Chapter 4

Measuring Natural Capital—Making More from Less

Saving our planet, lifting people out of poverty, advancing economic growth . . . these are one and the same fight.

Ban Ki-moon, UN Secretary General

The creation is groaning.

Saul of Tarsus, circa AD 50–63

The earth is what we all have in common.

Wendell Berry

The drive to measure natural capital¹ is based upon one simple premise: the earth—despite its capacity for annual renewal—has only limited resources that must be properly valued and managed. In the previous two chapters, we covered how human capital and social capital are related to one another and can be measured in non-monetized ways, bringing value in many different ways, including through their correlation with business performance. Similarly, managing natural capital can also bring business advantages, while also adding to individual and community well-being around the world—a correlation of the capitals that creates a virtuous cycle of measureable benefits.

We will examine in this chapter how businesses can manage their inputs of natural capital with the same level of intentionality and rigor with which they currently measure financial capital. By doing so, they can become much more resource efficient. And we will show how businesses can assess the benefits this new approach can bring not only to the company but to nature and society.

This is not about the much more commonly applied approach—typical in corporate sustainability and other CSR initiatives—to measure outputs, i.e., the ecological footprint of manufacturing, in an effort to do “less bad” to the environment (at a cost) while conforming to external standards, namely CO₂ (carbon) footprint. While both the input and output approaches certainly have their uses, fewer companies today have attempted an inputs-focused resource efficiency approach, which is where we see an opportunity for a “big win” in terms of using natural capital for maximum positive impact in the context of a new, more holistic or complete capitalist business model.

Two broad environmental schools of thought in the literature: inputs vs. outputs approach

The questions we asked ourselves in looking at natural capital were how to make more with less and how the benefits of doing so can be measured. These questions, in turn, have two important implications. First, that a focus must be placed on those factors that can be controlled by the company. Second, that a similar focus must be placed on how the company can optimize the efficient use of natural resources across the entire business value chain, asking how we can measure what we use, and how we can simultaneously increase our economic output.

When we reviewed with our research partner based in Germany—the Wuppertal Institute for Climate, Environment, and Energy—the quite substantial literature on the roots of environmental thinking, what became obvious is that we had a choice between two broad schools of thought that have developed over the last thirty years: In the model, do we focus on controlling inputs or outputs? And which of these approaches would most likely generate the clearest results while driving the most significant and lasting positive change?

The general problem with outputs (purely from a measurement perspective in a business context, rather than one of principle) is that in a highly complex natural environment, it is often difficult to pin down which outputs are the effects of specific causes. Hence, it is harder to manage outputs at a local business unit level. Scientists have managed to find the causal link between CFCs (chloroflourocarbons) and ozone layer degradation, but this was more the exception than the rule with outputs measurement. Outputs are also a measure of what has been already done to the environment, not of what could be achieved. Our view is that business should try to control what is within its purview as early in the manufacturing process as possible, and that this will provide measurable and tangible returns.

We completely agree that it is a fundamental responsibility of business to participate in international and transnational negotiations about limiting outputs, that business should provide governments with the maximum assistance to minimize emissions and harmful effects, and that business should adopt output environmental metrics to report the impact of its activities on the planet. Such agreements and practices, however, tend to be more protracted in terms of time frame and are often beyond the control of a single entity, making them more difficult for business to manage.

The inputs choice

While the outputs approach is appropriate at the aggregate level (i.e., at the corporate and country level), for goal setting, communications, and benchmarking purposes, the inputs approach is more appropriate at the granular, local business unit level to inform management decisions. Our considered business model approach in the area of natural capital, therefore, has been to focus on inputs because they constitute, in our view, the simplest, most pragmatic and actionable approach in a business context for the following reasons:

1. The inputs choice allows for better measurability

Measurability (hence, the ability to manage) decreases along the causal chain from input to impact (output), as illustrated by the model of causal chain analysis developed by the OECD (see figure 3). This is because the inputs into any production system, for example raw materials or fuels, are known in terms of the amount consumed in the production process. However, measuring the effects of the outputs of the production system, for example how particular emissions and effluent mix in the environment to create harm, often cannot be known without detailed and expensive environmental monitoring. As a result, the impacts of some waste and chemicals (e.g., plastics, hormone-mimicking chemicals, etc.) are only beginning to be understood and are currently very difficult to quantify.

