Why restoring natural capital is good for business

| Podcast

From regular water shortages in California to a nitrogen crisis in the Netherlands, the deterioration of natural capital has had tangible consequences—and has given rise to a reckoning within business and government. In this episode of The McKinsey Podcast, McKinsey associate partner Caroline De Vit and partner Josh Katz talk with global editorial director Lucia Rahilly about a recently published special report on natural capital: what it is, why it matters, and how Fortune 500 companies are moving now to create opportunities and mitigate rising risks.

After, K–12 teachers in the United States are leaving their jobs in unprecedented numbers. McKinsey partner Jake Bryant shares what teachers need to stay.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

This transcript has been edited for clarity and length.

What is natural capital?

Lucia Rahilly: There’s this thing called natural capital, and it’s the subject of a recently published McKinsey report. McKinsey partner Josh Katz helps us make sense of what it is.

Josh Katz: A scientist would tell you that it’s things like air, water, or soil: living organisms.

Lucia Rahilly: OK, that’s the “natural.” But what about the “capital”? Well, think of it like a balance sheet that reports a company’s assets and liabilities—planet Earth’s balance sheet. One of its liabilities is soil pollution.

What risks are CEOs facing?

Josh Katz: Fifty percent of our habitable land is dedicated to agriculture, and our plants that grow on that land are dependent on the soil. So, if we deplete the health of that soil, it’s like depleting our balance sheet or undermining the strength of our assets.

Caroline De Vit: It can potentially decrease land productivity by 12 percent and increase food prices by 30 percent over the next 20, 30 years.

Lucia Rahilly: That’s McKinsey associate partner Caroline De Vit, showing the societal impact of one kind of diminished natural capital. Beyond soil degradation, depletion of natural capital includes . . .

Josh Katz: We’ve seen species collapse or are at risk of certain species collapse, biodiversity loss, freshwater consumption, our levels of chemical and plastic pollution, nutrient pollution, and others.

Lucia Rahilly: Continued deterioration of natural capital, according to the report, “could trigger extreme changes to the planet, undermining the conditions on which society and the economy have come to rely. For instance, if rainfall patterns and temperatures change so much that existing agricultural lands become unproductive, or cities lose access to water, scientific research suggests the result could be mass migration and humanitarian disaster.”

This is The McKinsey Podcast, where we help you make sense of the world’s toughest business challenges. I’m your host for today, Lucia Rahilly. What’s at stake for the C-suite if they don’t take action now?

Caroline De Vit: First of all, the business license to operate, be it the social license or the regulatory license, is at risk here. The competitive advantage of that company may also be at risk if nothing is done to address nature. And finally, even the business of the company may be at risk of what we call physical or transition risks.

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Lucia Rahilly: Take Europe, for example. Recently, the EU parliament discussed the possibility that companies demonstrate the products they export to the EU are not contributing to deforestation.

Caroline De Vit: Which is extremely complicated to do, because you have to look at the entire value chain. But that could be potentially a risk for business.

Lucia Rahilly: While not a business, the Netherlands exposed itself to risk—and had to take drastic steps to comply with European legislation—on the reduction of nitrogen. The excess nitrogen it created killed marine life and drove biodiversity declines, affecting insects and birds. Consequences are that licenses for nitrogen-emitting activities such as construction are harder to obtain, causing project delays. Speed limits on Dutch roads were reduced to help ease short-term emissions of nitrogen. And some areas in the Netherlands are considering reducing livestock numbers by 30 percent.

These actions have triggered widespread protests. Sharp course corrections can come with large societal costs. Taking action proactively to preserve natural capital can prevent such shocks.

What can be done?

Lucia Rahilly: And some companies are heeding the call.

Caroline De Vit: Working a lot with investors, I’ve seen over the past months and even the past year there is definitely an appetite and a view that by investing in nature, you could achieve both environmental and financial returns.

There is definitely an appetite and a view that by investing in nature, you could achieve both environmental and financial returns.

Caroline De Vit

Josh Katz: The vast majority of Fortune 500 companies have recognized climate change in their disclosures or set near net-zero targets. Being early can present opportunities.

