“Do you want biodiversity loss with that?”
It’s common knowledge that beef is bad for the climate. A study by Poore and Nemecek finds that a given quantity of beef produces carbon dioxide equivalents of nearly 60 times its weight, on average. It’s also well known that raising cattle is land intensive. The social costs of this land use beyond climate regulation may be significant — new tools can help socially responsible investors quantify them.
The Ecosystem Services Valuation Database (ESVD), developed by the Foundation for Sustainable Development and Brander Environmental Economics, is a recently released dataset of more than 4,000 records from more than 600 studies that measure the annual value of one or more ecosystem services. Ecosystem services can be broadly classified into 3 categories using the definitions provided by the United Nations led Millennium Ecosystem Assessment: provisioning services (e.g., food, water, raw materials), cultural services (e.g., recreation and tourism, existence and bequest value), and regulating and supporting services (e.g., air quality regulation, carbon storage, waste treatment, maintenance of genetic diversity).
Provisioning services are allocated, though often inequitably, by markets and government regulation. This is true to a similar extent with cultural services like recreation and tourism. But regulating and supporting services, including biodiversity, are largely unmanaged and most susceptible to a tragedy of the commons. By incorporating the value of regulating and supporting ecosystem services into investment decisions, investors can have greater insight into the social value produced by their portfolio.
To illustrate, let’s take a look at McDonald’s. Slightly dated statistics suggest its restaurants account for more than 1 million metric tonnes of beef consumption, roughly 1.5 million metric tonnes of potato consumption, and half a million metric tonnes of chicken consumption each year. Applying the results of Poore and Nemecek’s meta analysis of food’s environmental impacts, we can come up with a range of values for the land use required to support this consumption. Agricultural practices vary widely and have dramatically different impacts on land use — one kilogram of beef requires about 83 square meters at the 10th percentile and 735 square meters at the 90th percentile. The ranges for chicken (7 square meters to 16 square meters) and potatoes (less than 1 to slightly more than 1 square meter) are narrower and on a much smaller scale.
Once we are able to approximate the land use of key commodities, we need to estimate the percentage of ecosystem services lost on the land that has been reserved for their production. For this, we might turn to the Biodiversity Integrated Assessment and Computation Tool (B-INTACT) developed by the Food and Agriculture Organization of the United Nations (FAO). The tool estimates the effect of land use changes, infrastructure, fragmentation, and human encroachment on the average abundance of species relative to what would exist on undisturbed land of different types.
Our understanding of species within even the plant and animal kingdoms remains limited, much less beyond them, but measures of species abundance may serve as an adequate proxy for the loss of ecosystem services broadly. According to the B-INTACT tool, the conversion of land to agricultural uses may reduce species richness by 40 to 95%.
It may be impossible to know the undisturbed state of land that supports the products of any given company, but we can refer to a few land types by default to get a sense of the potential social cost of the ecosystem services foregone. For example, the ESVD suggests an average annual value for temperate forests of $3,422 per hectare (between 2 and 3 acres) for all ecosystem services. Excluding the component values attributed to raw materials (likely embedded in market prices) and climate regulation (captured in separate analyses of the social cost of carbon) leaves us with $2,666 per hectare, which is primarily derived from air quality regulation, existence, and bequest values. A similar approach yields a value of $1,179 per hectare for undisturbed grasslands.
It is important to note that the total figures in the ESVD likely underestimate the total social value of ecosystem services. At this stage of the project, the ESVD serves as much to identify gaps in data and research as it does to function as a decision aid. The values mentioned for temperate forests and grasslands do not yet include estimates for the maintenance of soil fertility or genetic diversity, moderation of extreme events, or waste treatment. In other words, the values we are currently assigning to lost ecosystem services are best understood as lower bounds.
Continuing with McDonald’s, if we assume that all land used for beef, potatoes, and chicken production was once temperate forest, and that 90% of the ecosystem services noted above have been lost, the social cost ranges from more than $20 billion to nearly $200 billion annually — or a multiple of the company’s net income. As you might have guessed, beef accounts for the vast majority of the lost ecosystem value. However, the sale of chicken and fries alone carries a cost of $1 to $2 billion annually.
To the company’s credit, they have been very active in improving the sustainability of their food sources, so we may have some confidence to apply the lower end of these ranges to our company analysis. But even the most progressive purveyor of food can’t avoid the reality that our diets create a tremendous environmental burden that must be accounted for in capital allocation.