2. The inputs choice allows measurement through just five metrics (parsimony)

The inputs approach allows businesses to identify with a great level of accuracy a small range of diverse, but universal, factors (the principle of parsimony, or simplicity)—such as biotic and abiotic materials (i.e., organic and inorganic), water, air, land, biodiversity use—that account for the use of natural capital by a firm. In our experiment described in chapter 7, we were able to isolate just five measures (abiotic/biotic materials, water use, air, topsoil erosion) that account through a life cycle analysis for almost 90 percent of the inputs used in the manufacture of the single sachet of coffee that was the subject of the first natural capital experiment. See table 4.1.

Figure 3. Inputs vs. Outputs and Measurability of Impacts²

It is important to keep in mind, however, that not all of these five universal input metrics are actionable in every business situation. Hence, it is important to focus on those a firm can take action on within its own business context. For example, in the coffee sachet scenario we describe in chapter 7, we chose to address abiotic materials because they involve nonbiodegradable packaging of a coffee sachet—something very much within the control of the firm. Likewise, we deprioritized the topsoil erosion issue, though if the firm were vertically rather than horizontally integrated, owning its own farming plantations, the topsoil erosion metric would be more actionable and, therefore, more relevant to our specific business.

Table 4.1. The Five Key Metrics of Natural Resource Input

3. Two simple methodologies can cover almost all of a planet assessment (parsimony)

MIPS (Material Input Per Unit of Services). The input approach enables a business to enact a simple, less labor-intensive, flow-based quantitative methodology (called material input per unit of services, or MIPS). MIPS enables managers to measure all of the five natural capital inputs required to produce one unit of any product (e.g., one cup of coffee). It allows identification of the areas needing improvement and provides benchmarking with other products. As described by Dr. Justus von Geibler and his colleagues from the Wuppertal Institute, “By using MIPS, companies can control the life-cycle-wide environmental pressure potential of the materials they use, their processes, logistics, and products in real time.”³

HSA (Hot Spot Analysis). The hot spot analysis (HSA) is a qualitative methodology that addresses environmental issues along an entire value chain in a quick and reliable way that cannot be addressed by quantitative approaches (e.g., biodiversity), for which no accurate data exists as yet and that are not satisfactorily covered by input metrics (e.g., waste and emission). It is a methodology based on the work of environmental experts such as Dr. Geibler, knowledge coming from the scientific literature, and existing case studies. The results highlight so-called “hot spots” in a product’s value chain (i.e., sections in the value chain where high levels of inputs are being used) that provide a starting point to begin making more with less. Not all hot spots are actionable, of course, but identifying those that are actionable for a firm through business interventions, and then addressing them, could make a firm much more resource efficient.

4. Natural capital productivity (“Factor Four” approach)

The great benefit of the inputs option is that it ultimately offers a greater focus on resource productivity (doing more with less, wasting nothing) that is very aligned with the efficiency principle most companies have adopted to manage their operations. Additional positive features of inputs focus include the possibility to scale and aggregate the information from the smallest to the largest business unit. This is a useful feature for developing an accounting system for the planet, applying the so-called Factor Four framework (see figure 4).⁴ Factor Four can help define a single performance ratio measuring the return on input from the planet by comparing the product to the amount of input materials required to produce it through natural resources metrics. And finally, the inputs approach allows fairly simple monitoring of how effectively the planet’s resources are being managed over time through a specific business activity.

Figure 4. Factor Four/Factor Ten—Making More from Less

5. Actionability—Planet accounting system for management purposes

The input approach can ultimately be leveraged to create a four-point planet accounting system (PAS) to measure inputs on a regular basis, comparing inputs year by year, and tracking action taken in strategic areas. The four points of the PAS are as follows:

Data inventory. This section includes database maintenance with all input flows across the product(s) life cycle and ongoing monitoring of the relevant scientific literature to improve the hot spots analysis (HSA).

Update. This involves updating regularly the resource inputs measurements through MIPS and complementing them with the findings of the HSA.

