McKinsey Report: Saving Threatened “Natural Capital” Could Translate to Opportunity For Businesses

Researchers warn that progression of climate change could result in a “tipping point” where small deviations that occur escalate to a degree resulting in irreversible changes, triggering a series of effects. 

A new McKinsey report studies tipping points through a different lens—that of natural capital – the world’s inventory of natural assets like land, oceans, freshwater and ecosystems. The authors caution that ongoing taxation of natural capital could lead to nature-related tipping points and consequences. They explain it like this:

Population growth and increases in per-capita consumption are depleting the world’s natural capital more quickly than it is replenished. Continuing to operate our economies outside a safe operating space means that our planet cannot regenerate at the same pace as we are consuming its natural capital—with nonlinear, unpredictable, and unsustainable consequences.

“More localized impacts are already apparent,” says one of the authors, Duko Hopman. He points to consequences from reduced water availability in California to the “nitrogen crisis” in the Netherlands highlighting potential for nutrient pollution to harm marine life and other life forms.

But before we go deeper into the problems, know a positive message comes with the forewarnings: Companies can seize business opportunities to minimize risks created by the depletion of natural capital, to the tune of nearly $700B of opportunity a year, through reduced operating costs.

“We have identified many levers or corporate actions that are return on investment (ROI)-positive according to our estimates.

“These include crop fertilizer reduction, water system leak management, food waste reduction, and alternative delivery models for packaging, among many others,” Hopman says.

He and his co-authors explored several nature-related tipping points, or planetary boundaries, and found those most impacted are 1) biodiversity loss, 2) chemical and plastic pollution, 3) nutrient pollution, and 4) greenhouse-gas emissions.

Their analysis suggests corporate action could potentially return the world to “safe levels” in three planetary boundaries: 1) forest cover loss, 2) freshwater consumption, and 3) nutrient pollution.

Companies can do a lot on their own.  They can measure their impact and dependence on nature. They can identify actions to take specific to their supply chains. And they can invest in and measure the progress of such actions over time.

The report provides more detail, citing four actions companies can take:

Corporations generate savings when the lever or action results in lower operating costs, usually from reduced need for inputs (energy, water, fertilizer, raw materials, etc.).

The agriculture sector reportedly has the greatest impact on planetary boundaries. Crop agriculture accounts for more than two-thirds of freshwater consumption, about 60 percent of nitrogen runoff pollution, and 32 percent of terrestrial biodiversity loss, according to the analysis. Similarly, livestock agriculture is the largest contributor to biodiversity loss and phosphorus pollution.

Some potential solutions include using sustainable agricultural equipment, which reportedly could present up to $50B in market opportunity by 2030. Regenerative agriculture (practices like no till and using crop cover) could reduce farm operational and input costs and provide about $65B in value annually when fully implemented while improving biodiversity. And water-efficient agriculture techniques could yield an estimated $40B in net value globally each year from reduced water consumption.

The food processing industry takes its planetary toll, directly related to food loss, which occurs largely in the manufacturing sector (between harvest and retail) and related to food waste (occurring in the retail sector and at the consumer level).

Suggested measures to mitigate food loss and waste could help address biodiversity loss, forest loss, freshwater consumption, and nutrient pollution by reducing how much land is needed for agriculture.

In a September 2022 report, McKinsey laid out guidelines for developing an action plan by which food manufacturers and retailers could reduce food waste by 50 to 70 percent, which at high level entails establishing a baseline and setting targets; systematically developing and implementing initiatives; and establishing enablers for lasting change.

With regard to chemical and plastic pollution the newest report focuses on plastic-waste emissions to aquatic environments. Retail and service sectors were found to be responsible for about 77 percent of these emissions.

Corporations could potentially mitigate 60 percent of the projected 2050 overage of the identified boundary of eight metric megatons of plastic-waste emissions to aquatic environments per year, Hopman says.

The authors do say that potential actions, specifically to replace plastic with alternative materials, can be challenging to sort through. Plastics have lower total greenhouse gas emissions than available alternatives in several applications, among benefits. And some alternatives have associated environmental impacts – paper drives demand for wood products, affecting biodiversity.

Rather than suggest levers to replace plastics with alternative materials, the authors focus on other options: alternative delivery models, expanding recycling, improving recycling, and reducing plastic in packaging.

Here are estimated outcomes of the above four measures:

Hopman adds this caveat: “To be clear: ‘ROI positive does not necessarily mean easy.’ “Of the many actions that require initial capital investments and investments in capabilities, it will take time for them to come to fruition.”

He points to another consideration: levers that currently pencil as ROI negative in aggregate could be made ROI-positive through changes in regulatory policy, subsidy reform, or other measures and may, in many cases, be ROI positive for some companies.

“This highlights the importance of individual companies ‘doing the math’ to determine whether a given lever may be ROI positive or negative in their particular situation.”

Going for positive environmental benefits also requires a lot of work. It means looking into the whole value chain.

“This may include switching to suppliers with lower impacts on nature. Companies may also want to act in tandem with their sector peers, suppliers, and customers to eliminate leakage and ensure holistic impact,” Hopman says.

The research findings within this report build on years of work by scientists, policymakers, as well as organizations such as the Stockholm Resilience Centre, and is based on Science Based Targets Network (SBTN), and the Taskforce on Nature-related Financial Disclosures (TNFD).