New UN-backed study on biodiversity and ecosystem services shows clear leaders in the extractive sector
A new report by the Natural Value Initiative (NVI), titled Tread lightly: Biodiversity and ecosystem services risk and opportunity management within the extractive industry, reveals the potential business risks facing the extractive sector (specifically oil, gas and mining) from their reliance and impact on natural resources and explores how companies in these sectors currently address these issues in their operations.
Report highlights potential business risks facing the mining, oil and gassectors from their reliance and impact on natural resources
20/10/11 - As we move towards an increasingly resource and carbon constrained world, companies in the extractive sector are likely to experience reputational, operational and financing risks associated with the decline of biodiversity and ecosystem services – the benefits society receives from nature – together referred to here as ‘BES’.
The report authors investigated 30 oil, gas and mining companies with a total market capitalisation of Euro 1,900 billion. It concluded that whilst many of the companies evaluated were working to assess BES risk and opportunity, none were yet managing the issue comprehensively.
Companies demonstrating a leading approach included Anglo American plc, Rio Tinto plc, Xstrataplc, BG Group plc, Eni Spa, and Royal Dutch Shell plc. Such approaches were characterised by strong publicly stated policy commitments on BES, comprehensive (although not always yet fully employed) risk and opportunity evaluations conducted at a site and corporate level, and well developed management and monitoring systems. Furthermore, a number of companies were recognising the links between key social and environmental issues (such as climate change and water management) and BES.
The report also found that some companies were lagging behind in addressing BES issues, despite having similar risk exposure to the leading companies. These laggard companies – and those investors that hold bonds or stocks of these companies in their portfolios – may face risks that affect their bottom line or may be missing out on key business opportunities.
Saskia Verbunt, project Manager at the Dutch socially responsible investment NGO, VBDO, and co-author on the report made the following recommendation: "Oil, gas and mining companies need to ensure they have clear policies, governance, management systems and reporting on BES. A fundamental building block of this is gaining a strong understanding of impact and dependence on BES and the associated risks and opportunities posed to the business. For investors who want to make sound investments and realise long-term returns, this understanding is as vital as for the companies they invest in.”Building BES risk and opportunity into investment decisions
The Natural Value Initiative (NVI) is a collaboration between Fauna & Flora International, the United Nations Environment Programme Finance Initiative (UNEP FI), Nyenrode Business University and the Dutch Association of Investors for Sustainable Development (VBDO). The new report highlights the extractive sector’s dependence and impact on biodiversity and ecosystem services, and the associated risks this presents to investors.
"Biodiversity and ecosystem services have already begun to affect value, albeit in ways that most investors do not necessarily recognise as such – more familiar are terms like ‘escalating environmental remediation costs’, ‘tight water supplies’ or ‘the end of easy oil’. But what is stillmissing is a set of tools that goes one step beyond framing good operational practices, and enables companies and their investors to put an economic value on BES value held, added or lost,” commented Karina Litvack, Head of Governance and Sustainable Investment, F&C Investments. "This report is a key step forward on the path to bringing such a valuation tool into being, by establishing a common understanding of good practice and how to measure it.”
According to Steve Waygood, Head of SRI engagement at Aviva: "One of the reasons that biodiversity and ecosystem services are not conventionally included in broker notes is that historically the private sector has received such services for free. This is a long-term market failure that needs to change. Increasing resource scarcity and pressure from civil society are acting to make the issue more material, particularly for high impact sectors such as the mining, oil and gas industries. If a company is managing this issue well, it is a good indicator of the quality of overall company management.”
The Natural Value Initiative is working to address this market failure by gaining a better understanding of companies’ dependence and impact on biodiversity and ecosystem services and the way these risks are currently being managed. "Managing natural assets and threats before they become costly is a means to curb risk exposure while increasing competitiveness. If profitability and social responsibility are to be sustained into the future, then so too must ecosystem services and biodiversity. Our research showed that, not only were companies exposed to different risks relating to this issue, the quality of controls over those risks varied considerably. This means that ultimately some companies – and those investing in them – will win and some will lose out on this issue,” said Annelisa Grigg, Project Director of the Natural Value Initiative.
Investors in extractives can and should minimise their own risk by establishing clear policies and processes to account for BES risks and opportunities, and provide guidance to high risk companies within the sector as to what constitutes good performance. Investors that supported the Tread lightly report are already engaging companies using the report results.
"We have long understood that extractive companies leave deep footprints on the planet, and last year the oil spill in the Gulf of Mexico gave us a dramatic demonstration of just how deep those footprints can be. Now, NVI has given us a tool we can use to assess BES management, as well as some very valuable data on biodiversity impacts and policies for a group of large extractive companies. This tool gives us a superb way to assess the quality of management and the potential risks this poses for extractive companies, and we intend to use it as we carry out those assessments,” stated Julie Gorte, Senior Vice President for Sustainable Investing at Pax World,one of seven investors involved in the study.
The study can be found here