Lucia Rahilly: Opportunity like, if your company is the first to create projects that will generate . . .

Josh Katz: . . . what may become biodiversity credits someday, or if you’re very early in addressing the risks that are in your supply chain because of nature, I think that will prove a competitive advantage in the medium term, maybe even sooner.

Lucia Rahilly: Another competitive advantage is tech innovation. There’s lots of it happening in agriculture.

Josh Katz: We’ve seen even in the past few years the ability to more specifically apply nutrients and more specifically place seeds, and what we call precision, or smart, agriculture. Policy makers have recognized the power of that, too. So, doing that should enable us to have even greater yields, for example, with even fewer resources or different types of resources.

We’ve even seen that methane reduction from using direct-seeded rice versus flood-irrigated rice is significant. We have hundreds of millions of farmers around the world, many of whom don’t have access yet to some of these technologies but will as we get there. I think that’s very exciting.

Lucia Rahilly: Also exciting? Tackling the risk around plastic.

Caroline De Vit: Actually, 85 percent of the ocean waste today is coming from plastic.

Lucia Rahilly: And some companies are seizing the opportunity to mitigate that kind of waste.

Josh Katz: We’ve seen many actions like changing the packaging, reducing the quantity of plastic in the packaging, finding ways to increase recycling rates of the collection and recycling rates of the packaging.

Lucia Rahilly: Other promising actions have to do with shrinking food loss.

Caroline De Vit: Reducing food loss at the manufacturing stage and then food waste at the end of the value chain is a big, big lever here if you want to decrease natural-capital depletion. It could be done with improved inventory management practices and some advanced analytics.

Lucia Rahilly: What about the approach to test and learn? Is that appropriate in this context?

Josh Katz: I think we absolutely will have to test and learn. We are going to have to recognize that we don’t have the perfect solution, but that doesn’t mean we can sit and wait for the perfect solution.

Lucia Rahilly: Thanks so much for joining today.

Josh Katz: It was a pleasure. Thank you.

Caroline De Vit: Merci.

Inspiring K–12 teachers to not quit

Lucia Rahilly: We can’t sit and wait for the perfect solution to a human capital problem either. In the United States, there’s a record number of K–12 teachers who are leaving their jobs. What could make them stay? McKinsey partner Jake Bryant has answers.

Jake, what does K–12 education mean to you personally? Have you had exposure to the classroom beyond being in the classroom yourself growing up?

Jake Bryant: I have. I was a middle-school teacher early in my career, and I had the opportunity to teach in a low-income school that, against the odds, was one of the highest performing in California at that time. I was a solid novice teacher, but it was amazing to be around peers there who loved their students but also loved the craft of teaching and were relentless about getting better and helping each other get better. I benefited a lot from their coaching.

Lucia Rahilly: Talk to us about turnover among K–12 teachers in the United States. What does the research tell us about what attrition looks like?

Jake Bryant: Turnover has reached all-time highs. We’ve gotten some new data back as to what exactly happened last summer, and it’s not good. So, you had a cadre of a hundred teachers and now you only have something like 85 coming into the school year.

Lucia Rahilly: What’s driving teachers out the door?

Jake Bryant: When you’re with your class and it’s going well and things are coming together, it’s absolutely one of the most thrilling and joyful and life-giving experiences possible.

But then there’s so much more, and most of it’s quite challenging. You have undue administrative burden. Maybe your school has enough teachers for now, but you don’t have enough cafeteria workers or aides, and you have to take time away from your preparation to go meet the bus or oversee recess. Or maybe your school doesn’t actually have quite enough teachers, and the time you were intending to prepare your lesson instead must be put toward covering a class where your colleague is absent or that position hasn’t been filled. So I think it’s a little disorienting.

Also, the experience of teaching is often quite isolating. In a school, there’s maybe 25, 50, a hundred other teachers there depending on how big it is, but you don’t actually interact with each other as professionals too often. So, you’re not getting feedback and ideas. You’re not getting to workshop your lessons with a colleague, as you might in other “white collar” professions. My last thought, though, is there’s that phrase: the future’s already here. It’s just not evenly distributed.

