Why Dow is Putting Nature on the Balance Sheet

Today’s announcement by Dow Chemical that it will launch a multi-year effort to measure and track the business value of ecosystem services represents a small step for a company, a giant leap for critters of all kinds.

Dow isn’t the first company to make the link between the services nature provides and their value to a company’s bottom line. But its new initiative — a five-year partnership with The Nature Conservancy — goes beyond the academic. Its aim is to create a set of tools and methodologies other companies can use to integrate the economics of ecosystem services in business decision making.

For the uninitiated, ecosystem services refers to the $33 trillion or so worth of “free” deliverables provided to us by a healthy planet, including clean water, breathable air, pollination, recreation, habitat, soil formation, pest control, a livable climate, and a bunch of other things we generally take for granted. As I’ve written about for years (see here, here, here, and here), such benefits aren't valued by companies, since they don’t directly pay for them; they don’t appear on a company’s balance sheet. But that doesn’t mean they aren’t critical to a company’s financial future.

Ecosystems have value, when you consider what a company would have to pay to replicate their services if they weren’t otherwise available. And as ecosystems get stretched and diminished — whether by human activity, changes in climate, or natural cycles — they can impinge not just on profits, but a company’s very ability to operate.

Under the agreement announced today, Dow and TNC will work together to examine how Dow’s operations rely on and affect nature. The aim is to advance the incorporation of the value of nature into business, and to take action to protect the earth’s natural systems and the services they provide business and society. One key objective is to share all tools, lessons learned and results so that other companies, scientists and interested parties can test and apply them.

Dow and its foundation are committing $10 million to this collaboration over the next five years.

What’s going on here? Why has this venerable chemical giant suddenly decided to put a price tag on nature?

“We have been on a sustainability journey for close to 20 years,” Neil Hawkins, Dow’s Vice President, Sustainability & EH&S, told me last week. “We had our first set of sustainability goals that ended in 2005. We’re halfway through our 2015 sustainability goals. They’re very focused on some of the areas you’d expect — EH&S performance, the whole life-cycle of our products, and delivering products that actually help the world solve major challenges.

“But the one area that we don’t explicitly address is ecosystem services and biodiversity. It’s an area we felt we needed to get better in. We have a long history in conservation, and probably have done as much conservation as most companies. But we needed a thoughtful, economic approach that builds directly into our business decision making the value of nature to Dow — be it water, wetlands, forests, etc. And also the value we’re providing, because we have a lot of land holdings and a lot of facilities worldwide.”

For example, Hawkins explained, consider water. Dow uses a lot of water in the production of its materials and chemicals. "Most places in the world don’t have a mechanism for understanding the value of the water from the point of view of pricing. But there are implications to Dow if we don't have the supply of water we need at the right time and the right place." If a plant is in a water-challenged region, finding ways to improve the water availability for everyone, including Dow's plant, can be a valuable opportunity. “There might be value in Dow’s making investments far away from our plant in order to secure more reliable supplies of water,” he said.

“Water supplies don’t just come from rivers on site. They’re also impacted by the ecosystems upstream, like forests,” explained Michelle Lapinski, Director, Corporate Practices at TNC. “Forest cover in a watershed significantly influences water quality and quantity. Trees naturally hold back water during rain events and release it slowly, preventing flooding and providing water during dry periods – and regulating the supply and quality of water better than many facilities can. By evaluating ecosystem services, a company like Dow may decide to invest in forest restoration to ensure continued water flow for their business, and others who rely on it.”

