It’s Time for Business to Aim Higher. Here’s One Way to Do It — Natural Climate Solutions
Today, society grapples with numerous and difficult crises — racial discrimination, socioeconomic inequities, COVID, climate change, and many others. People yearn for — and are now demanding — more conscientious, responsible, inclusive and long-term oriented leadership. People don’t just look to the government for such leadership. They also expect that the business community will step up, do much more, and make a real difference addressing these crises. And they want this to happen now.
All CEOs and management teams should be looking for opportunities to demonstrate how they will make important contributions to society that go far beyond business as usual. Yes, well-run companies should and will get their houses in order so that they comply with ESG checklists. But the best companies will go much further.
How best to do this? There are many areas where companies can focus their ambition to do good. To show how this can be done, let’s look at climate change, and specifically on how the private sector can drive natural climate solutions (NCS) and do so in a way that makes business sense.
(By the way, please don’t think that with the other urgent crises we now face, we can somehow wait to address climate change later. Climate change will be the greatest disruptor that people currently under the age of 40 will ever face. Cities will be underwater, temperatures will climb so high that major cities will be uninhabitable, and we’ll suffer multiple climate refugee crises with tragic humanitarian outcomes. If you thought that lack of PPE and ventilators was the greatest failure of leaders to prepare for a well-understood and long-predicted threat, just you wait.)
Until recently, most work and advocacy around NCS had been done by non-profit conservation organizations. But now, NCS is being touted by the private sector as a key part of the world’s climate change solution set. This is good news. But for the solution to scale, we need the private sector to lead.
Some Background — NCS Is an Essential Climate Strategy
Even under the most aggressive carbon emissions reduction scenarios, the world will need to rely on some form of carbon removal to meet its 2.0C or more ambitious climate targets. According to a Goldman Sachs report, 25% of total human-caused CO2 emissions cannot currently be abated by large-scale commercial technologies. If we’re going to achieve net zero, as the experts say we must, it’s imperative to invest in carbon offsets, and better yet, removal.
Corporations are (rightly) first focused on reducing their emissions. That’s absolutely where they need to start, and it should be their highest climate-related priority. Thanks to pressure by activists, customers, shareholders and employees, companies are now taking action. They’re not waiting for government regulations mandating them to do so. They’re doing what they can to reduce their carbon emissions by using less energy and switching to renewables. And when they can’t reduce further, they are now also committing to purchase large volumes of offsets to reach carbon neutrality. Some companies go even further and aim to reach net negative.
This is where NCS enters the picture. By restoring or protecting forests, peatlands, soil, mangroves, or other ecosystems, carbon can be removed from the atmosphere and stored. At the same time, other positive outcomes can also be achieved including protecting habitat for biodiversity, establishing outdoor areas for recreation, preserving watersheds, strengthening various important community benefits, and so on. Projects to create NCS can be funded through the marketing, trading and sale of carbon credits.
A good example of a project like this is one recently announced by my former organization, the Nature Conservancy (“TNC”). TNC acquired some 250,000 acres in Kentucky, Tennessee and Virginia — making it one of the largest land conservation and ecological restoration projects ever accomplished in the eastern US. The landscape is beautiful. It’s also a biodiversity hotspot, a major migratory corridor, a favored area for hunting and hiking, and a vital network of important watersheds. Many jobs will be created to make this all possible. The forest will be managed with the goal of increasing the storage of atmospheric carbon. This allows TNC to raise capital for the land purchase by selling carbon offsets. Everybody involved gets a win-win-win-win outcome: nature preserves, outdoor recreation, biodiversity habitat, watershed protection, jobs, and carbon removal.
Good News — Demand for NCS Is Likely to Soar
Nature — forests, soils, wetlands and other ecosystems — is currently the only readily scalable, cost-effective carbon removal solution. More and more companies are planning to purchase nature-based offsets and invest in nature-based removal. Amazon, Shell, Microsoft, Salesforce, many oil and gas companies, airlines, and others have all explicitly committed to nature-based removal as part of their climate efforts. And as part of the We Mean Business coalition, more than 1,000 businesses have signed on to an agenda for a pro-climate COVID-19 economic recovery that includes “invest in nature-based climate solutions” as one of its pillars.
