Long Term Impacts of Sustainability on Business Risk and Opportunities

This is the concept of "natural capital", and can be described as the economic function of ecosystem services such as water purification and pollination, for example. This is also why biodiversity is vital to the long term success of many businesses. Biodiversity refers to the variety of life at the genetic species and ecosystem level, and the way businesses interact with biodiversity is what provides essential resources that society has been built upon.

For example, since the agricultural revolution, plant and animal breeders have taken advantage of underlying genetic diversity to selectively breed species for desirable traits such as improved yield and quality, enhanced pest resistance of certain plants, and longer growing seasons.

Businesses may not realize their dependence and impacts on biodiversity. It is estimated that over 60% of natural capital impacts are embedded in supply chain, strengthening the argument that businesses need to prioritize sustainability. Even businesses with no direct relationship to natural capital must consider their indirect biodiversity dependence and impacts along their value chain, as all business operations still rely on electricity, which is most commonly extracted from fossil fuels. Naturally, these considerations come with trade-offs, the most prominent being the balance between the four components of revenue, cost, compliance, and capital.

For example, large revenues may be generated in the short-term through resource extraction or even exploitation. However, unsustainable resource extraction is likely to generate higher costs in the long term and may be detrimental to the longevity of that resource stream. That not only limits potential for growth in that area, but has negative ripple effects on the entire ecosystem as well.

On the other hand, operational costs may be a growing concern for most businesses, considering the increasing energy costs. However, these could be reduced by investing in measures or technology that tap unto sustainable sources of energy such as wind and solar. These come at a higher capital investment upfront, but are more sustainable options in terms of cost management and environmental impacts in the long run.

The urgency for companies to take action on their sustainability goals comes from the tangible and intangible costs that result from continued degradation of the natural capital embedded in their supply chain. These costs might include costs incurred from supply chain disruptions due to limited raw material supply, potential legal liabilities and pollution clean-up, and even the cost of lost revenue from the loss of "social licenses" due to irresponsible practices.

Biodiversity risks, like climate risks, must eventually be integrated into strategic business planning. With increasing mandatory climate reporting requirements for certain companies to do business, companies are encouraged to undertake deeper reflection into how climate positive policies could benefit them. Additional compliance requirements may present an opportunity for businesses to adapt early by building up internal knowledge and familiarity with biodiversity-informed cost and benefit analyses. Organizations can take their first steps into sustainability reporting by understanding Scope 1, 2, and 3 emissions according to the GHG Protocol, and how Scope 3 emissions are relevant in your supply chain.

The concept of natural capital allows us to frame our dependence and impact on nature in economic terms – and the connection between biodiversity and financial flows has never been more salient. Economic development can no longer be segregated from ecosystem services, and growing recognition will spur legislative and capital shifts. As your business learns to navigate the integration of biodiversity considerations into their evaluation of business risks and opportunities, we hope the resources available at SPARKD Partners are useful to you.

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This article was produced by the team at SPARKD Partners as part of its August Articles - a series of Supply Chain articles published every Tuesday and Thursday for the month of August. Click the button below to read more of our articles.