Of course, some of these decisions go beyond a single company’s — or even a group of companies’ — ability to control. It’s a societal matter, not a corporate one. That’s where a group like The Nature Conservancy comes in. “We work in a number of cities in water supply,” Glenn Prickett, TNC’s Chief External Affairs Officer, told me. “In Bogotá, Quito, and São Paulo, we’ve worked with combinations of bottling plants, hydroelectric facilities and local water utilities to help each of them understand the value of the water they’re getting from the watershed in terms of what it would cost to install their own reservoir or filtration plant if they didn’t have the water they need in the quantity and quality they’re currently getting it. That becomes the benchmark. Then there’s an economic case for them to provide some amount of money up to that value toward a common effort to protect and restore that watershed. So, we’ve set up water funds in those cities where different entities pay into the fund to work with upstream landowners to protect and restore forests in the riparian areas. That’s an example of how a company can do a very clear valuation and be part of a larger societal effort to maintain the resources.”

These are complex calculations, the stuff of doctoral dissertations, being applied to the down-and-dirty world of business activity in faraway places. As such, the Dow-TNC partnership will likely make only a small dent in understanding how to integrate the value of nature into business decisions, and in only a limited number of scenarios, let alone have the valuations appear on corporate balance sheets. But there’s significant potential here to bring the scientists together with the bean counters — and have them translate all of this complexity into a language meaningful to those who set corporate strategy. As Lapinski put it: “Businesses talk in dollars and numbers and scientists and conservationists talk about beetles and birds. We’re trying to take beetles and birds and put them into dollar numbers so that companies can value nature just as any other asset.”

Of course, the implications of this go well beyond accounting. I asked Hawkins how he would measure the success of this five-year collaboration.

Success, he said, would be, “if, at the end of this, we’re able to fully integrate this into our business decision making as we site facilities, as we make changes to existing facilities, as we look at our product development — if we can build in an economic valuation of nature and how we touch nature. If we can create environments and markets where business naturally is doing valuations and reaching the best economic outcomes while still meeting their growth objectives — I think that becomes a longer-term goal.”

TNC’s Prickett weighed in: “To me, most fundamentally, success comes if businesses start to see conservation — that is, helping to restore healthy ecosystems — as a source of cost reduction and revenue enhancement. This is business, not just a philanthropic exercise in corporate responsibility or regulatory compliance.”

It’s a first step, to be sure, but an important one. And it will take more than just one chemical company and one NGO, however well-funded, well-staffed, and well-intentioned, to bring this into the mainstream.

“You’ve got to have some companies that are willing to try this, to take it on, to partner and collaborate with another organization with similar interests,” says Dow’s Hawkins. “And that’s really at the core of this agreement: How do you take that first step to make this a reality by building it into a company and into a business and, hopefully, into a broader economic approach?”

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ULE 880: A New Year’s Report

Today marks another significant milestone in the development of ULE 880 – Sustainability for Manufacturing Organizations, the company-level standard we’ve been developing in partnership with UL Environment. Indeed, a great deal has been going on behind the scenes the past few months, so it’s time for an update.

First, a brief refresher. For more than a year, my team at GreenBiz Group has been engaged with UL Environment to develop and commercialize a company-level standard for sustainability — that is, environmental, social, and corporate governance issues — to be used as a tool for companies, government agencies, and other stakeholders. (I’ve previously provided a history of the project here.)

Last July, we released a draft of the standard for public comment. More than 700 individuals — representing companies, nonprofits, government entities, consultants, trade associations and concerned citizens — registered to review the draft. A subset of them submitted more than 1,500 individual comments on specific segments and indicators in the standard. Both numbers represent record stakeholder engagement in Underwriters Laboratories’ 116-year history.

In November, we convened a subset of stakeholders — roughly 20 representatives of major companies, accounting firms, consultancies, advocacy groups, and government agencies — to provide input to address some of the reviewers’ more challenging comments — ones where there was a wide range of conflicting opinion, for example. And at every step, the ULE-GreenBiz team waded through the feedback, making anything from minor tweaks to major adjustments along the way.

The fruits of those labors are being published today: ULE ISR 880. ISR stands for “Interim Sustainability Requirements,” part of the argot of UL’s standard-making process. If this were software, it would be the pre-release version.

