds that specialize in socially responsible investing have increased from $12 billion to $178 billion since 1995.[1] Beyond the basics of environmental process efficiency, such as water and energy use reduction and waste minimization (information that is easily and inexpensively collected), Exponent, together with clients, is exploring additional steps for corporate clients to achieve sustainability and increase their bottom line.

One way to realize business sustainability is through eco-asset management, a way to transfer ecological conservation efforts into net economic benefits for the company. Companies have typically undertaken environmental projects, such as site cleanup or habitat restoration, in response to government enforcement and have accounted for these projects as a liability on their financial statements. Many companies establish substantial environmental reserve accounts to meet unexpected costs related to ecological and environmental risks that may arise in the future. In this vein, habitat conservation or restoration has been accounted for as an externalized expense. However, within the eco-asset management construct, ecological conservation projects can go beyond compliance and become a recognized asset that adds to the bottom line.

Eco-assets provide two benefits to companies: ecosystem products and ecosystem services. Ecosystem products are resources, such as timber and minerals, which have well-defined values because they are traded on open markets. Ecosystem services such as carbon sequestration, flood control, potable water, and habitat for endangered species have been overlooked as assets, because they were considered “common goods,” and thus were viewed as “given” or “free for the taking.” Valuing property with conventional economics fails to account for such services, which can make significant differences to a firm’s bottom line. The concept of eco-assets is gaining popularity as companies find ways to incorporate eco-assets as additional monetized holdings. Sachin Kapila of Shell comments, “I see a time when offsets just become a market mechanism. I believe one day we will be able to trade biodiversity offsets.”[2] Innovative business leaders foresee eco-assets, like other valued goods and services, translating into economic benefits through the basic economic theory of supply and demand.

There are two key components of managing eco-assets for the bottom line: 1) find hidden economic assets within the ecological characteristics of the property, and 2) explore markets for those assets. The framework can best be explained using an example of a company with a large number of properties. The company needs to know exactly what land holdings they own, the ecological characteristics of each property, and the environmental health of the land. They need adequate data to scrutinize the physical and biological charac- teristics of their land, historical uses of the properties, current land use, hydrology, habitat types, biodiversity, and other ecological characteristics, such as the presence of endangered species or sensitive habitats. Such a large undertaking for inventory and spatial-relationship analysis can be done with tools such as geographic information systems (GIS).

The second part of the eco-asset management framework is quantifying the value of the eco- services on each property. Intan- gibles such as company reputation, brand recognition, corporate values, investor relations, and license to operate have indirect impacts to the bottom line. For example, restoration or conservation of an area can be accomplished with little investment, but can provide public benefits such as recreational and educational opportunities that can enhance a company’s environmental stewardship reputation, both locally and globally. Restored properties can also generate savings by preventing or offsetting potential future liabilities such as remediation costs or natural resource damages, providing tax benefits from conservation easements, increasing future property value and salability, and reducing costs of future monitoring and maintenance.

For eco-assets that can be monetized, there are market- places such as conservation banks and mitigation banks. The most developed market, which has received the greatest publicity in recent months, is the carbon credit market.[3] Other lesser- known markets include wetland banks, sulfur dioxide trading credits, water quality banks, aquifer recharge credits, mitigation credits, as well as emerging markets for biodiversity banks and habitat credits.4 Some of these markets were established by governmental agencies granting credits as a reward for conservation or improvements in ecological services. These credits can be bought and sold on the open market—meaning that these credits not only have a value, but also have a price.

Enterprising for-profit companies have sprung up to coordinate the buying, selling, and trading of these credits. For example, the Chicago Climate Exchange’s (CCX) current trading price for carbon credits is $3.50 per metric ton of carbon dioxide (February 5, 2007) and since its inception in 2003, $92,344,370 worth of carbon credits has been transacted. The U.S. Conservation Bank, which trades credits for endangered species and their habitats, has protected and/or restored 44,621ha of land through 930 transactions, with an average price of $2,697 per credit, and a total transaction value of $375,908,799 since 2005. The U.S. Wetland Mitigation Bank has bought and sold wetland credits ranging from $5,000 to $250,000 per credit, with an average of $36,357 per credit, for a total transaction value of $289,659,887 between 2000 and 2005.[4] Clearly, new ways are emerging for fully valuing eco-services, and this dynamic is affecting the ways businesses manage their holdings.

