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| Source: | Plattform Nachhaltig Wirtschaften |
| Category: | Articles & Commentary|Themes|Biodiversity |
| Date: | 09.06.2010 |
Pro-biodiversity business
a new landscape of opportunity
 Ecotourism in Cathedral Peak Nature Reserve, South Africa.There are two ways in which business relates to Biodiversity and Ecosystem Services (BES). Firstly, companies depend on BES, e.g. on the existence of healthy forests and seas for the provision of commodities like fish and timber, on bees for the pollination of flowers or fruit trees, and on freshwater sources for the provision of drinking and irrigation water. Secondly, economic activities affect BES, e.g. through land conversion, overexploitation and pollution. This threatens the provision and use of BES in the long-term. When talking about the impact of business on BES, the focus tends to be on the negative side. However, corporate action can also enhance biodiversity. This article will explain in which way business can have a positive impact on BES.
With the increasing recognition of the economic and market value of BES, new 'pro-biodiversity business opportunities' are emerging. Pro-biodiversity business is defined as business activities which deliver net positive effects to biodiversity and are commercially viable. They create value both on the P of Planet and on the P of Profit. Often also on the P of People, when local people are involved in the business. This new field of business simultaneously creates new pro-biodiversity investment opportunities. Our research has revealed a number of new markets in this field. They attract private money which is being channelled into the conservation and enhancement of BES, or the money is used as 'Payment for Ecosystem Services' (PES).
We distinguish the following types of pro-biodiversity business models:
I carbon - compensation for stewardship of climate regulation services. This market is probably the best known market because of the already established trading schemes for emission credits. Voluntary emission credit markets are also developing and many have advocated the introduction of REDD;
II water - payments for watershed management to conserve the quality or volume of water services, such as water purification (see the Vittel example below) or for white energy purposes;
III biodiversity - payments to preserve natural habitats, i.e. the basis for healthy ecosystems. Offsets are an emerging category of biodiversity payments. In the EU and the USA, legislation requires compensation for the loss of certain types of ecosystems by economic activities in order to assure that there is no net-loss of biodiversity;
IV certified forest products - timber and non-timber;
V ecotourism - payment of park fees and also generating income for small businesses around the park (lodging, transport, guides);
VI genetic resource/bio-prospecting - pharmaceutical industry.
Often, a pro-biodiversity business model includes a combination of the above services. For example, maintaining a forest can generate carbon emission credits, re-saleable water rights, biodiversity offsets and income streams from ecotourism (so-called bundled payments). Another common form is through certified products, such as organic food, where the preservation of ecosystems is built in the price.
To create a sustainable and commercially feasible pro-biodiversity business, the provision of ecosystem services must be paid for by public and/or private buyers. Perrier Vittel S.A. (Vittel), the world's largest bottler of natural mineral water, provides an interesting example. Vittel was faced with the challenge of an increasing level of pollution of their natural water supply sources. But instead of choosing the more common solution of transferring its operations to new sites and building new filtration plants, they chose a different path. Partnering with the French National Agriculture Institute (INRA) and French Water Agencies, Vittel developed a system to conserve the quality of their water. Vittel offered the farmers in the spring area of their water supply financial compensation if they agreed to lessen the intensive farming. By decreasing their impacts on the local ecosystem, the farmers contributed to the deliverance of clean water. Besides the positive effect on the local ecosystem, calculations of INRA showed that the project was economically justifiable as well.
There are different drivers for PES and pro-biodiversity business. Vittel offered compensation on a voluntary basis which was motivated by a cost reduction perspective. Other business considerations can relate to risk-management, early adaptation to new public regulation (or expected stricter regulation), or market innovation. And obviously, CSR, ethical and philanthropic motives can play a role when engaging in voluntary PES markets.
Regulation and governmental enforcement can also be an incentive for pro-biodiversity business. For instance, in the USA, 'wetland banking' is a well established mechanism, which was induced by the Clean Water Act in 1972 by the US Army Corps of Engineers regulations. This Act aimed at protecting America's disappearing rivers, lakes, swamps and other wetlands. It became illegal to fill, dredge, or in any other way damage a wetland without permission of the US government. In order to obtain a permit, it should first be determined whether the damage can be avoided. In cases of unavoidable damage, it must be mitigated and compensated. In most cases of mitigation banking, a third party entrepreneur gains authorisation from regulators to create or restore a relatively large area of wetlands. Afterwards, these wetlands are used as a 'bank of credits' and are sold to developers, who use them to meet their mitigation obligations.
A third driver for PES-markets is that of government-mediation. This refers to governmental programmes that use public funds to pay private land-owners for the stewardship of ecosystems on their own property, e.g. the reduction of water or pesticides use. According to the Katoomba Group (an international network of individuals working to promote and improve capacities related to PES), this is still the biggest constituent of current PES-markets.
