A new report by an international business coalition underscores the urgency of the need to transition toward a greener economy.
The report, 'Natural Capital at Risk - The Top 100 Externalities of Business', estimates the top 100 environmental externalities are costing the global economy $4.7 trillion a year in terms of the economic costs of greenhouse gas emissions, loss of natural resources, loss of nature-based services such as carbon storage by forests, climate change and air pollution-related health costs.
The report was released recently at an Environment summit in New Delhi by The TEEB for Business Coalition, a global, multi stakeholder platform formed to develop and support the uptake of natural capital accounting in business decision-making.
The report assessed more than 100 environmental impacts using the Trucost environmental model covering the major categories of natural capital consumption: water use, greenhouse gas (GHG) emissions, waste, air pollution, water and land pollution, and land use. These were then quantified by region across over 500 business sectors.
The main findings were:
- 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 totaling 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$4.7 trillion or 65% of the total primary sector impacts identified.
- The majority of environmental externality costs are from greenhouse gas emissions (38%) followed by water use (25%); land use (24%); air pollution (7%), land and water pollution (5%) and waste (1%).
The highest impact sectors by region globally include:-
- Coal-fired power in Eastern Asia and in Northern America ranked 1 and 3, respectively estimated at US$ 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 6 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 # 7.
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.'
The report stresses that planetary boundaries are being approached at a reckless pace, and that global biodiversity, nitrogen and climate thresholds may already have been breached. Global economic direction and resource use is the underlying cause of this, says the report.
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).
Achim Steiner, UN Under-Secretary General and Executive Director, UN Environment Programme (UNEP) noted '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.'
His comments were echoed by Usha Rao-Monari, Director, Sustainable Business Advisory, IFC, a member of the World Bank Group, who noted 'Sound natural capital management goes hand in hand with benefits for companies, investors, communities, and the environment'.
'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.
The report offers a number of recommendations for companies, investors and governments:
Recommendations for Companies
- Focus on gathering primary impact data, and conducting primary environmental valuation studies, on likely hot spots in direct operations and in supply chains.
- Identify existing mechanisms that could internalize natural capital costs and the probability and financial impact of these costs being internalized in the future.
- Consider using valuations for environmental key performance indicators to apply 'shadow' pricing in procurement decision-making and financial analyzes.
- Explore opportunities for adaptation and to improve resource efficiency, both internally and within the supply chain.
- Evaluate options to change suppliers, or the geography of sourcing or materials, if suppliers do not respond to time-bound improvement programs.
Recommendations for Investors
- Identify which assets are most exposed to natural capital risk, and which companies and governments are able and willing to adapt.
- Identify the probability and impact of natural capital costs being internalized.
- Build natural capital risks, adjusted for the likelihood of internalization, into asset appraisal and portfolio risk models.
Recommendations for Governments
- Identify the distribution of natural capital risk across the economy, and look for hot spots of low natural capital productivity.
- Understand how business sectors' global competitive position may change in the future as a result of natural capital costs.
- Develop policies that efficiently and effectively internalize these costs, avoiding sudden shocks in the future, and helping businesses to position themselves for a natural capital constrained world.