Why restoring natural capital is good for business - The McKinsey Podcast Recap

Podcast: The McKinsey Podcast

Published: 2023-04-21

Duration: 960

Guests: Josh Katz, Caroline De Vit, Jake Bryant

What Happened

Natural capital, as explained by McKinsey partner Josh Katz, refers to the stock of natural resources like air, water, soil, and living organisms. Caroline De Vit, an associate partner at McKinsey, notes that 50% of habitable land is used for agriculture, and degradation of soil could decrease land productivity by 12% and increase food prices by 30% over the next 20 to 30 years.

Caroline De Vit also highlights the broader depletion of natural capital, which includes biodiversity loss, fresh water consumption, and plastic pollution. The continued deterioration could lead to extreme changes, such as unproductive agricultural lands and cities losing access to water, resulting in mass migration and humanitarian disasters.

The episode discusses the risks for businesses that fail to address natural capital issues. Caroline De Vit warns that companies may lose their business license and competitive advantage due to physical and transition risks. European legislation, for example, may require companies to prove their products do not contribute to deforestation, which could be a significant challenge.

The Netherlands serves as a case study where excess nitrogen has led to biodiversity decline, making it harder to obtain licenses for nitrogen-emitting activities. This situation has resulted in societal costs and protests, highlighting the importance of proactive measures to preserve natural capital.

There is growing interest among investors in projects that balance environmental and financial returns. Many Fortune 500 companies have set net-zero targets, recognizing early action as a competitive advantage. Caroline De Vit suggests opportunities in creating biodiversity credits and addressing supply chain risks.

Technological innovation in agriculture, such as precision agriculture, is reducing resource use while increasing yields. Direct-seeded rice, for example, significantly reduces methane emissions. Companies are also tackling ocean waste by changing packaging and improving recycling rates, contributing to a holistic view of environmental impact.

Reducing food loss within the manufacturing and value chain stages is another promising area. Advanced analytics and improved inventory management practices can address natural capital depletion. A test-and-learn approach is emphasized as necessary, acknowledging that perfect solutions are not yet available.

The episode concludes with insights into the K-12 teacher attrition crisis in the United States. McKinsey partner Jake Bryant discusses the challenges teachers face, such as administrative burdens and lack of collaboration, and suggests solutions like increasing pay and re-engineering working conditions to make the profession more sustainable.

Key Insights