Figure 1. Are Eco-Assets Included On Your Bottom-Line?

The challenge for businesses with extensive or diverse land-holdings is to determine what eco-assets they own and whether these assets can be reasonably valued in the available marketplaces by being sold, or traded locally or regionally. Using the information gathered and stored in GIS, Exponent ecologists can determine whether the properties have eco-services that can be valued. If the company were trying to decide whether or not to sell an unused property, for example, the eco-asset framework would incorporate the value of credits that can be earned for significant ecological services, such as a wetland that provides ideal habitat for an endangered species, in addition to the current real estate price or revenue- generating capability of the land (such as rent, resource extraction, or development). In this case, a conservation or restoration effort may be a more financially sound alternative for the property than selling the land at fair market value or keeping the land in production (Figure 1). For example, International Paper (IP) decided to restore habitat for the red-cockaded woodpecker in return for mitigation credits in 1999.[5] IP’s 90-year old longleaf pine Southlands Forest in Georgia was habitat to only 3male woodpeckers. Initially, IP managed only 728 ha of the habitat, and after their conservation agreement, they increased the available habitat to 2,140 ha. IP relocated woodpeckers from other properties, constructed artificial nest cavities, and restored longleaf pine to increase the population to 55birds, including 15 breeding pairs by 2006.[6] According to their agreement with the conservation bank, once 18 breeding groups have been established, IP can sell credits to developers who have the endangered woodpeckers on their land. In 2004, it was estimated that a woodpecker credit was worth $250,000.[7] The establishment of a conser- vation bank for woodpeckers can become a source of revenue for IP operations in Georgia. Additionally, IP can use their credits to harvest timber in other areas that are used by red- cockaded woodpecker as habitat. Thus, IP’s efforts that go beyond requirements from the Endangered Species Act also give IP greater flexibility in managing their operational timberlands.[8]

Aside from conservation and mitigation banks, there are other valuation methods that can be used to find the hidden value of eco-assets. These include replacement costs, contingent valuation, benefits transfer, and non-monetized methods such as habitat or resource equivalency analysis (HEA/REA) and trades and offsets. Trades and offsets can also be established with the use of GIS-based inventory of properties, characterized by their eco-services. These characteristics can be statistically clustered to determine whether the eco-assets are similar enough to each other for trading on the market, or for use as a mitigation offset for another property. Exponent believes that by integrating ecological knowledge and coordinating resources that can value hidden eco-assets, an eco-asset management frame- work provides a net positive benefit that truly accounts for the maximum value of the land, both environmentally and financially. Exponent’s EcoSciences practice is building on its ecological work by finding these hidden eco-assets and identifying their economic value. Shareholder interest and corporate profitability can increase by enhancing both sustainable business practices and sustainable ecosystems.

Footnotes

[1] http://www.businessweek.com/magazine/content/07_05/b4019001.htm.

[2] http://www.mitigationactionplan.gov/Biodiversity_Offsets_Report.pdf.

[3] http://www.ieta.org/ieta/www/pages/index.php?IdSiteTree=2.

[4] http://www.ecosystemmarketplace.com.

[5] http://training.fws.gov/history/speeches/Jclark/HCP.htm.

[6] http://www.internationalpaper.com/PDF/PDFs_for_Our_Company/ Sustainability%20Reports/ IPSustainability2006.pdf.

[7] http://ecosystemmarketplace.com/pages/article.news.php? component_id=639&component_version_id=712&language_id=12.

[8] http://www.environmentaldefense.org/article/cfm?ContentID+2664.