Nature in the balance: What companies can do to restore natural capital

Specific corporate actions, many with a positive return on investment, could help reverse the trend of the depletion of natural capital.

Economic activity fundamentally depends on natural capital, the world’s stock of natural assets. But today, natural capital is being rapidly depleted, which has increasingly tangible consequences, from water shortages in California to a nitrogen crisis in the Netherlands.

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This article is the summary of a full report in which we examine the state of natural capital, the economic sectors depending on and affecting it, and the opportunities for companies to help reduce those demands. It marks a first attempt to identify and size the actions corporations could take to act as catalysts to return the planet to a “safe operating space for humanity.”

The issue is a critical one: natural capital is in decline across multiple dimensions. By one estimate, current demands require resources at least 1.8 times greater than what the Earth appears to be able to sustain at this point. 1 Yet fatalism would be misplaced. One of our key findings is that while a range of economic sectors contribute to this depletion of natural capital, specific actions taken by companies using current technologies—and supported by broader enabling actions of the whole of society—could not only reverse the trend but also generate positive return on investment (ROI) in a substantial number of cases.

Human activity seems to have pushed the planet outside a ‘safe operating space’ on four planetary boundaries

To frame our research, we use the latest scientific research on planetary boundaries. Introduced in 2009 and updated in 2015, these boundaries provide a framework for tracking the planet’s ability to support human development. 2 The framework defines a safe operating space for humanity with respect to the systems and processes that govern the stability of the Earth’s atmosphere, oceans, and ecosystems. While climate change and some of its cascading impacts are now more familiar, the planetary-boundaries framework outlines eight additional Earth systems that, if destabilized beyond a defined level, could trigger a tipping point and lead to irreversible environmental changes, according to what we know today.

We find that the impact of human activity is already extending beyond the safe operating space for at least four boundaries: biodiversity loss, chemical and plastic pollution, nutrient pollution, and greenhouse-gas (GHG) emissions (Exhibit 1). For two other boundaries—forest cover loss and freshwater consumption—the current impact of human activity is deemed to be in the “zone of uncertainty.” For full details of definitions and our methodology, see the technical appendix, which is published separately.

Exhibit 1
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Terrestrial biodiversity loss stands out, at an estimated 2.7 times beyond the planetary boundary as currently understood and 1.4 times beyond 1970 levels. This raises an alarm not only because of its direct impact on humanity but also because of the feedback loops between biodiversity and the other planetary boundaries.

Another standout boundary is chemical and plastic pollution. We estimate that the world economy currently emits 2.6 times more plastic into water sources each year than it did in 2010—negatively affecting species, ecosystems, and food webs, and reducing the ability of oceans to sequester carbon.

Agriculture is the largest contributor to exceeding planetary boundaries, as currently understood

As part of our analysis of the planetary boundaries, we estimate the contributions of economic sectors to the current position of each boundary. Based on this analysis, the agriculture sector in particular has the single largest direct impact (Exhibit 2).

Exhibit 2
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The retail sales and services sector—which includes retail, accommodation and food services, IT, finance, insurance, professional and support services, education, health, and entertainment—is also a major contributor to the nature impact across multiple boundaries, notably chemical and plastic pollution.

Food systems have the most significant impact on the environment: they are the largest contributing sector for five of the nine planetary-boundary control variables we assessed. Our midpoint estimates suggest that crop agriculture accounts for 72 percent of freshwater consumption, 61 percent of nitrogen runoff pollution, and 32 percent of terrestrial biodiversity loss. We estimate that livestock agriculture is the largest contributor to biodiversity loss (53 percent), and phosphorus pollution is the second-largest contributor to nitrogen runoff and deposition (51 percent).

The disproportionate estimated impact of agriculture stems from its direct land footprint and the strong influence of downstream sectors such as the food-processing industry. Therefore, many actions that would address the impact of agriculture on natural capital would require sustained behavioral and operational changes from downstream actors, from individual households to buyers of agricultural products, including food processing companies, groceries, and restaurants.

