Companies and their investors face both an opportunity and a significant problem. Consumer demand is set to grow significantly over the next few years with the increase in middle class consumers, especially in emerging markets. However, this is against a backdrop of increasing resource scarcity and the degradation of our natural ecosystems. One of the challenges will be to understand the value of the natural systems we rely on – commonly referred to as natural capital – and how these systems can be managed. The current business model creates significant environmental externalities. For example, water is not usually priced according to how scarce it is. The report, authored by Trucost, identifies financial risk from environmental externalities e.g. damages from climate change, pollution, land conversion and depletion of natural resources, across business sectors at a regional level. It demonstrates that high impact business sectors make an economic loss when the costs of environmental damage such as their natural resource use and pollution costs are accounted for. However, businesses and investors can take account of natural capital impacts in decision making to manage risk and gain competitive advantage.
Headline findings are:
- The primary production (agriculture, forestry, fisheries, mining, oil and gas exploration, utilities) and primary processing (cement, steel, pulp and paper, petrochemicals) sectors analyzed are estimated to have externality costs totalling US$7.3 trillion, which equates to 13% of global economic output in 2009.
- The value of the Top 100 externalities is estimated at US$4.7 trillion or 65% of the total primary sector impacts identified.
- The majority of environmental externality costs are from greenhouse gas emissions (38%) followed by water use (25%); land use (24%); air pollution (7%), land and water pollution (5%) and waste (1%).
The highest impact sectors by region globally include:
- Coal-fired power in Eastern Asia and in Northern America rank first and third, respectively estimated at US$ 453 billion per annum in Eastern Asia and US$ 317 billion in North America. These consist of the damage impacts of GHG emissions, and the health costs and other damage due to air pollution. In both instances, these social costs exceeded the production value of the sector.
- The other highest impact sectors are agriculture, in areas of water scarcity, and where the level of production and therefore land use is also high. Cattle ranching in South America, at an estimated US$ 354 billion ranks second. Wheat and rice production in Southern Asia rank fourth and fifth respectively.
- Iron, steel and ferroalloy manufacturing ranks sixth at US$225 billion. Cement manufacturing globally accounts for 6% of CO2 emissions, and Eastern Asia produces an estimated 55% of the world’s cement, so it is not surprising that it comes in at seventh.
During the past decade commodity prices erased a century-long decline in real terms, and risks are growing from over-exploitation of increasingly scarce, unpriced natural capital. Depletion of ecosystem goods and services, such as damages from climate change, pollution or land conversion, generate economic, social and environmental externalities. Growing business demand for natural capital, and falling supply due to environmental degradation and events such as drought, are contributing to natural resource constraints including water scarcity.
The report assessed more than 100 environmental impacts using the Trucost environmental model which condenses them into six eKPIs to cover the major categories of natural capital consumption: water use, greenhouse gas (GHG) emissions, waste, air pollution, water and land pollution, and land use. These eKPIs were then quantified by region across over 500 business sectors. The method used has limitations and is only designed to give a high-level indication of the priority sectors and regions where natural capital risk lies. Limitations in the method are outlined in the report to support ongoing development of this type of analysis.
The study ranks the top 100 impacts in each sector, broken down by region to provide a platform for companies and investors to assess exposure to unpriced natural capital, both directly and through supply chains and holdings. It also highlights sector-level variation in regional exposure to impacts to identify opportunities to enhance competitive advantage. Impacts across all six eKPIs were combined by region and sector to create a ranking of the top region-sectors globally.
Alastair MacGregor, Chief Operating Officer of Trucost, who conducted the study states, “Recent soft commodity price volatility due to drought, and its impacts on company profits, nation’s trade balances and inflation has underscored the dependency of investment returns on natural capital. This trend will accelerate in the future on a number of fronts .”
Dr. Dorothy Maxwell, Director of the TEEB for Business Coalition states, “Understanding natural capital risk and opportunities is essential for businesses to position themselves in an increasingly resource constrained world.”
The report shows that the scale and variation in impacts provide opportunities for companies and their investors to differentiate themselves by optimizing their supply chains and investment strategies. Some recommendations for companies include implementing processes to measure and manage natural capital used; strengthening business models to mitigate exposure to global risks such as water scarcity, volatile energy and agricultural prices, rising GHG emissions and climate change impacts.
Pavan Sukhdev, Chair of the Advisory Board of TEEB for Business Coalition states, ”We need undoubtedly to change how we do business, but we cannot manage what we do not measure – and at present only a handful of businesses measure their externalities. Resolving this is at the heart of the green economy and sustainability itself.”
Achim Steiner, UN Under-Secretary General and Executive Director, UN Environment Programme (UNEP) states, “Forward-looking companies are already recognizing that the key to competitiveness in an increasingly resource-constrained world will hinge in large part on escalating natural resource efficiencies and cutting pollution footprints—the numbers in this report underline the urgency but also the opportunities for of all economies in transitioning to a Green Economy in the context of sustainable development and poverty eradication.”
Peter Bakker, President World Business Council for Sustainable Development comments, “Now that we have this high-level assessment of where the priority areas are, we need to encourage companies to increasingly consider the value of nature in decision-making, and ultimately accounting and reporting. The results of such company assessments should also be shared so we can fit the pieces of the puzzle together to develop a standardized approach to account for nature.”
Commenting on the study Michael Izza, chief executive of ICAEW explains, “This study highlights that the disciplines of accountancy and economics need to evolve to recognise that the limiting factors to production and growth are no longer just labour, capital and technology. As our economies, populations and our consumption have grown exponentially relative to nature, which once seemed so abundant and limitless, we now have to face the fact that this is not so.”
“Sound natural capital management goes hand in hand with benefits for companies, investors, communities, and the environment,” said Usha Rao-Monari, Director, Sustainable Business Advisory, IFC, a member of the World Bank Group. “This study makes the business case for companies and investors to take natural capital into account if they wish to save on resource use, access markets and financing, and mitigate major environmental and social risks,” she added.
“Incorporating the use of natural capital into a business’ sustainability strategy is something that every company must do to understand their real sustainability issues in order to engrain them into day to day operations and overall planning. This is no longer an option and now more than ever it is critical for reporting requirements to include natural capital accounting and government legislation to address corporate transparency and accountability,”states Jochen Zeitz, Director of Kering and Chairman of the board’s sustainable development committee and Co-Chair, The B Team.
Planetary boundaries are being approached at a reckless pace, and some argue that global biodiversity, nitrogen and climate thresholds have already been breached. Global economic direction and resource use is the underlying cause of this. Corporations today account for two-thirds of our economy and resource use, and most of the global stressors of planetary boundaries (emissions, freshwater use, land-use change, chemical pollutants, etc) are in reality the negative externalities of “business as usual”. These externalities have grown too large to ignore, and are estimated at close to US$2.1 trillion for the top-3,000 listed corporations (UN Principles for Responsible Investment, 2010). To mainstream the measurement and management of externalities in business, the “TEEB for Business Coalition”, a global coalition of pioneering organizations on natural capital, was formed in 2012. It aims to create awareness of this issue amongst decision makers in business and support scaling ‘best-of-breed’ solutions from leading corporations to value, manage and report their externalities.
About the TEEB for Business Coalition – www.teebforbusiness.org
About the Business for the Environment summit – www.b4esummit.com
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