Monetizing the Value of Nature: A Lever for the Resilience of Economic Actors

The global economy is heavily dependent on biodiversity. According to the World Economic Forum, More than half of global GDP depends on the ecosystem services provided by nature[1] (example: water and biomass supply, pollination, climate regulation, and the water cycle).

At the same time, Economic activities have a significant impact on nature, because they involve the conversion of natural areas, and because they contribute to the overexploitation of resources, pollution, and climate change. As a result, biodiversity is declining rapidly: according to the IUCN, The rate of species extinction today is 100 to 1,000 times higher than it was in past geological eras[2].

Why do we need to take action now to protect nature?

The WWF estimates that The decline of nature will cost nearly $500 billion a year by 2050, due to coastal degradation (66% of economic losses), loss of carbon storage (26%), reduced water availability for agriculture, loss of habitats for pollinators, and loss of forest ecosystem services (8%)[3].

To halt the loss of biodiversity, The mobilization must be massive and collective : redirecting financial flows toward more sustainable sectors (financial institutions), implementing regional strategies (public sector) and corporate strategies (businesses), and exerting pressure through changes in lifestyles and consumption patterns (citizens).

Taking action to preserve nature is a a short-term cost for businesses, but one that is still lower than the future cost if we delay taking action. IPBES estimates that Delaying measures to preserve and restore biodiversity by a decade could double the cost of taking immediate action[4].

Here we get a glimpse of the a striking tension between a short-term profit-driven mindset and the need to transition to new business models over the long term, starting right now. Living systems encompass biological realities and a sense of time that can only be understood over the long term; among other examples, the biological cycle of a forest spans several hundred years, and sustainable practices (e.g., areas left to evolve naturally, species diversity) yield beneficial effects for nature only after several years or even decades.

What natural hazards do businesses face?

Risks and opportunities reflect the impacts and dependencies on nature from a business perspective. In other words, they outline the economic implications of these issues to guide decision-making within a company or organization.

These risks and opportunities stem from two distinct issues. On the one hand, the physical risks reflect the dependence from the company to the ecosystem services provided free of charge by nature. On the other hand, the transition risks stem from the impacts the company's impact on the environment. The occurrence of these risks can result in significant financial losses for the company.

How can we ensure that companies take environmental issues into account in their strategies?

To ensure that the issue is considered by management, Quantifying and monetizing the stakes is crucial. Because that's the language of executive committees, and because strategic decisions are driven by financial considerations.

This monetization exercise can be carried out using four approaches, which are presented below.

These four approaches remain complex. To date, there is no no standardized methodology to implement them, the The regulatory framework is volatile and unstable, and the Bibliographic resources remain limited to support these analyses. However, frameworks such as the TNFD and the previous version of the CSRD (unfortunately!) recommend quantifying the effects of nature-related risks and opportunities on revenue, expenses, cash flows, the value of the company’s assets and liabilities, and sources of financing.

How does Carbone 4 help its clients monetize nature-related issues?

Carbone 4 supports its clients in these four approaches to monetizing nature-related issues. For example, Carbone 4 worked with Auvergne-Rhône-Alpes Energie Environnement to monetize two ecosystem services provided by the Arlysère Forest, using the replacement cost approach: reducing the risk of rockfalls, valued at €180 to €530 per hectare of protective forest per year; and water management, valued at €20 per hectare of total forest per year.

"The study helped shed light on the many benefits the forest provides to the community and served as an initial educational effort for elected officials. As a result, the budget allocated to forest maintenance operations was increased."

— Anaïs Pasteur-Godinot, Project Manager for Transition Pathways, Auvergne-Rhône-Alpes Energy and Environment

Carbone 4 has developed a a methodology for scoring and monetizing nature-related risks and opportunities, aligned with the new ISO Biodiversity Standard and the TNFD recommendations, which incorporates each of these approaches. Various scenarios can be examined (for example, a business-as-usual scenario and an optimistic scenario for biodiversity). For the assessment, several parameters are analyzed: exposure, sensitivity, time horizon, and the probability of the risk occurring. The analysis helps identify significant risks and opportunities and calculate the potential monetary impact of their occurrence over a given time horizon. The ultimate goal is to be able to guide strategic decision-making by comparing the short-term cost of taking action with the future cost—in the medium to long term—of inaction.

Carbone 4 will soon launch a market study to enhance its approach to monetizing climate and biodiversity issues. We are looking for partners to fund and co-develop this exciting methodological work. Please feel free to contact us to join the project!

Putting a monetary value on environmental issues also raises the question of accounting terminology. How can we align financial accounting with carbon accounting to take action?  That's what we'll be exploring in our next article on the subject.

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How can we align financial and carbon accounting to take action?

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