The development of pro-biodiversity business opportunities can be expected to grow in the near future because of the introduction of stricter governmental regulation worldwide to preserve biodiversity, an increasing scarcity of natural supplies, such as clean water, fertile land, clean air and raw materials, and a growing CSR awareness.
In the current issue of forum CSR international The business case for biodiversity you are going to find many interesting articles and best practice examples.
- Sebastian Winkler (IUCN): The business case for biodiversity
- Joshua Bishop (IUCN): The Economics of Ecosystems and Biodiversity for Business
- Shulamit Alony (IUCN) & Stefan Hörmann (GNF): A guide to business and biodiversity
- Ralph Thurm (Deloitte): The impact of biodiversity on the accounting business
- The Biodiversity in Good Company Initiative
- Christoph Santner: Masdar - a role model for the world?
- Mariana Bozesan: Integral Impact Investing
- Muhammad Yunus: The future belongs to Social Business
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The investment community is also starting to recognise pro-biodiversity business as a new field of opportunity. Investment companies get involved in pro-biodiversity business projects and structure investment funds in a way that they offer interesting risk/return characteristics for investors. The set-up of some interesting and innovative funds has been supported by so-called 'High Net Worth Individuals' (HNWI), generally defined as individuals or families having investable assets of over 1 million US dollars. HNWI are usually first in discovering new investment opportunities. Development banks and private equity funds come next, and institutional investors follow when the market matures. Already, the more progressive and sustainability-minded institutional investors are following the developments in this field, as BES-investments reflect a long-term investment perspective. As mentioned earlier, since the scarcity and value of ecosystem services is expected to increase in the coming decennia, profits on investments in these assets would increase accordingly. Investing in BES-funds also corresponds with their policies regarding Socially Responsible Investment (SRI), for which the public calls increasingly. Additionally, since BES-investments regard a new type of investment or asset class, investing in them contributes to portfolio diversification.
Our research has identified an array of BES-investment funds already being offered to investors. The funds show a high level of variety in several respects, e.g. concerning the type of biodiversity business invested in, and the type of ecosystem being preserved or enhanced. A common element is that they usually engage multiple stakeholders, including local communities.
Some funds have already achieved a volume and expected rate of return that can meet the needs of large institutional investors. These funds are mostly forestry-related. Important income streams derive from sale of certified timber products and carbon credits. Revenues from other PES-markets are added, e.g. the sale of biodiversity credits, ecotourism payments and the sale of raw materials for renewable energy. This strategy is sometimes referred to as 'forestry plus'.
Other funds build on newer PES-schemes to serve as the main source of income. Some are still quite small in size, others are in the start-up phase. However, their value creation on the biodiversity component is presumably higher than for the more traditional forestry funds. One of the innovative initiatives is the Malua Wildlife Habitat Conservation Bank (Malua Bank), developed by New Forests Pty and Equator LLC. Through the newly established ECO Products Fund LP, the Malua Bank has received a 10 million US dollar investment to restore and protect the Malua Forest Reserve. These 34,000 hectares of previously logged forest are located in Sabah, Malaysia, and are home to endangered animal and plant species. The area was an important source of palm oil. The Sabah Government agreed to cease logging operations and to allow forest restoration and the creation of new, sustainable sources of income. For each 100 square metres of restored rainforest, a 'Biodiversity Conservation Certificate' can be issued by the Malua Bank. These certificates are sold to companies seeking to offset their biodiversity impacts (voluntary or compliance) and to conservation organisations. The revenues of the sale of these certificates are shared between (1) an endowment fund to assure the long-term conservation of the area, (2) a foundation established to improve the livelihood of the local people, and (3) the investors. This new business model offers an interesting alternative for the current unsustainable exploitation of palm oil.
Besides offering an alternative to unsustainable land use, private investments also fill gaps where traditional financing turns out to be insufficient for the restoration of high-priority conservation areas. For example, the private equity management firm Ecosystem Investment Partners (EIP) employs private and institutional investors' funds to acquire and restore high-priority conservation properties across the USA. In 2007, they acquired 1,030 acres bordering the Great Dismal Swamp National Wildlife Refuge in south-eastern Virginia. The property has long been one of the US Fish & Wildlife Service's (FSW) top priorities for conservation in Virginia.
