Environmental Issues No Longer a Low Impact Business Risk

Research we did for the TEEB for Business Coalition Natural Capital at Risk finds that the environmental costs of business are costing the global economy $7.3 trillion a year (equivalent to the GDP of China) from the loss of natural resources and ecosystem services, greenhouse gas emissions, and air pollution-related health costs.

The ability of companies to continue to externalize all of these costs is diminishing as governments find it increasingly difficult to manage them. In this context, polluter pays principles are gaining traction. Companies in many industries and regions are already forced to internalize some of the costs of their environmental and social damage through carbon taxes and cap and trade schemes. Socialization of costs is also becoming more unacceptable to the public and companies are at risk of losing social licenses to operate.

Environmental issues are no longer a low impact business risk that can be deferred in an economic downturn. Companies and investors need to consider environmental costs as core business and investment issues. Alongside emerging regulatory considerations, the impact of extreme weather events is already being felt on bottom lines. Companies in the food, beverage and apparel industries where margins are tightly linked to agricultural commodities have been most obviously affected. Household favourite Weetabix recently announced that it was forced to halt production of popular lines following a British wheat shortage caused by last year’s cold and wet summer which devastated the UK harvest. Mulberry was affected by rising leather costs due to increased animal feed costs, linked to crop failure following drought and H&M has also been affected by rising cotton prices, again due to drought. Companies that view these challenges through the environmental lens can optimize their operations and supply chains to minimize these risks.

To ensure value is derived from environmental initiatives in an economic downturn, companies need to ensure their programs are linked to clear financial objectives. Placing a monetary value on environmental impacts, as PUMA did with when it published the world’s first environmental profit and loss account, is particularly useful in ensuring environmental initiatives are linked to strategic bottom line objectives. Companies are increasingly learning to apply natural capital accounting to help them incorporate thinking about how to alleviate their environmental impacts directly into existing financial and operational systems.

Against a backdrop of increasing regulatory and natural resource pressures fueled by population growth, companies that act now to develop resource efficient technologies and services will be the successful companies of the future.

Sarah Wainwright runs Trucost’s information partner program which aims to support organizations in providing environmental information and guidance to their stakeholders. She holds a degree in Natural Sciences and Marketing from the University of Bath.

This article is reprinted from the Trucost blog with the permission of Trucost.