According to our midpoint estimates, retail sales and services account for 77 percent of chemical and plastic pollution (as measured by plastic waste emissions in aquatic environments). Previous McKinsey research has identified that the power sector and industry are the largest contributors to the GHG emissions that drive climate change.

Corporate action could help set natural capital on a path to recovery by 2050

Our research suggests that companies have the potential to shift the world’s trajectory on natural capital and usher in a return to a safe operating space for humanity by 2050. It also suggests that they could do so through a set of targeted actions that use existing technologies and, in many cases, could provide positive returns on investment.

Our research assesses the effect of 47 potential corporate actions across five planetary boundaries: biodiversity loss, forest cover loss, freshwater consumption, chemical and plastic pollution, and nutrient pollution.

Overall, our analysis suggests that corporate action could potentially return the world to safe levels in three of the planetary boundaries: forest cover loss, freshwater consumption, and nutrient pollution. The sized levers could also address 48 percent of the projected overage of the boundary for biodiversity (getting close to a pre-1970 level) and 60 percent of the identified boundary for chemical and plastic pollution. Exhibit 3 highlights the abatement potential identified across all examined boundaries.

Exhibit 3
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While corporate action can make a difference, our analysis suggests it is not sufficient on its own. “Whole of society” levers such as nature conservation or consumer dietary shifts could help close the remaining gaps, as could technologies that are not yet widely available, including those that can break down plastic or extend the shelf life of foods.

The abatement potential we present assumes each opportunity is, where feasible, pursued systematically and completely across the world; that there is collaboration and coordination between upstream and downstream partners (for instance, between farmers and the buyers of agricultural products); and that policy makers and other stakeholders create enabling conditions. We have made other simplifying assumptions that are described in detail in the full report.

Almost half of the estimated abatement potential could provide a positive return on investment

Based on our midpoint estimates, 12 levers could have a net-positive ROI in 2022 dollars. If fully implemented, these levers could deliver about 45 percent of the total identified mitigation potential, amounting to an annual benefit of about $700 billion, net of costs. These levers include switching to regenerative agriculture, reducing food waste, and implementing new delivery models (such as returnable- and reusable-container programs) to reduce plastic production and pollution.

Four levers—precision agriculture for cropland, regenerative agriculture in pastures, construction plastic recycling, and mechanical recycling—could deliver 8 percent of the identified mitigation potential at a net cost of about $15 billion per year.

Twenty levers are estimated to be ROI negative in 2022 dollars. If fully implemented, they could deliver about 55 percent of the identified mitigation potential at an annual cost, net of savings, of about $1.5 trillion. They include agroforestry, biological pest control, drip irrigation, water-efficient manufacturing techniques, and biodegradable plastic for packaging.

These rough ROI estimates are bound to change over time. New technologies can reduce costs, and new policies and investor expectations could encourage a greater accounting of nature impacts. Conversely, costs may be higher, or returns lower, due to localized adoption challenges or slow adoption.

Corporate action on nature would have meaningful overlap with climate action

Actions to address loss of natural capital overlaps with decarbonization activities that companies are already contemplating or pursuing. The costs above exclude the total cost of action on climate, but there are synergies.

For our research, we include carbon abatement levers only if they provide abatement potential across noncarbon planetary boundaries; 13 of 47 levers meet this criterion. Nine of the 13, including regenerative and precision agriculture, drip irrigation, and switching to solar and wind power generation, together could address 64 percent of the projected gap to the freshwater boundary, 44 percent of the gap for nutrient pollution, and 5 percent of the gap for biodiversity loss. Estimates suggest these nine levers could also abate 15 metric gigatons (Gt) of CO2e of emissions per year, or about 40 percent of annual emissions in 2020.

Agriculture and other sectors could meaningfully contribute to abating loss of natural capital

Agriculture is the largest contributor to the depletion of natural capital, followed by retail sales and services (which includes retail, accommodation and food services, IT, finance, insurance, professional and support services, education, health, and entertainment), and the power sector.

