Most business leaders now recognize that climate change is a grand challenge of the highest order. While there is vast potential for corporate action on this issue, relatively little is known in practical terms about how firms should go about managing their stakeholders to address environmental preservation.

In this article, we will describe how a Brazilian cosmetics company has been working with its stakeholders to create positive impact on the Amazon rainforest. Founded in 1969, Natura & Co. is the world’s largest B-Corporation, with 2022 net revenue of US$7.4 billion. Recognized with the United Nations Champion of the Earth Award in 2015, it has also been the parent company for other purpose-driven brands including The Body Shop, Aesop and Avon. By aligning the interests of its stakeholders with its own, Natura is simultaneously achieving both financial and environmental aims.

Intrigued by the company’s innovative approach, we recently set out to assess how Natura aligns stakeholder interests to address environmental issues. In this article we will summarize our findings, which were recently published in Management Science.

The tragedy of the commons

Nobel Laureate Elinor Ostrom defined the commons as "land or resources belonging to or affecting the whole of a community." Her seminal work showed that governing the commons is complicated because, by definition, members of a community compete to use its resources while, at the same time, those resources must remain accessible to all. These features, she argued, lead to ill-defined property rights, weak incentives for preservation and, consequently, to what she called the "tragedy of the commons."

The tragedy, per Ostrom, is that all stakeholders have incentives to exploit the community’s resources to the detriment of the common interest. This can — and has — led to the overexploitation and depletion of common resources. Today, this tragedy is extensive and includes the exploitation of fishery waters, river basins, air pollution, communal grazing lands and natural forests. In each case, access to resources among stakeholders with an incentive for private use leads to a ‘negative externality’ for the group.

Negative externalities occur when the production and/or consumption of a good or service exerts a negative effect on a third party independent of the transaction. In the case of natural forests, where property rights are held jointly, individual stakeholders have logged, mined, trafficked animals, and clearcut forests for private agricultural use. In doing so, these stakeholders have generated private gains amid public losses.

Some of the mechanisms used by governments to address these scenarios involve laws and regulations around their use, taxation and penalties for deviant behaviour. However, these actions are often ineffective, particularly when governments don’t have adequate resources, must attend to competing aims that dilute attention to environmental problems or are led by parties who see no direct benefit from the engagement of their stakeholders in joint value creation.

British-American economist Ronald Coase argued that an alternative approach is feasible under certain conditions: in a situation of low transaction costs, a market mechanism can be developed to internalize externalities and increase production value through bargaining among the participants. The result, Coase argues, can be a more efficient and effective arrangement than what could be accomplished by the government.

Coase assumes that it is straightforward to identify stakeholders who are directly affected by an externality and that negotiations among stakeholders are feasible because all parties understand the nature of the common problem and have the capacity to negotiate. However, in the case of the Amazon rainforest and Natura, these assumptions don’t hold.

Prior to interacting with Natura, many Indigenous farmers in the region had little contact with big corporations or experience in market exchange. In such a situation, some might suggest that the government should have intervened to facilitate bargaining between agents as an alternative to enacting laws and regulations. However, in this instance, the government did not intervene, and Natura set out to devise an agreeable arrangement itself.

The insight in this case is that a private actor such as a corporation may achieve an alignment of interests through the ‘private ordering’ of stakeholder interests. Put simply, stakeholder decisions not to exploit or to restore common resources may be supported by a firm that overcomes impediments to align stakeholder interests in ways that internalize environmental externalities.

Take the case of a polluting factory, which was analyzed by Coase. He demonstrated that, if the factory owner and neighbouring property owners could freely bargain, they might achieve a more efficient allocation of rights and constraints than a government seeking social welfare. In this example, the private stakeholders internalize pollution’s negative externalities and deploy the market to allocate resources more efficiently than a regulator could.

Here’s another example: suppose that an individual decides to cultivate a rose garden in a public space within a neighbourhood. If transaction costs are minimal, the agent may bargain with other residents living in nearby properties aiming to obtain rights and resources for the garden in exchange for pleasing aromas and visual experiences. As we show in our study, Natura likewise implemented arrangements that constituted the achievement of positive externalities through the reforestation of previously clear-cut areas analogous to the rose garden.

The Natura approach

Recent advances in new stakeholder management research indicate that firms with a purposeful stakeholder orientation have several advantages over those with a shareholder orientation. In some situations, an orientation toward stakeholders can directly improve the firm’s economic performance as well as its environmental performance. In others, the achievement of a stakeholder orientation requires innovation in the engagement and alignment of stakeholders with the firm through a reconstruction of the company’s approach to value creation and distribution.

In this latter situation, stakeholder-oriented firms can reduce transaction costs, align interests among diverse agents, equalize negotiation capabilities and provide innovative solutions to collective problems. This then allows the firm to resolve collective action problems more effectively than the government by extending “Coasean arrangements” in specific ways that are inaccessible to the government.