Assessment. This step allows comparison of current results with the last completed measurement in order to assess the real vs. expected impact.

Actionability. We then analyze potential technological improvements to reduce resource inputs and improve resource efficiency in select strategic areas, identifying select potential interventions based on their practicability and environmental impact potential.

6. Inputs and outputs are complementary and serve different purposes

Finally, as illustrated in table 4.2, the inputs and outputs approaches are complementary and connected with one another, but they have different audiences and serve different purposes. While the inputs approach focuses on improving the efficiency of natural resource use and is more appropriate at the microscale of the business unit level for informing management decisions, the outputs approach focuses on measuring and reducing waste and is more appropriate at the macroscale of a nation or corporate/industry level for reporting purposes. Hence, the inputs approach in our view is more actionable in a business context—in the sense that it drives management decisions more directly—than is the outputs approach. And when a firm works to improve its efficiency of using natural capital inputs, this also has a positive impact on reducing outputs.

Table 4.2. Comparison of Input and Output Approaches

When we implemented the measures outlined in this chapter on one particular example of the “journey of a cup of coffee” from Colombia to the United Kingdom (see chapter 7), we were able to quickly identify where we could achieve economic growth while reducing natural resource use. This presented opportunities to improve quality of life and boost sustainability by using technologies that were already available. In other words, these benefits—both for the planet and for the company—did not require excessive investment in new technology.

This outcome, in turn, suggests that the improvements we found are theoretically available to anyone running any manufacturing business, though in some business activities there may in fact be no available technological solution (as yet), or a technological frontier may not have been reached, creating a time lag while workaround solutions are explored. But we are not seeking here for the perfect solution, but simply to refocus business on what it can do to become more resource efficient on the front end of its activities. And from what we know of our own industry’s business ecosystem, there is much room to advance on the inputs side of things. Further, even incremental advances in controlling inputs appear to have big potential payoffs, not just for the initiating business but for the many stakeholders involved.

There is a potential paradox with this approach of “doing more with less to enhance growth,” because if taken to an extreme, excessive growth eventually will negate the positive environmental effects through increased resource-intensive business activity. This is known as the Jevons effect or Jevons paradox in economics, when technology enables efficiencies that ultimately drive more rather than less consumption due to increasing demand, so there may be a limit to how resource efficient a company should be, and it may in certain circumstances be important to make less from less for a time to mitigate against resource depletion. That said, business is presently so resource inefficient—in part because natural capital is not yet properly valued and managed intentionally through the kind of measurement we propose—that a great deal of environmental good can be done before any danger point of the Jevons paradox is reached.

What we can claim with growing confidence about natural capital based on our learning to date is that while a purely outputs approach can certainly help a business conform to external benchmarking and reporting standards, an inputs approach in the context of a business model can make us more resource efficient. This is done by giving business managers the hot spot areas/pain points that they may be able to address through new or existing natural capital–related management practices.

Greater resource efficiency, in turn, leads not only to cost savings; we believe it can also promote business growth, with the follow-on effect of reducing the negative footprint we leave behind—all beneficial business outcomes. We have the ability now to collect sufficiently granular data on planet inputs. This gives us a concrete goal: to address the ways in which the use of the five resource areas can be reduced to minimize the impact on the planet while boosting company profitability.

Summary of key natural capital findings

Natural capital inputs are measurable. Using five “universal” metrics (abiotic and biotic materials, air, soil erosion, water) and applying a standard value chain life cycle–type analysis, we can acquire the necessary data to measure planet inputs. In the illustrative coffee pilot, these five metrics covered approximately 90 percent of all the input flows across the product life cycle of the pack of single-serve Colombian coffee we examined.

Natural capital efficiency impacts performance. Natural capital inputs efficiency can positively impact business performance. Wuppertal’s “Factor Four” concept, whereby a sufficient reduction of inputs creates efficiencies that have the combined effect of generating savings, reducing environmental footprint, and driving growth, is very promising. And the simple discovery in the coffee pilot that almost three-quarters of the abiotic materials input metric was covered by the nonbiodegradable aluminum foil packaging gave the business the knowledge it needed to target R&D investment toward developing a biodegradable pack that, in turn, would begin to bring value through efficiency.