Agriculture seems to have the greatest opportunity to address projected overages or gaps in the biodiversity, freshwater, and nutrient planetary boundaries by 2050. Agriculture levers account for 72 percent of the total identified improvement in biodiversity loss, addressing 35 percent of the global overage in 2050, according to the midpoint estimate of our analysis. Agriculture could also bring the world within the planetary boundary for forest cover loss, address 82 percent of the gap to the freshwater consumption boundary, and meet 94 percent of the gap for nutrient pollution in 2050.

Midpoint estimates suggest that eight levers, if fully implemented, could have the largest impact in addressing the agriculture sector’s impacts on nature. Four of these levers require collaboration across the supply chain, but the agricultural sector could implement four directly:

  • Regenerative agriculture, which includes planting cover crops and using no-till farming, could address three out of five planetary boundaries by minimizing soil disturbance, limiting consumptive water losses, and enhancing habitats. At scale, it could mitigate 8 percent of the projected 2050 gap for the biodiversity boundary, 5 percent of the gap for the freshwater consumption boundary, and 16 percent of the gap for the nutrient pollution boundary. We estimate that, if fully implemented, regenerative agriculture could reduce farm operational and input costs and potentially provide $65 billion in value annually.
  • Agroforestry, which includes planting trees in cropland and pastureland and implementing buffer strips of natural vegetation cover, is the largest lever for biodiversity, according to our estimates. We assume it would be implemented in a way that does not affect output. Combined, agroforestry in cropland and pastureland could reduce 11 percent of the projected 2050 gap to the biodiversity boundary across cropland and pastureland for a cost of approximately $180 per hectare. We estimate that full mitigation could cost $300 billion globally each year.
  • Water-efficient agriculture techniques, including alternate-furrow irrigation, optimized-drip irrigation, and water-efficient seeds, could reduce freshwater consumption to address 19 percent of the projected 2050 global overage. We estimate that water-efficient agriculture could provide $40 billion in net value globally each year from reduced water consumption when fully implemented.
  • Manure management techniques, including anaerobic digesters on large farms and manure sequestration on smaller farms, could potentially address 39 percent of the projected nitrogen surface runoff overage and 32 percent of the projected phosphorus pollution overage. Both techniques would involve increased investment in necessary infrastructure and operational costs. We estimate that the net annual global cost will be $45 billion.

Four additional levers could affect the agriculture baseline but would require close partnership between the agriculture sector and downstream sectors. Our estimates suggest that plant-based alternatives for meat and dairy; advanced seed technology, including genetically modified seeds; and the reduction of food loss and food waste through supply optimization could help pull the economy back toward the boundaries. Together, these levers could address 23 percent of the gap for the biodiversity planetary boundary, 100 percent of the gap for the forest cover loss boundary, 45 percent of the gap for freshwater consumption, and 55 percent of the gap for nutrient pollution—simultaneously generating net savings for companies. Advanced seed technology and food-waste reduction would be ROI positive, with an estimated net annual savings opportunity of $320 billion. Corporate-driven adoption of plant-based alternatives (which would require pricing at a loss to achieve parity with animal-based products and to drive adoption) is currently estimated to be ROI negative and could cost $370 billion annually.

Nonagricultural actors can also take actions to address their direct footprints. The following four actions have significant potential for abatement:

  • Switching to solar and wind power could reduce freshwater consumption by 12 percent of the gap to the planetary boundary and reduce nutrient pollution by 4 percent. Our estimate suggests that implementing low-cost power generation switching could provide net value of $95 billion annually through lower operating costs.
  • Addressing plastic waste by reducing the amount of plastic in packaging, implementing new delivery models (for instance, returnable- and reusable-container programs), expanding mechanical and chemical recycling of plastics, and using compostable bioplastics could help the retail sales and services sector address 52 percent of the plastic pollution overage. Plastic reduction and alternative delivery models would be ROI positive and provide an estimated $35 billion annually in value by reducing the amount of plastic needed. The remaining levers would be ROI negative, costing $40 billion annually from increased capital and operational costs.
  • Sustainable-forestry measures—including variable thinning instead of clearcutting, the creation of buffers, subsoiling, and multispecies forestry techniques—could help the forestry sector address 5 percent of the overage on biodiversity. These measures could result in an estimated net cost of $300 billion annually.
  • Mine reclamation, specifically in regions where it is not currently required, is unlikely to be able to address more than 0.1 percent of the projected 2050 overage of biodiversity loss. But it would be important at a local level and for other measures not quantified in this analysis, including water pollution, chemical pollution, and heavy-metal contamination. Expanded mine reclamation efforts could cost up to $60 billion annually.