If we just add up the offsets that will be needed to meet recently announced commitments, we see that demand for NCS will grow significantly over the period immediately ahead. If we assume that many other companies will choose to follow these leaders, that will mean even more demand. And if these voluntary commitments to offset emissions are eventually bolstered by compulsory regulatory climate policy that accepts offsets, the numbers will rise much more. We expect demand for nature-based offsets to soar between now and 2030.
But Who Will Produce the Needed Supply?
It’s easy to see demand for natural climate solutions rising sharply. But it’s not as clear where we will get the needed supply. Organizing the ambitious projects that will produce offsets at large scale is a huge and complex undertaking. Often locations for such projects are remote (think rainforests) and upfront capital needs can be significant. If the project requires restoration of an ecosystem (say a forest or mangrove), significant time is required for natural growth and associated carbon capture to occur, which means likely delays in monetizing the carbon credit and generating cash. Offsets also need to be credible of course so that means verification by third parties is necessary. Monitoring costs to do such verification start high, and somehow — probably through the innovative use of technology — need to be brought down for the offset to be affordable.
Some NGOs have been doing excellent work in this area and have laid the groundwork nicely. But to grow supply sufficiently so that NCS can be a significant climate strategy, we need the private sector to get in the game and do what it does best. If I learned one thing over the 24 years I spent as a Wall Street banker, it’s this: well-led private companies with strong business plans know how to move quickly, deploy needed project management experts, mobilize necessary capital, and harness the right technology. These are exactly the things we need for NCS to scale.
What Should the Private Sector Do in the NCS Market?
After reducing their own emissions to the maximum extent, companies can purchase high quality NCS offsets to lower their emissions further. Each day, it seems another important company announces ambitious plans along these lines. This is a trend that all of us who care about climate progress should support. The key success factors are to be fully transparent, and to purchase only the highest quality offsets. Companies should also be humble and open to input and criticism. There are a lot of things to get right here. Actively-engaged buyers of NCS have a big role to play in shaping and improving this climate strategy over time. Already, we see big buyers pushing suppliers for more participation by smaller land and forest owners, and for greater focus on biodiversity and community outcomes.
Second (and this is the main point I want to make in this essay), companies should consider whether they are well-suited to get directly into the business of generating NCS offsets. As noted, it’s likely that demand for NCS will soon exceed supply. We can anticipate that the price of offsets will rise sharply as a result. Accordingly, originating NCS will not only be a critical need for climate progress, it’s also likely to be an opportunity to earn good business returns. It’s a way for companies to show the special leadership that stakeholders now want to see. At a time when business faces a lot of criticism, here’s an opportunity to demonstrate how it can be a powerful force for good.
Who are the companies that can do this well? Players from diverse sectors should be able to succeed and make critical contributions. Companies with sophisticated project management expertise, networks across diverse geographies, risk management skills, financial engineering prowess, government affairs strengths, and access to capital and technology should all be ones that have an edge.
For example, we now see global oil & gas companies like Shell and BP entering the field. Of course, these companies have not always been viewed as heroes in the climate space. Now, though, they are declaring plans to transition from fossil-fuels to clean energy. They bring decades of experience running complex, capital-intensive, and long-lived projects all around the world. They will also need NCS offsets to fulfill their own climate commitments so, from a risk-management perspective, it’s logical that they’d want to provide at least some of their needed supply. They’re also in a good position to facilitate offset purchases by their customers. Such activities could be a big part of their plan to reinvent themselves over the next few decades as energy solutions companies (as opposed to fossil fuel bad guys). It makes sense for them to get in the game now, and it seems likely that they can make a positive difference as they draw on these critical capabilities they have.
