A return on investment framework can help businesses identify the costs and benefits of participating in voluntary programs under the US Endangered Species Act that aim to encourage conservation by the private sector—beyond what is required for compliance.
Preserving endangered species has implications well beyond the individual species’ viability into the future. The protection of species—from charismatic megafauna such as polar bears and sea turtles, to small invertebrates like crustaceans and corals, to plants including the American chestnut—matters not just as an end in itself, but also to broader ecosystem health and human well-being.
The US Endangered Species Act (ESA) protects imperiled species by prohibiting harm to listed species and their habitat. Over the last 20 years, the US Fish and Wildlife Service (FWS) and National Marine Fisheries Service have developed programs to increase management flexibility under the ESA and to encourage voluntary conservation actions by the private sector—above and beyond what is required for ESA compliance. Because two-thirds of all listed species are present on private lands in the United States, and one-third is present only on private lands, conservation investments by the private sector are critical to the long-term success of the ESA.
Conservation investments by the private sector are critical to the long-term success of the ESA.
Why would private landowners and firms voluntarily engage in proactive conservation efforts? Businesses face a choice: to invest their time, money, and personnel in conservation associated with voluntary ESA programs, or not. How should that choice be analyzed? In recent research, we outline the available programs and how a return on investment (ROI) framework can be used by private sector conservation managers to inform decisionmaking about participation. ROI analysis is used to depict the scale and timing of an investment’s costs and benefits. Because ESA conservation program investments typically involve future costs and benefits, we employ a net present value framework, a conventional and widely used approach for assessing the profitability of an investment or project that accounts for the time value of money and discounts future costs and benefits relative to those in the present.
A Spectrum of Programs
A range of distinct voluntary programs exists under the ESA, including Candidate Conservation Agreements, Safe Harbor Agreements, the Working Lands for Wildlife Initiative, and a new Prelisting Conservation Policy, among others. Different programs are available in different contexts, depending on whether they target listed versus non-listed species, apply to public versus private lands, and seek to avoid harm to species versus create net conservation benefits. The programs also differ in terms of whether or not they provide regulatory assurances about future compliance requirements. Accordingly, participation incentives differ across the programs. Nevertheless, an ROI framework can be applied to each.
The Challenge of Quantifying and Defining Returns
For conventional business decisions, such as whether or not to develop a new product line, companies can relatively easily put a dollar value on the cost of investments (such as expected research and development, marketing, distribution, and training). The return on the investment is typically harder to estimate, but a variety of market data (current sales, consumer surveys, analysis of competitors, and so on) can be brought to bear to predict future revenues. Also, in a conventional business investment setting, costs and returns are denominated in the same terms: dollars. Costs and benefits estimated all in dollar terms allow an analyst to numerically apply the net present value formula and determine whether the investment yields a positive return (and thus is a good investment), or not.
Relative to a conventional business decision, analysis of private sector conservation returns is more difficult for two main reasons. First, not all conservation returns yield a direct, bottom-line change in a firm’s revenues or costs. Second, much of the data needed to quantify conservation returns are not conventional, market-oriented data. For example, conservation returns depend on factors such as ecological conditions and processes, land use and management by other private sector businesses, and legal issues. Quantifying these factors is difficult for scientific and legal experts, let alone a company’s own financial analysts.