The study “Natural Capital at Risk – The Top 100 Externalities of Business” was released from the TEEB for Business Coalition during the Business for the Environment summit in New Delhi. The authors of the report estimate that the global top 100 environmental externalities are costing the economy world-wide around $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.
London & New Delhi, 15 April 2013: 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.
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%).
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.
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.”
The report can be downloaded here.