Putting a price on our future

Helping big businesses consider their impact on the environment is leading to a re-evaluation of activities to combine profitability with sustainability.

If we really want to effect change, we have to find a way to align sustainability with business models
Jake Reynolds

How can businesses value and manage their dependencies and impacts on the natural world? How can banks be encouraged to make clean energy investments? As sustainability moves up the agenda, the University of Cambridge Programme for Sustainability Leadership (CPSL) is linking Cambridge academics with international businesses to help their leaders make responsible decisions for the long-term.

"Companies are starting to think about the ecological impact of their activities across their supply chain," said Dr Bhaskar Vira, University Senior Lecturer in the University’s Department of Geography. "We’re trying to put a real economic value on natural resources." Production of many mass market consumables, from beer to chocolate, takes advantage of many natural resources that aren’t currently factored into operational costs.

"A global food manufacturer, for example, wants to be aware of all the ingredients that have gone into one of its flagship confectionary products, and the way in which they’ve been grown and sourced," said Vira. "Throughout that supply chain there may be impacts on the environment that aren’t currently factored into the price of the product." Similarly, an agribusiness giant depends on tomatoes supplied by farmers in California - a water-scarce region. Working with CPSL, we’re are asking whether there is something this company can do to encourage farmers to be more water efficient in their working practices."

"If a company was asked to pay for the groundwater used in its factories, how much would it cost? Water use might be 10% of the overall operating budget, and that’s the kind of figure a company might start to take seriously. At the moment they don’t need to pay this cost, but if a government starts to regulate in the future they might need to. Similarly, if the government of California starts to regulate farming practices and the cost of tomatoes suddenly shoots up, certain companies need to factor this into their long-term business planning. It makes good strategic sense to anticipate some of these future changes."

CPSL has drawn together a group of companies in the food, agriculture, and extractive industries, into a project called ’Right Values for Externalities’, whose goal is to reflect the external costs incurred in product lifecycles on their balance sheets. "We created teams of one economist and one ecologist to work on case studies with companies, using company data to understand what its impact might be," said Vira, who provided scientific guidance for this project, co-funded by the Natural Environment Research Council as part of the Valuing Nature Network ( www.valuing-nature.net ). The work has resulted in the creation of practical guidance for companies wishing to undertake an evaluation of external impacts associated with their activities, and to understand how these risks can be anticipated and prioritised in their decision-making.

The project is one of many convened by CPSL, whose Director Polly Courtice said "we’re facing a perfect storm of having to provide food, energy and water for a population that’s growing from seven billion to nine billion, and the pressures this puts on society. CPSL is having a continuous series of conversations with businesses to work out how to respond to these challenges.

"We are driven by how we can help to promote change, and avert environmental and social crises that are much nearer to the present day than we used to think," said Courtice. Vira added, "We want to use our case studies as examples of what other businesses should be thinking about. CPSL plays a key role in this as a trusted intermediary between the University and businesses -that trust is developed through long term relationships."

At a different level of engagement, Professor Danny Ralph, Academic Director of the Centre for Risk Studies at Cambridge Judge Business School, is involved in a CPSL project aimed at finding ways to unlock greater mainstream investment in clean energy. "The Banking Environment Initiative is a means of tackling key sustainability issues," he said. CPSL drew together six banks and six energy companies, and linked them with the Centre for Risk Studies, and with Dr Chi Kong Chyong and Dr David Reiner in the Judge’s Energy Policy Research Group, to investigate valuation models for clean energy investments.

"Banks want to invest in companies they believe will cope in the future. But green technologies are expensive, and energy companies making these investments are unlikely to recoup their costs. Should an institutional investor choose a company that appears to be very forward-looking in its R&D and is moving towards green technologies, but isn’t very ’capital efficient’, over a more focused one?" asked Ralph. "A long-term investor needs to ask which companies are positioning themselves so they can adapt their basic products to a world we can’t even predict."

Using a methodology called real options analysis, the Cambridge team showed the importance of building in a degree of flexibility, to account for decision-making around uncertain future market conditions. "In a standard banking valuation, a company would diversify its risks," explained Ralph. "But climate change, for example, is affecting the whole world. You can’t diversify something we’re all going to face together. What we’ve done is highlight that investors need to stop thinking about diversification in terms of a portfolio where the risks are unrelated. This changes the nature of the uncertainty around investment risk."

"Danny’s work is helping to drive a conversation in the industry about valuation methods, and is having a big impact on the thinking of these banks," said Dr Jake Reynolds, CPSL’s Director of Business Platforms. "If we really want to effect change, we have to find a way to align sustainability with business models, and that means banks discussing this with their clients. This project has provided a brilliant platform for that - these conversations about clean energy were just not happening before."

"We are working with people dealing with real problems that our research community may have a great deal to contribute to," said Courtice. "We try to act as a bridge between the knowledge base in the University and that in the business community, and create opportunities for them to interact. We’re looking for areas of mutual interest and we’re maintaining the engagement long enough for the issues to emerge."

CPSL’s Executive Education programmes raise awareness of issues from climate change to resource scarcity to transport. Around 6,000 business leaders have now completed a programme, and on leaving have become part of CPSL’s global Sustainability Network.

A key focus of CPSL’s work now is to bring this network into closer with the University’s research. A series of business platforms have been set up, bringing together senior practitioners with shared interests in particular business problems from climate change and natural capital depletion, to responsible investment and product innovation. The aim is to help practitioners identify what needs to change, and to take practical action to achieve this with their peers.

"Leaders come on our Executive Education programmes and then ask what they can do to change their organisations," said Reynolds. "They realise that even if they became the world’s most sustainable company that wouldn’t solve the problem because their peers may not be with them, or their suppliers, or their clients, or government policy might be tilting business the other way. So they start thinking about their industry and the wider influence it has over the economy. Many come to the conclusion that they have to work together on these big problems rather than go it alone."

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