For another example, consider major international financial institutions. Their employees and customers are asking them to do more on the climate front. They bring global reach. And their project finance expertise could be essential. It’s easy to imagine that some of the most ambitious forest restoration projects in the future will be ones that need to draw on multiple sources of capital — say, international aid funding as the most junior slice in the capital deck, so-called “impact capital” as the intermediate tranche, and market-rate capital at the senior level. Large scale “blended capital” projects like this have been frequently discussed, but nobody has done a great one yet. Hence, this is an opportunity for a financial institution to show off its capabilities. As for clients — both wholesale and retail — they’ll likely be seeking climate risk management and carbon offset guidance in the years ahead, so offerings in this area could provide a competitive advantage. Seems like a no-brainer new business opportunity for firms like Morgan Stanley or JPMorgan.
Or, take a tech giant. Again, any of the big leaders would bring global reach, innovation skills, and overall clout. Plus, their stakeholders are demanding that they do more to address climate. Microsoft, for example, which has boldly committed to going carbon negative, is taking this challenge head on. It has committed to a $1 billion climate investment fund, much of it aimed at developing carbon-removal technology. Microsoft is therefore well-positioned to be a leader in thinking through how investments in “natural capital” or “green infrastructure’ (i.e., forests, grasslands, soil, mangroves, etc) compare to man-made machines that draw carbon from the air and store it in the ground. This is just what we need: hard-headed, fully-costed no nonsense analyses of what nature can and can’t do.
I don’t want to be glib here. Thinking through whether a company should take on a new initiative like NCS is a major undertaking and requires careful analysis and thorough planning. My point is that there is significant opportunity here for companies in various sectors to demonstrate bold leadership and to show how they can help achieve important societal progress, while simultaneously strengthening long-term business value.
But This Won’t Be Business As Usual
I really want to emphasize this next point: success in NCS will require much more than traditional business capabilities. Companies should not try to do all of this on their own. For NCS to be credible and to scale, the private sector should engage strategically with civil society and seek support through partnership with environmental NGOs. This can
be done through bilateral projects with nonprofits, through coalitions with many companies and environmental organizations, and by overall participation in the broad environmental community.
The private sector is not starting from scratch. Some early mover companies are off to a good start in the NCS marketplace. Some are spurring technological innovation to reduce the prohibitive costs of verification, validation and monitoring while also enhancing transparency and accountability. Others are investing in AI, blockchain, and satellite technology to disrupt traditional carbon accounting. Others are trying to lower the labor costs associated with afforestation (ie. planting trees) by using drones and other technology to restore larger swaths of land more quickly. And most of them are working productively with well-regarded and accredited third party verifiers such as Verra and the Climate Action Reserve. Again, this is all welcome, good news.
But — and this is where private sector leaders need to be more attentive — there’s more to all of this than traditional business thinking might suggest. I recommend that companies and leaders try to be humble, listen, and learn to engage better with diverse non-business constituents, including community groups, landowners, indigenous peoples, environmental watchdogs, verifiers, and multilateral organizations. This will take skills and capabilities that are often less developed or under-resourced.
I regularly see well-intentioned CEOs underestimate how important it is to get non-business outcomes right, such as biodiversity, impacts on community, and transparency. When criticism arises from environmentalists, they naturally want to fight back and defend themselves. But the better way to play this is to welcome such feedback as input that will help this strategy grow, gain acceptance, and succeed more fully and quickly than otherwise. (See “Here’s What CEOs Should Do Right Now to Up Their Company’s Environmental Game.”)
Late in my career at Goldman Sachs (back in 2005–08), I ran the firm’s first environmental unit. One of my duties was to engage with activists such as the Rainforest Action Network, who were very critical of us. I figured out right away, even if we didn’t always agree with the activist critics and campaigners (and of course we didn’t), that it was definitely in our best interest to pay close attention and to maintain an open dialogue with them. They were smart, they cared, and they knew things we didn’t know.
