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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.

SocialFunds.com -- 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.

That projection, Trucost observed, does not account for the impacts of climate change and resource scarcity multiplying as conditions continue to degrade.

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.

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."

Analyzing more 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 analyzed.

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.

"The extent 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.

The 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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