In particular, a private corporation may have the capacity to cultivate negotiation capabilities in local stakeholders with control over valuable resources. Through training programs, long-term contracting and relationship commitments, the company may cultivate institutional capabilities in previously under-supported stakeholders that ultimately lead to the development of sustainable markets. Such investments are justified because they yield private benefits to the corporation over the long term.

By leading the way on this front, Natura has enacted these and other types of solutions in its interactions with diverse actors, including rural suppliers, civil society organizations, direct sellers, consumers and even shareholders.

The firm addressed failures in local market institutions by developing an open institutional infrastructure, which reduced local transaction costs and empowered a wide range of actors, including both participants and non-participants in direct exchange with the company.

The company’s enablement of an efficient system for sourcing Amazonian agricultural products increased its own profitability by shifting volume toward products that commanded premium prices because of their Amazonian content — which led, in turn, to the allocation of financial value to Indigenous suppliers of ingredients.

Historically, the Amazon region has been neglected by both the private and public sectors. For decades, it was considered the archetype of wilderness and underdevelopment. Some political figures in Brazil went as far as to claim that the natural environment in the Amazon was impeding the country’s economic progress and that the rainforest should be destroyed.

Under this framework, deforestation was encouraged to yield economically valuable timber and animals. The depletion of these natural resources was accompanied by human rights violations, including underpayment, enslavement and violence against Indigenous persons.

To establish a healthy network of Amazonian suppliers, Natura created an "Amazon Plan," which saw it increase its presence from four municipalities in 2000 to 56 in 2018. Rather than procuring conventional products through arm’s-length transactions, it created an ecosystem of suppliers through flexible contracts and trusting relationships with Indigenous communities. Over time, these relationships deepened as Natura collaborated with local leaders to engage in farmer training and other supportive activities.

To implement its Amazon Plan, Natura took two critical steps:

1. To be energy efficient and pool production at a single location, it built an industrial plant in the Amazon city of Benevides, Pará State, which subsequently became an “EcoPark” for multiple firms working in the Amazon region; and
2. It established a dedicated Eco-Relations team to develop relationships with rural communities, which was crucial to establishing trust with Indigenous community leaders. Through regular visits, staff and local leaders built personal connections prior to discussing the details of contractual arrangements with implications for community farmers.

An essential feature of Natura’s arrangements was the ability of its Eco-Relations staff — many of whom were members of Indigenous communities themselves — to understand that, in Indigenous Amazonian cultures, value is conceptualized in ways that are fundamentally different from traditional economic theories. The team’s mandate was to explore mutual interests with community leaders to source Amazonian ingredients for cosmetics, shampoos and soaps. After identifying a potential ingredient, the team would begin discussions with community leaders regarding potential arrangements.

An important step toward forming contracts was the establishment of an association or cooperative in the locality to collectively set the terms of sale on price and quantity. Members of the Eco-Relations team worked with communities to set up bank accounts and to implement arrangements for transporting products to its Eco-Park.

After arrangements were established, Natura’s team worked with the community to identify processes through which ingredients would be extracted without damaging the forest to ensure its sustainability over time. A critical feature of this approach was the sustainable harvesting in perpetuity of Amazonian ingredients from the forest. Rural suppliers then became responsible for collecting, processing and shipping the products to Natura’s Eco-Park, where they received payment for the ingredients.

At the plant, the ingredients were transformed into natural oils, butters and pastes that became the essence of the cosmetics, shampoos and soaps in the Natura Ekos product line. The company then advertised the products’ social, environmental and technical benefits to consumers.

Natura’s payments to Amazonian municipalities for fruits, nuts, seeds and berries were set to convey sufficient value as to preserve the alignment of supplier interests with rainforest preservation. Among the total payments Natura made to the communities, 39 per cent were direct payments for products while the remaining 61 per cent were for additional benefits to the community. For example, Natura paid for access and use of traditional knowledge (71.5 per cent of the total), local research on Amazonian products (16.5 per cent), investments in infrastructure and institutional support (five per cent), provision of training programs and technical assistance (four per cent) and compensation for commercial images and carbon credits (three per cent).

The company’s employees, executives and shareholders made a commitment to sharing value with local communities to align interests and maintain Amazonian supplies. According to former CEO Roberto Marques:

"To prevent ucuuba trees from being cut down for the production of brooms sold in local shops, [we] decided to pay twice the amount that the Amazon community received for their work. Instead of cutting, they started to earn more to keep the trees upright and extract only the seeds, which have moisturizing properties for the production of creams.

Natura benefited from these arrangements directly in several ways, including through higher profitability than the estimated average for global cosmetics companies.

Our research

The purpose of our analysis was to determine whether and how Natura was able to remediate negative externalities through the deterrence of deforestation and to support positive externalities through reforestation. The data on which our analysis depended was drawn from the Brazilian National Institute for Spatial Research (INPE), which reports geo-referenced satellite information on environmental protection for each of the 760 municipalities in the Amazon region. The INPE system uses images from Landsat (NASA) satellites and has been recognized globally as a reliable monitoring system for forest preservation. We also used data from the Brazilian Geography and Statistics Institute (IBGE) on the yearly Municipal Agricultural Production Census.