Lucia Rahilly: The talent gap in general in the United States has been a headline topic for some time now. How does the talent market look for teachers in particular? There must be lots of openings. Is that changing dynamics for teachers who do decide to look for new opportunities?

Jake Bryant: I think it is. I think if you’re a high-quality teacher, trained and experienced, it’s a bit of a seller’s market for your labor, and that’s great. We want teachers to feel valued, recruited, like star athletes or investment bankers or whoever. The tricky thing, though, is that the districts don’t have much flexibility, typically, to do things differently.

It’s hard to hire as far ahead in the school in the calendar year as you would like to be. In some districts, there now are hiring bonuses, but that’s the minority of places. So I do think there’s a lot more competition to hire teachers, but on average, there’s not a lot of flexibility to do things differently than you’ve done before.

Lucia Rahilly: And how big a role do factors like geography, school type, and tenure play in how teachers interpret their professional experience?

Jake Bryant: I think they play a pretty significant factor. Just in the data, the differences between higher-income and lower-income schools in terms of turnover are pretty stark. A second phenomenon that we observe is teachers leaving lower-income schools and migrating to higher-income ones over the course of their careers.

Certainly, there are needs in higher-income schools. There’s impact to be had. We don’t begrudge that. But structurally, it’s unfortunate and it’s also preventable. A lot of teachers get into teaching because they want to have that social impact to serve the students who need them most. Then, because those schools aren’t well resourced or other factors around it, as they come up in their mid-20s, three or four years into their profession, they look around and say, “I like this job, but it could be a lot easier in the suburb down the road.”

Lucia Rahilly: What can be done to motivate teachers to stay in their jobs and to be happier and more engaged? And to improve the quality of their professional life and their longevity in the profession?

Jake Bryant: The first answer is obvious, which is that we just need to pay teachers more. They shouldn’t be below par on white-collar professions. They should be above, maybe well above. There are countries where someone will think seriously, I’m good at math. Should I be an engineer or a teacher? And there’s not a compensation differential, or even compensation as a teacher might be slightly preferable. We’re nowhere close to that. I think there’s a lot of opportunity to encourage teachers both to join the profession and to stay even beyond compensation. And obviously compensation is one of the harder levers to pull.

There are a couple of ideas beyond compensation. One is just in the recruitment itself. There’s a lot of opportunity for school recruiters to build a little bit of that foot-forward buzz, brand, and proactivity. That’s rarely the case today on how we get folks to stay.

We just need to pay teachers more. They shouldn’t be below par on white-collar professions. They should be above, maybe well above.

Jake Bryant

There’s quite a bit of opportunity there, too. The big-picture hope would be that we can design the role itself to be more sustainable, more life giving to move some of the administrative burdens off of teachers, just to reengineer some of those working conditions so that they’re more collaborative with colleagues, that they’re getting more feedback and growth, and the drudgery of it goes away.

The reality is teaching is likely to remain difficult. It’s not going to be an easy day any day. Anybody with kids—one kid, let alone 25 in front of them—will attest to that. There are some inherent challenges to it. So maybe we give teachers sabbaticals; we give them opportunities to shift toward more of a curriculum-oriented role or more of a coaching role.

All this to make it more flexible and dynamic and to move through a series of experiences that help teachers sharpen their craft but also get more variety from one year to the next, or even from one semester to the next.

Lucia Rahilly: Anything you can think of, Jake, that you wanted to get out there that you didn’t have the opportunity to?

Jake Bryant: There’s a ton of reason for optimism. There are schools where those administrative burdens are taken off of teachers’ shoulders and there’s dedicated staff to tackle them. There are schools where that culture of collaboration, colleagueship, mutual improvement, and professionalism are deeply embedded and very profound and make everybody better at their jobs and make those jobs more exciting.

So, it’s not the case that this is just a national phenomenon of drudgery and challenge. We have many bright spots and it’s fully feasible in my mind that those bright spots spread.

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