Four actions could guide corporate efforts on nature

The playbook for corporate engagement on nature is still in early development. Some companies are starting to acknowledge dimensions of nature such as biodiversity loss, but very few have set quantified targets, and those commitments vary.

Given all the demands facing companies in a challenging macroeconomic environment, it can be hard to know where to start. Four steps could help companies find their way.

First, companies can assess their nature footprint—that is, the types, magnitude, and materiality of their impacts and dependencies on nature. Before defining a nature strategy, companies would need transparency to ensure they can mitigate risks, address impacts on natural capital, and identify business opportunities. Companies can select metrics that broadly address impacts across their footprints from numerous indicators that are already available.

Second, companies can identify which of their activities have the potential to both reduce impacts on nature and improve company performance. For each potential company-specific lever, companies can determine the abatement potential, how long it would take to have impact, sources of financing, and possible returns, among other factors. The “mitigation hierarchy”—an international framework from the World Bank’s International Finance Corporation—could provide guidance on the priority order of actions to take. 3

Third, companies could set initial targets for nature and levels of commitment, define a set of actions, and integrate them into a broader portfolio of initiatives. Companies may look to organizations such as the Science Based Targets Network (SBTN) for guidance on how to set time-bound, science-based, and quantitative targets in line with the planetary boundaries. 4 They could create a portfolio of initiatives that includes implementing abatement levers and potentially investing in nature or biodiversity credits.

Fourth, companies can closely monitor progress against their goals and may prepare to disclose their progress. Various organizations are working to develop standardized voluntary reporting metrics, and the Taskforce on Nature-related Financial Disclosures (TNFD) has developed detailed guidance across four pillars of disclosure: governance, strategy, risk management, and metrics and targets. 5

Corporate action on nature would need to be accompanied by enabling actions from other stakeholders

Companies can do a lot to support the return to a safe operating space for humanity, but they cannot do it on their own. Other stakeholders in both the public and social sectors will have a critical role to play in tackling issues such as evolving regulatory and policy guidance, a lack of standardized metrics or definitions of nature, widely distributed and nonstandard nature-related data, a lack of funding and financial incentives, limited options for investing in nature’s recovery, and a shortage of needed “green skills.” Three broad sets of enabling actions could help companies and stakeholders overcome these and other barriers:

Provide a framework for corporate nature efforts. Standard nature reporting requirements could help companies identify which metrics are most critical and make company disclosures consistent and comparable. While companies could set ambitious targets on their own, governments can help encourage broader corporate action by setting clear guidance for nature actions and outcomes to target.

Develop and invest in the infrastructure—data, skills, and opportunities—that would help inform company actions. Data on nature are frequently spread across sources and can be difficult to aggregate and use. Improving data availability and supply chain traceability are key enabling measures, along with more training to develop a workforce with the broad set of “green skills” necessary to interpret and use nature-related data to inform decision making. Corporations would also need more options for investing in natural-capital preservation, which scientifically rigorous and well-regulated credit markets can help provide.

Consider expanding financing and incentives. Financing a nature-positive path would likely require more resources than today’s approaches to nature finance can muster. Given that 55 percent of the identified abatement potential does not generate a near-term return on investment under current assumptions, new financing, incentives, and ways of thinking are needed to address the funding gap. For example, governments could consider reassessing subsidies or use internal accounting to price nature externalities and guide decision making. Financial stakeholders could also implement policies and create new financial products that would help direct funding flows toward nature-oriented outcomes.

In the current economic environment, companies face a multitude of challenges, including talent retention, macroeconomic pressures, geopolitical instability, and supply chain problems. Taking action on nature would not add to existing burdens, but instead could bring tangible benefits for both natural capital and company revenue. Building natural capital will be a journey that leads to a destination of greater prosperity and an economic environment that operates within safe limits.

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