The ISR will be used to pilot the standard with a small group of companies, which we’ll be announcing in the next couple months, and is also being made public for another round of comment. With the combination of additional comments and real-world piloting, the UL Environment-GreenBiz team will finish a final revision and issue the final ULE 880 standard this summer.

A lot has happened to the standard since its debut last summer. I can only summarize it here. The complete rundown can be found in a 256-page “response paper” published today. It provides details of the key comments and how they were addressed by the ULE-GreenBiz team, and includes a lengthy supplement that excepts some of the 1,500-odd comments.

Among the key issues:

• One Size Fits All. By far the most consistent feedback point was whether ULE 880 is applicable across all manufacturing sectors, specifically in the area of performance.
• Organizational & Product-Level Indicators. Many stakeholders expressed concern about how and whether to integrate more product-specific indicators into ULE 880.
• The Weighting of Domains. In the first publicly available draft of ULE 880, we sought to recognize social and environmental impacts equally, and highlighted governance as an area of particular emphasis in promoting sustainability within an organization. Stakeholders expressed a variety of competing opinions regarding the weighting across domains and indicators.
• Organizational Boundaries. We received a number of comments related to setting the boundaries of an organization for the purposes of certification.
• Baseline Years. The initial draft of ULE 880 attempted to treat the establishment of a baseline year on an indicator-by-indicator basis. In other words, an organization could have a baseline year of 2003 for a greenhouse gas inventory, but have a baseline year of 2006 for a water inventory. Many stakeholders pointed out how difficult and unmanageable such a mechanism would be for certification purposes, and suggested simplification. The simplest approach, they said, would be to establish a single baseline year for the scope of the standard, yet one arbitrary baseline year would potentially “penalize” companies by not rewarding them for work conducted prior to that date.
• Compliance and Regulation. Throughout the stakeholders comment process, many wanted greater understanding and explanation about how ULE 880 would address compliance and regulation.

I won’t address here how the ULE-GreenBiz team addressed each of these issues in the latest version of the standard — you’ll have to read the ISR, which can be downloaded on ULE’s CSDS, the online tool that we’ve used to collect stakeholder feedback. It’s free, though you’ll need to register. (If you registered previously as a reviewer, you’re already good to go.)

Much of these questions (and several others not mentioned above) point out the incredible complexity of creating a standard of this type. The ULE-GreenBiz team has navigated a thicket of such complexities since we set out on this course, and we feel confident that we’ve come up with practical and pragmatic solutions consistent with our original mission and values.

All told, it’s been a tremendous effort — not just on the part of our respective teams, but on the hundreds of individuals who devoted considerable time and effort to this. We were gratified, even surprised, by the passion and commitment with which people responded to the draft standard — clearly, hours of work for some of them. To all who participated, our sincere thanks.

What’s next? During the coming weeks and months, we’ll be announcing the companies that will be piloting the standard inside their own operations, as well as those that will begin to use it to assess their suppliers. We’ll also be announcing the first of the “Big Four” accounting firms that will sign on as independent auditors for the standard, along with several other parts of the system being built to support ULE 880.

For now, I encourage you to read the ISR document and let us know what you think.

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The 10 Most Hopeful Green Business Stories of 2010

There's a lot to be said for viewing the year just passed through the rear-view window.

Toyota's hybrids hit the wall, so to speak, in terms of being seen as a paragon of safety. BP spouted all too vividly the perils of the petro-based economy. The bigger peril, climate change (or global warming, or whatever it's called) became, somehow, a non-issue, politically speaking. Indeed, the political climate in the United States turned against pretty much all things environmental. Meanwhile, toxic substances and gender-bending chemicals found their way into everything from mattresses to baby bottles. I could go on.

But please, kind readers: Step away from the ledge. There's much to be hopeful about.

