The estimated cost of global environmental damage caused by human activity in 2008 is $6.6 trillion, which is equivalent to 11 percent of global GDP, according to a study released by the UN-backed Principles for Responsible Investment (PRI) and the UN Environment Programme Finance Initiative (UNEP FI). The study also finds that the top 3,000 public companies were responsible for $2.15 trillion, or about one-third, of all global environmental damage.
The UN groups say the study, conducted by Trucost, is an initial effort to quantify in monetary terms the environmental harm caused by business and the possible future consequences for investor portfolios, fund returns and company earnings.
Another key finding of the study reveals that the most environmentally damaging business sectors are utilities, oil and gas producers, as well as industrial metals and mining. Those three accounted for almost a trillion dollars worth of environmental harm in 2008.
“This report sends a powerful message that the environment is also the business of business. Polluters must pay. Safeguarding the environment and using our natural assets efficiently entail collective action. Cohesive policy and regulation is required to fully account for externalities and speed up the integration of material environmental issues into investment decisions. The bottom line is that if we are to achieve a sustainable global economy, then we must stop drawing down our natural capital,” said Paul Clements-Hunt, Head, UN Environment Programme Finance Initiative.
The study, “Why environmental externalities matter to institutional investors” (PDF), estimates that the annual environmental damage from water and air pollution, general waste and depleted resources could reach $28.6 trillion in 2050, or 23 percent lower if clean and resource-efficient technologies are introduced.
Environmental damage costs are typically higher than the cost of preventing or limiting pollution and resource depletion, according to the study. One result is that workers and retirees could see lower pension payments from funds invested in companies exposed to environmental costs.
In addition, as environmental damage and resource depletion increases, and governments start applying a “polluter pays” principle, the value of large portfolios will be impacted by higher insurance premiums on companies, taxes, inflated input prices and the price tags for clean-ups, according to the study.
Study recommendations include collaboration to encourage companies and policy makers to reduce environmental impact, and regular monitoring and reporting from investment managers on how they are addressing exposure to environmental risk.
Other suggestions include targeting laggards or the most influential companies within a sector to drive improvements across an industry, addressing issues related to air pollution, waste and heavy metals, as well as risks to biodiversity and ecosystem services, in addition to greenhouse gas emissions.