Despite numerous attempts, FSW was unsuccessful in acquiring sufficient funds for restoration through traditional channels like federal and state conservation grants. EIP was asked to provide a solution, in partnership with FSW, The Nature Conservancy (TNC), the State of Virginia and the US Army Corps of Engineers. EIP's projects tend to generate attractive returns for investors through several revenue streams:
- the establishment of a wetland and endangered species mitigation bank. The generated credits are being sold on the open market for wetland banking, which is well established in the USA;
- conservation finance: revenues are generated through the sale of conservation easements, fee simple, a transfer of development rights and other economic transactions;
- lease of farmland to organic farmers;
- lease for recreational use.
EIP also aims to capitalise on newly emerging markets like water quality improvement and carbon sequestration through land conservation and restoration.
In summary, our research has shown that interesting new markets are developing around the conservation of biodiversity and ecosystem services. Certain pro-biodiversity funds are generating respectable profits, mostly forestry-funds, and are currently fit for investments by institutional investors. Innovative projects often tend to lean more on investments by HNWI's and philanthropic money. Governmental support in the form of soft loans or guarantees, regulatory support or mediation stimulates the development of the PES business model. In this respect, public-private cooperation efforts can be decisive to create facilitating environments and lift projects in their take-off phase to future bankable ventures. Civil society organisations and development agencies can be instrumental as 'social engineers' and intermediaries to support governments in designing policies, to make basic investments feasible and prepare the ground for corporate activity (see Guiana Shield Initiative in text box).
As pro-biodiversity businesses aim at value creation in three dimensions - financially, ecologically and socially - it represents a business model which is fit to be used in a sustainable future. Pro-biodiversity projects can offer an alternative to the prevailing unsustainable exploitation of ecosystems. PES supports the progressing economic valuation of ecosystem services (e.g. through the TEEB study), which will be essential for maintaining the worldwide infrastructure of natural ecosystems. Moreover, where public money is insufficient to preserve high value biodiversity areas, private money can play a role. We believe in the potential of these innovative business models.
 Fishing communities depend on supply of fish (Kampot River, Cambodia).
Guiana Shield Initiative
Since 2000, the IUCN Netherlands Committee is involved in the implementation of the Guiana Shield Initiative (GSI). The Guiana Shield in northeast South-America comprises a unique eco-region with one of the largest remaining areas of intact tropical rainforest, containing an exceptional and rich biodiversity. It also holds some 10-15% of the world's freshwater. The Guiana Shield extends from Colombia in the West through to the Brazilian State of Amapá in the East. Main objectives of the current second phase are to promote sustainable financing mechanisms that assure maintenance of ecosystem services, and to contribute to poverty alleviation through benefit sharing mechanisms. Lessons learned so far, are that the contractual arrangements for payments/compensation for ecosystem services which are being implemented in various pilot sites (Iwokrama in Guiana, Matavén in Colombia and Iratapuru Brazil/Amapá) have a unique added value to the operationalisation of forest ecosystem policies. This is because of their strong monitoring component involving local communities' expertise and advanced (remote sensing) technology, and also because equitable sharing of the payments with the local communities is a key element in the contracts. These elements have attracted the attention of potential new donors (the Norwegian, French and British Development Departments, the Moore Foundation). In the case of Iwokrama, Canopy Capital (private sector) participates.
The insights presented in this article result from desk research, interviews and a conference, organised by the authors and Ard Hordijk, Julia Levashova (both Nyenrode), and Vineta Goba (ECNC). The Dutch Ministry for Environmental Affairs was the main sponsor of the research. The Steering Committee of the research project consisted of: Rob Lake (APG investments), Sachin Kapila (Shell); Joshua Bishop (IUCN); Mark Campanale (Four Elements Capital) and Arthur Eijs (Dutch Ministry for Environmental Affairs). We are grateful that many organizations involved in pro-biodiversity business shared their experiences and documentation with us.
Contact
 Irene Jonkers works as a researcher with the Center for Sustainability since 2008. In her research she focuses on international sustainability challenges for business and has been involved in two large projects on biodiversity and the financial sector.
E-Mail: i.jonkers@nyenrode.nl
 Tineke Lambooy is a Senior Researcher in the field of Corporate Social Responsibility at the Center for Sustainability of Nyenrode Business Universiteit since 2007. Her specialisation is business and biodiversity. Since 2008, she is mainly focussing on capital markets and biodiversity.
E-Mail: t.lambooy@nyenrode.nl
 Sjef Gussenhoven is specialising in new financing mechanisms for nature conservation, as advisor with IUCN Netherlands. He has a professional background in development economics, and ample experience as a consultant and manager of development cooperation programs in several countries.
E-Mail: sjef.gussenhoven@iucn.nl
 Henk Simons is senior biodiversity advisor at IUCN NL. He is ecologist, and specialized in business and biodiversity issues (including impact analysis, identifying business opportunities).
E-Mail: henk.simons@iucn.nl
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