To measure the degree of environmental protection and depletion, we used two primary outcomes. The first, forested areas (in square kilometres), describes the total preserved area of the Amazon rainforest in each municipality. This value is updated every year by INPE’s satellite images. The second, fire incidents (in number of occurrences) indicates the number of fire incidents each year by municipality. Our hypothesis was that Natura’s entry into a municipality would impact forest preservation positively compared with what would have occurred had it not entered the municipality.

Result 1: We found evidence that Natura’s entry was positively tied to forest preservation in those municipalities. Forest preservation was 47.9 per cent higher in municipalities where Natura entered. Natura’s entry contributed to the preservation of about 1.8 million hectares, which is equivalent to 1.7 million football fields.

How did this impressive level of preservation occur? Our evidence points to perceptions in Amazonian communities of variable benefits and costs of conventional versus Amazonian agriculture. “Conventional agriculture” refers to practices that can only be conducted on cleared land, such as cattle farming and obtaining high-volume crops to be sold on competitive commodities markets. “Amazonian agriculture” refers to renewable fruits, nuts, seeds and berries originating in the Amazon biome that are produced in a way that sustains the forest.

One supplier described to us that, if it were not for the cocoa program developed with Natura, local rural producers would have been compelled to switch from cocoa to cattle raising. And to enable that, they would have had to clear-cut the forest and transform the area into pasture. Therefore, one mechanism by which Natura managed to promote forest preservation was by providing a viable economic option to small rural producers to keep the forest standing. As a result, fewer areas were converted to conventional agriculture such as cattle raising and soybean production.

We analyzed six types of agricultural products in our study, including three conventional ones (total soybean and corn production in hectares and total cattle herd in number of animals) and three Amazonian agricultural products (total acai, cocoa and passionfruit production in hectares). We expected that Natura’s entry into a municipality had a negative impact on sales of conventional agricultural products and a positive impact on sales of Amazonian agricultural products.

Result 2: As expected, Natura’s activity was significantly associated with a reduction in conventional agricultural products that are prevalent in the area, including soybean production (54 per cent reduction), cattle production (16.5 per cent reduction) and corn production (51.6 per cent reduction). Natura’s activity was also positively and significantly associated with the three Amazonian agricultural products that are used as ingredients in its products.

Result 3: Our results regarding fire incidents are complex. Although the number of fire incidents in the municipalities that Natura entered increased by 49.4 per cent, we believe the company may have elected to enter municipalities in which fire incidents were extensive and imminent — which is consistent with the finding that, even after the firm’s entry, fire incidents increased. Growing certain products might also trigger a higher number of small-scale fire occurrences, which occur at the forest’s edge and are not as harmful to the old forest.

Our views are reinforced scientific arguments showing that in the Amazon, fire typically occurs in forest edges by escaping from deforested areas, pastures and agricultural fields and leaking into surrounding forests. Cupuaçu and açaí grow on trees and palms that tend to be cultivated in former pasture lands, so they are associated with forest regeneration in the forest’s edge. In contrast, pataqueira is a type of Amazonian grass (herb) that does not require much space and can be cultivated in irrigated beds. A blog post on Natura’s website reports that fire is traditionally used to produce this species: “According to local traditions, fire is used to plant pataqueira. The vegetation that margins the streams is burned and, after this, the plant is sown. We [Natura] had to find a new way of doing it without using fire, chemical inputs, and in a distant location.”

This quote illustrates why the pataqueira product has the strongest correlation with fire incidents among all products sourced by Natura, and yet the use of fire in sensitive areas carries dangers both for uncontrolled spread and environmental impact that had not been accounted for prior to Natura’s entry. As a result, Natura worked with communities to encourage the cultivation of pataqueira in ways that mitigated uncontrolled fire risk and river erosion.

To summarize, Natura’s entry into municipalities slowed down the upward trend in fire incidents. So, despite the increase in fires after its entry, this increase was happening at a faster rate when the firm was not in those locations. Internalizing environmental externalities while governing common-pool resources is a complex quest. Further research is required on the tension between Natura’s reforestation efforts and fire occurrences deliberately performed by large-scale ranchers who advocate for conventional agriculture. Despite these difficulties, our study provides evidence of success in achieving the kind of private ordering of stakeholder interests envisioned years go by Coase.

We believe the case of Natura has global significance. By using local fruits, nuts, seeds and berries as ingredients in its products, it has internalized the benefits of forest preservation in arrangements implemented in partnership with Indigenous communities and supported by the price premiums paid by ecologically oriented consumers.

This case provides a solid basis for optimism regarding the potential for impact of purpose-driven, stakeholder-oriented corporations. By developing innovative approaches to stakeholder interest alignment, private-sector actors can take inspiration from Natura’s achievements. We must always remember: There is no planet B.

This article originally appeared in the Spring 2024 issue of the Rotman Management Magazine. Subscribe now for the latest thinking on leadership and innovation.