April 26, 2013
Price Externalities, Report Tells Companies and Investors
by Robert Kropp
A new analysis from Trucost estimates that unpriced externalities cost the global economy at least
$7.3 trillion per year, and finds that no companies in high impact sectors would be profitable if
they had to account for environmental costs.
A 2010 report
from leading environmental data provider Trucost estimated that the global cost of environmental damage
caused by human activity reached $6.6 trillion in 2008, or 11% of the global Gross Domestic Product
(GDP). Furthermore, Trucost warned, a business as usual scenario could lead to losses of at least
$28.6 trillion by 2050.
One year later, a widely cited report from Mercer warned
institutional investors that the short-term horizon of most equity and bond investments prevents
investors from factoring in the long-term risks and opportunities relating to climate change. The
economic cost of climate policy could lead to as much as a 10% increase in portfolio risk over the
next 20 years, Mercer found.
That projection, Trucost observed, does not account for the
impacts of climate change and resource scarcity multiplying as conditions continue to degrade.
Despite the urgency documented in these reports, the
allocation of private investment assets to sustainable alternatives remains inadequate to the task
at hand. It's been estimated that 85% of the financing of the low-carbon transition will have to
come from private investment, but as governments fail to appropriately price emissions and continue
the surreal practice of fossil fuel subsidies, the necessary scale of private investment has been
hampered by perceptions of unacceptable risk.
A case in point: the 2012 Trends Report of
US SIF: The Forum for Sustainable and Responsible
Investment reported that assets totaling $3.74 trillion were devoted to sustainable investment
strategies by the end of 2011. But in a recent analysis, Cary Krosinsky of the Network for Sustainable Financial Markets
(NSFM) found that only $400 billion in assets were focused on identifying best performers by
sector or according to general sustainability factors.
Now, Trucost has authored a new
study, entitled Natural Capital at Risk – The Top 100 Externalities of Business, which analyzes the cost to
the global economy of such unpriced externalities as greenhouse gas (GHG) emissions, water use, and
land use. The report was commissioned by the TEEB for Business Coalition, a platform for the
development of natural and social capital valuation in business, and was originally presented at
the recent Business for the Environment summit in New Delhi.
"Risks are growing from
over-exploitation of increasingly scarce, unpriced natural capital," Trucost observes in the
report. "Depletion of ecosystem goods and services, such as damages from climate change or land
conversion, generates economic, social and environmental externalities."
than 1,000 direct environmental impacts, Trucost estimated that unpriced natural capital costs
amounted to at least $7.3 trillion in 2009, or 13% of global economic output. The degree to which
the greatest damage is concentrated in relatively few business activities is borne out by the
finding that $4.7 trillion of those losses, or 65%, occur in 100 of the more than 1,000 impacts
GHG emissions accounted for $2.7 trillion of the overall cost, followed by water
use ($1.9 trillion) and land use ($1.8 trillion).
The greatest impacts come from coal
power generation in eastern Asia, cattle ranching and farming in South America, coal power
generation in northern America, and wheat and rice farming in southern Asia.
to which agricultural sectors globally do not generate enough revenue to cover their environmental
damage is particularly striking from a risk perspective," Trucost noted. But overall, Trucost
found, "No high impact region-sectors generate sufficient profit to cover their environmental
impacts. Therefore if unpriced natural capital costs are internalized, a large proportion would
have to be passed on to consumers."
For investors, "the dependency of investment returns
on natural capital…will accelerate in the future," Alastair MacGregor, Chief Operating Officer of
Trucost, stated. The report recommends that investors build natural capital risks and the
likelihood that costs will be internalized into their investment decision-making.
report also recommends that companies conduct environmental valuation studies and account for the
likelihood of internalization of environmental costs. "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," Peter Bakker of the World
Business Council for Sustainable Development, an organization of companies that share best
practices on sustainable development issues, said. "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."
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