Looking forward, a big opportunity for NCS will be trying to align the burgeoning voluntary market for offsets with expected future compulsory regulatory regimes. With the exception of California, none of the major carbon cap-and-trade or carbon tax programs allow for nature-based offsets. The best way to change this will be through broad and diverse coalitions of businesses, NGOs, and concerned and informed environmental citizens.
CEOs not only under-appreciate how much value can arise from strong collaboration with civil society, they are also unsure how best to pursue such opportunities. Companies participating in the NCS market are going to need to develop the people and skills to build effective partnerships with NGOs.
The same is true on the NGO side. Those non-profit organizations ambitious about NCS should seek to improve at collaborating with the private sector.
I saw this all the time while I was CEO of the TNC (2008–19). Even with good intentions, the two sides — company and NGO — would sometimes start off with misaligned timetables, different prioritizations of business and environmental goals, very different working styles, and incompatible budgets. But we learned that these challenges could be overcome. The best way for both sides to do this is to first just get started, closely monitor early stage activity, and to be ready to step back, reassess teams, budgets and timelines. Some patience and effort here can really pay off with powerful outcomes that neither side can deliver on their own.
What Your Stakeholders Want to See
More and more people — employees, customers, shareholders — envision a new way of doing business. Stakeholders are setting the bar for business very high. Younger people and activists were once the loudest in making this demand. But today, the view is much more widespread. Institutional investors around the world are embracing ESG criteria and committing more of their capital to funds that invest exclusively on this basis. Even CEOs themselves acknowledge as much. Take, for instance, the Business Roundtable commitment made in April 2019: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
A company that pursues ambitious societal goals (and NCS is in that category) has much to gain. But it needs to do so while earning the trust of and sharing value with all stakeholders.
Acting in the best interest of all stakeholders hasn’t always been the DNA of Silicon Valley or Wall Street. Business traditionally prioritizes shareholder returns and profit over longer term value creation for all stakeholders. But to succeed in the environmental arena, companies need to develop these new competencies.
For example, as companies participate in the NCS market (both as buyers or sellers), stakeholders will want to see them engage with indigenous communities, farmers, small landowners, governments, and the environmental community in ways that foster trust and engender confidence. The companies will need to show they understand that the value of nature is not just carbon alone — watersheds, biodiversity habitat, community benefits, etc all need to be part of the game plan.
This Is Urgent — Please Get to Work
Natural climate solutions provide the private sector with the opportunity to accelerate the growth of an industry critical to the well-being of people and the planet. The stakes could not be higher. Further, it’s likely to be an attractive business opportunity — the proverbial win-win. For full success to be achieved, private sector speed, capital, and technology will be essential. It will also be essential to integrate best practices and know-how by partnering with able NGOs.
Humility combined with the innovation, capital, speed and scale characteristic of the private sector can supercharge efforts to harness the power of nature for climate — and tap into an under-appreciated business opportunity in the process.
The above blog is the ninth in a series on investing in nature. It was originally published on LinkedIn. Read the first eight blogs in this series: Nature Needs Investment Bankers (March 3, 2020); Raising the Capital to Protect and Restore a Forest (March 10, 2020); Environmentalists, Prepare Now for Opportunities in Fiscal Stimulus Programs (April 10, 2020); How to Support the Environment When You’re Stuck Inside During the Pandemic (April 16, 2020); Now Is the Right Moment for Building Inclusive, Diverse, and Non-Partisan Support for Nature (April 23, 2020); Here’s What CEOs Should Do Right Now to Up Their Company’s Environmental Game (April 29, 2020); How to Build a Profitable, Equitable, and Sustainable World (May 10, 2020); Hey Environmentalists—When Fundraising, Try Thinking Like Capitalists (May 21, 2020).
Mark Tercek advises companies, investors and NGOs on bold environmental strategies that make business sense. He draws on his experience as CEO of the Nature Conservancy — the world’s largest environmental nonprofit organization — and as a Partner and Managing Director of Goldman Sachs. He is the co-author of “Nature’s Fortune — How Business and Nature Thrive by Investing in Nature.” See marktercek.org for more information.