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 / Winter 2009 / Issue 57(originally published by Booz & Company)


The Thought Leader Interview: Gretchen Daily

The programs are quite innovative. For example, the Chinese government is implementing a national network of ecological-function conservation areas, which are protected areas like nature reserves, but designed around the natural capital assets supplying the most valuable services to people. The government’s highest priorities are the use of forests to regulate water flow for hydropower, irrigation, and flood prevention. When forests are cleared, the water from monsoon rains flashes off the land and is wasted, and can be quite destructive.

Another goal of eco-compensation is poverty alleviation. In rural areas, where a huge fraction of the population lives below the poverty line, the government is designing payments to reduce people’s vulnerability to fluctuations in rainfall and crop yield. And since the gender imbalance from China’s “one child” family planning policy has sensitized the government to the general problem of unintended consequences, it’s also conducting surveys to find out whether these payments have had the intended effects on households’ financial and educational well-being, and on health and nutrition.

Maximizing Investment

S+B: The Chinese and Costa Rican efforts were large-scale, government-driven initiatives. What do they mean for the private sector?
DAILY: First, the writing seems to be on the wall that businesses will have to respond to these new government priorities. No policymaker wants to block development. Mining, agriculture and forestry, and infrastructure development will all continue. But there’s a new business model emerging, one that aims to harmonize nature and people, so that what we call development will increasingly be designed to optimize long-term investments in both ecosystem capital and built capital.

For example, in China, the ecological-function conservation areas indicate where industrial infrastructure and activity is permitted, versus where natural capital is protected. In Colombia, the national government is implementing a similar system, revising resource licensing and mitigation requirements in mining, agriculture, oil and gas, transportation, forestry, and hydropower. In the U.S., in Oregon’s Willamette Valley — the main river basin in the state, which supplies water from Portland to Eugene — a major public–private partnership is looking at the future of land use in the basin.

In all three places, they’re mapping out scenarios that show the potential impact of decisions they want to make now.

S+B: How does that work?
The examples I know best come from the Natural Capital Project, where we developed a software system called InVEST (integrated valuation of ecosystem services and trade-offs) to help with this process. Decision makers use the software to identify the most valuable ecological assets in a region, like forest lands for flood control or timber supply, and it will analyze how they might grow or shrink in value under different development approaches. For example, if the Willamette Valley opts for more urbanization and industrial growth, including more roads or rail lines, someone can model the impact on carbon storage for climate stabilization, water quality for drinking and irrigation supply, biodiversity, scenic beauty (which is considered to be a big asset in Oregon), and property market value.

A corporation’s decision makers might use the software to assess the risks and other implications of alternative sites for a major project. They can decide whether to convert land for industrial development or to invest in restoring it. What’s the land really worth? What are the hidden values that can be tapped — or the liabilities if the land is not managed well?

These kinds of effects were written off as externalities in the past; now they’re being factored into regulatory policies, such as those addressing climate change and flood control. But the tools didn’t exist before to map out which parts of the landscape are worth developing and which are worth preserving. In a way, it’s like the days when oil was first discovered. Land that had always seemed relatively worthless suddenly had a visible value.

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