I've just finished an annual ritual, combing the past year's stories — all 2,139 of them — published on GreenBiz.com and its sister sites in order to identify significant trends in the world of sustainable business. I do this each year in preparation for our annual State of Green Business report, the 2011 edition of which will be released on February 1, the eve of the first of three State of Green Business Forums we'll be staging this year. The report identifies 10 key trends and 20 key indicators that show how, and how much, companies are transforming their operations in environmentally responsible ways.

Doing this review is tedious and time-consuming, but also heartening. There was much to celebrate over the past 12 months. Here, in no particular order, are 10 stories we published that I believe represent significant, hopeful developments:

GE To Boost Electric Vehicle Fleet By 25K

General Electric is by no means the first or only company to make a significant pledge to buy large quantities of electric and plug-in vehicles, though its recent commitment is one of the largest. In doing so, large fleet buyers like GE (and Enterprise, Frito-Lay, UPS and others) are proving that there is a mainstream market for these vehicles — that they're not just the playthings of well-to-do techies and greenies. And GE's initial purchase of 12,000 vehicles from General Motors, including the Chevy Volt, was a strong vote of confidence for the re-emerging U.S. automaker.

Procter & Gamble Packages Up a New Green Vision

For two decades, the world's largest consumer packaged goods company pretty much out stayed of the green marketplace. Its few forays were either ill-conceived (such as early 1990s commercials claiming that diapers were compostable) or focused solely on money-saving benefits (such as its successful Tide Coldwater detergent). But that changed in dramatic fashion with a series of long-term goals which, if met, would bring the company's factories to be 100 percent renewably powered, use 100 percent renewable or recycled materials for all products and packaging, and send nothing to landfills. Those bold goals are mid-century but the company set 10-year interim benchmarks that would set a trajectory for how products are designed and manufactured going forward. P&G still won't necessarily be overtly marketing green, but it could demonstrate that significant green commitments aren't incompatible with mainstream products and profitability.

Interface to Conduct Life-Cycle Analyses on All Products

The sustainability-minded carpet maker said it would complete something called "Environmental Product Declarations" or EPDs — detailed documents explaining the life-cycle impacts — for all of its products by 2012. EPDs analyze products from their raw material stage to disposal and are certified by independent third parties. In doing so, Interface took the lead on a growing trend of product transparency — not just for carpets, but for a wide range of other goods whose ingredients had previously been protected as trade secrets. We'll be hearing more about EPDs in the future, as more companies follow Interface's lead and make product transparency a core ingredient in their operations.

Levi's, Outdoor Industry Join Forces for Product Footprint Tool

Transparency doesn't come without a great deal of investigation and quantification, the metrics of which are still in their infancy. Those metrics took a leap forward, at least for one industry, with the emergence of the Eco Index, a project of the Outdoor Industry Association, a trade group of apparel, footwear, and equipment manufacturers. The Index, a web-based tool, provides guidelines, indicators and metrics aimed at enabling companies to score individual products related to their materials, packaging, manufacturing and assembly, transportation and distribution, use and service, and end of life. This is a terrific example of industry collaboration to solve collective challenges and get all players speaking the same language and using the same yardsticks. The presence of leadership companies like Levi's and Timberland will help ensure that the Index isn't intended for just a small circle of niche players.

Walmart Sows Major Sustainable Ag Commitment

Sustainable agriculture hasn't generally been the domain of large food growers or retailers, residing principally in the world of locavores, farmers markets, and natural food stores. But the world's largest retailer is helping to bring it into the mainstream with a commitment to support local farmers and their communities. Specifically, Walmart pledged to sell $1 billion in food sourced from 1 million small and medium farmers and provide training to farmers in sustainable farm practices, all while increasing these farmers' income. And while $1 billion over five years represents a tiny fraction of Walmart's annual grocery revenue — more than $250 billion in 2009 alone — it signaled that sustainable ag has matured into a mainstream means of production.

Eastman Bets on Bigger Profits from Greener Chemicals

Large chemical manufacturers have been turning gradually to green chemistry in recent years, but Eastman Chemical Company's goal — to derive two-thirds of revenue from new products that have sustainability benefits relative to other products on the market — represents a new direction for the 90-year-old Fortune 500 firm. Eastman also laid out some broader goals, such as working with customers to help them meet sustainability plans, using sustainability as a key factor in identifying growth opportunities, and using its internal Innovation and Sustainability Council to manage investments and determine priorities. It's not a 180-degree turnaround for the company, which claims to already derive one-fourth of its revenue from greener alternatives, but it sends a message that a fundamental shift is underway for an industry long linked to some of humanity's and the planet's worst health impacts.

Nike Shrinks GHG Footprint to 2007 Levels and Dumps Carbon Offsets

Amid political squabbling over whether curbs on carbon emissions would harm the economy, Nike reached a milestone, and did so profitably. The world's leading maker of athletic footwear and apparel announced it had dialed back its greenhouse gas emissions to 2007 levels. And it did this despite having announced in 2009 that it would stop buying carbon offsets and concentrate instead on reducing emissions through curbing business travel and reducing the embedded energy in materials and energy used in its manufacturing process. None of this, it seemed, hurt the bottom line. While Nike's fiscal 2010 revenue dropped 1 percent from the previous year, "We've never been more profitable," reported Nike President and CEO Mark Parker in the company's 2010 annual report, adding: "Gross margins came in at 46.3 percent for the year — that's a record." Nike has proved that addressing climate change can go hand in hand with scoring points with investors.

Half of General Motors' Plants Achieve Landfill-Free Status

This is the latest milestone in a decade-long effort GM has undertaken, getting 76 of its 145 plants worldwide to be "zero-waste." On average, 97 percent of the waste at these 76 sites gets recycled or reused to make new car parts, while 3 percent is incinerated to generate energy. The car maker is hardly the only company these days pursuing a waste-free goal, though it's been doing it longer than most. What's most remarkable about its achievement is that the company didn't put the brakes on its zero-waste efforts during its financial woes, bankruptcy, and multiple management changes, showing that eliminating waste can be and enduring and profitable pursuit.

LG to Spend $18B Cutting Carbon, Making Greener Products

The Korean industrial company was just one of several Asian manufacturers to make significant commitments last year to clean technology and greener products. Panasonic unveiled a three-year plan called "Green Transformation 2012," which it said will lay the groundwork for it to become the world's leading "Green Innovation Company" by 2018, Panasonic's 100th anniversary. Hitachi, which reached its century milestone in 2010, said it would put environmental innovations at the core of the company's operations for the next 100 years. Samsung said it spent $865 million during 2009 to develop greener products and make its manufacturing sites more efficient as part of a multi-pronged efforts to become one of the world's most environmentally friendly companies. And NEC Corp., Japan's largest PC maker, unveiled plans to invest $1.1 billion over eight years in battery and smart grid technologies. LG, for its part, said it would spend nearly $18 billion over the next decade cutting its carbon footprint by 40 percent and developing greener products. The ultimate impact of these efforts won't be known for years, but collectively, they made it loud and clear that Asian firms view green and clean innovations as their path forward to growth and profitability.

Intel Adds Sustainability to Corporate Charter

This was a largely unreported yet landmark achievement. Nearly all corporate charters, at least for large companies, mandate that management keep their eye focused solely on the financial bottom line, with no regard for environmental or social impacts. Indeed, diverting profits to invest in reducing those impacts could be seen as a violation of management's fiduciary responsibility to shareholders and subject the board to lawsuits or worse. Intel's board sought to change that, amending its charter to require that its Corporate Governance and Nominating Committee "Reviews and reports to the Board on a periodic basis with regards to matters of corporate responsibility and sustainability performance, including potential long- and short-term trends and impacts...." It was the highest elevation to date of the triple bottom line as a matter of shareholder concern.

That's my list. What's your most hopeful green business story of 2010? Feel free to weigh in below.

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