CSR Asia Comments on PWC's Economic Biodiversity Threat Study

Companies neglecting biodiversity issues despite huge business opportunities
by Helen Roeth hroeth@csr-asia.com

Link to PWC study click here

In recent months we have seen a series of warnings that biodiversity loss and the degradation of ecosystem services such as water supplies, storm-surge retention and carbon sequestration have reached such severe levels that they pose as serious a threat to the global economy as climate change. Earlier this year, the World Economic Forum identified biodiversity as one of the most interconnected global business risks and estimated the impact of biodiversity risks in dollar terms to be between tens of billions for inland flooding and infectious disease, to many hundreds of billions for food price volatility and chronic disease.

Business itself has contributed significantly to the loss of biodiversity with London-based consultancy Trucost estimating that the combined environmental damage of the 300 biggest companies in the world was worth US$ 2.2 trillion in 2008.

Yet, the vast majority of the world’s largest companies are ignoring the risks presented by environmental degradation and biodiversity loss as indicated by a report released by PricewaterhouseCoopers (PwC). The report is based on an analysis into corporate reporting on biodiversity and ecosystem impact and dependency, undertaken as part of the UN report on the Economics of Ecosystems and Biodiversity (TEBB) for business to be released in summer. The analysis showed that few of the world’s largest companies are currently communicating about biodiversity risks or opportunities with mainstream investors. Only 18 companies made any mention of biodiversity or ecosystems in their full annual report, of these six have measures in place to reduce their impacts, and only two identified it as a strategic issue.

This is alarming as it is already well understood that all businesses, regardless of size, sector and location, ultimately depend on biodiversity and how companies manage biodiversity is, increasingly, seen as relevant to their bottom line performance. The United Nations Environment Programme (UNEP) stresses the following four risk areas:

* Supply of resources: Natural resources form the basis of a range of commercial products (e.g. food, paper, textiles, colorants, fabrics), and the services provided by ecosystems are essential to many production and processing operations. The continued supply of these products and services depends not only on sustainable use of species or utilised ecosystem services, but the careful management of the entire ecosystems upon which they depend.
* Brand and reputation: The information age is allowing consumers around the globe to be informed of the activities of companies in the remotest of areas. Bad publicity can shake shareholder’s confidence and affect profitability.
* Licence to operate: Access to land and other resources are increasingly affected by a company’s environmental track record. By adopting best practices on biodiversity and environmental and social issues a company is more likely to obtain and maintain a legal and social licence to operate from local communities.
* Access to finance: Financial institutions, in line with the Equator Principles, the UN Principles for Responsible Investment, and other directives, are making more demands on businesses to operate within suitable guidelines to minimize their impact on the environment, including preventing biodiversity loss. The International Finance Corporation (IFC), for example, is currently reviewing its Performance Standards, including Performance Standard Six (PS6) on Biodiversity Conservation and Natural Resources Management. The standard will clarify what is meant by a ‘critical natural habitat’ in order to improve consistency of application of the standards and request clients to preferably purchase ecologically sensitive resources from primary suppliers that have verified sustainable management practices

As pointed out by PwC, existing loss of biodiversity and degradation of ecosystems have already had dramatic consequences for business: Soil erosion in Europe is estimated to cost EUR 53 per hectare per annum. Annual economic losses caused by introduced agricultural pests in the US, UK, Australia, South Africa, India and Brazil exceed US $100bn.

Despite this, when asked to rate levels of concern about a range of threats to their business growth prospects, only 27 percent of 1100 global CEOs said they were concerned or extremely concerned about the impact of biodiversity loss in a recent PwC survey.
44percent of CEOs also feel that governments need to take a stronger role in protecting biodiversity and ecosystems; with only a quarter feeling their current policies are sufficient. This is indicative of the lacking understanding of many CEOs that business itself possesses biodiversity relevant knowledge, technical resources and managerial skills and can play a major role in biodiversity conservation. PwC argues that business opportunities have emerged from biodiversity and ecosystem services protection, including the global market for certified organic food which exceeds US$ 30 billion. Valuable new biodiversity related asset classes have also emerged; in the USA for example, wetland banking credits* range in value from US$ 7000 – 850,000 per hectare and have attracted substantial entrepreneurial investment.

Pavan Sukhdev, leader of a UNEP-led TEEB study highlights that “Some of the biggest business opportunities for the next 10 years concern natural capital. Reducing Emissions from Deforestation and Degradation (REDD) could be a $100 billion business.”

Other business opportunities, as highlighted by UNEP, include:

* Market opportunities: Increasingly, consumers are showing preferences for sustainably and ethically sourced and produced products. The demand for environmentally-friendly paper, for example, has led to 5 percent of the world’s product base. The global market for organic products reached a value of US$33.8 billion in 2005. The potential size of markets for sustainable agricultural and fisheries products is estimated to reach US$ 200 billion by 2050.
* Brand advantage: Being an environmental leader, making long-term investments and pursuing robust environmental risk management can put you ahead of the game, help differentiate your brand, and attract new business. Companies that appeared on the Dow Jones Sustainability Index emerged in a stronger position from the recent financial crisis than their industry peers.
* New business ideas: Sizeable markets and investment opportunities are developing for offsetting programmes to mitigate unavoidable impacts, making restoring and protecting important ecosystems a lucrative business opportunity. These include, for example, wetland mitigation banks and conservation banks**, the latter of which are set up by protecting land that contains threatened species.
* New technologies: The challenge to build a green economy and address environmental threats while responding to the growing demands of an increasing human population, creates opportunities for new technologies related to water desalination and purification, waste management and recycling, as well as sustainable agriculture.

Biodiversity loss and ecosystem degradation are not in most cases the result of headline-grabbing man-made disasters and the fundamental risks presented by them are less visible and felt by any one company. They cannot be measured by simple, universal indicators such as temperature and atmospheric CO2 concentration. However, this year will see some major work on the business risks and opportunities related to biodiversity loss and ecosystem degradation by organisations such as UNEP who is working on a valuable business tool to push the biodiversity agenda to share the limelight with climate change. Companies are well advised to stay on top of the biodiversity agenda and start thinking about how biodiversity loss and ecosystem degradation can affect the future value of their business, as we will see a significant growth in regulatory controls on high-impact businesses and of bio-carbon related GHG emissions that are already paving the way for global financing mechanisms, such as REDD.

One place to look for guidance is the TEEB publication, which will be released at the first Global Business of Biodiversity Symposium in London on 13 July. TEEB will offer practical guidance for business on how to measure and manage the risks of biodiversity and ecosystem losses, explore innovative economic tools for adapting to produce in more biodiversity-friendly ways, and help business leaders to identify and grasp new market opportunities.

* Wetland banking is a process of tracking wetland and upland buffer credits that are designated for replacement of future wetland losses. These wetland credits may result from a prior replacement project with excess credits earmarked for banking, or from a wetland creation/restoration project done solely for the purpose of establishing wetland credits in the State Wetland Bank. Wetland banking allows wetland acreage to be purchased from an account holder who has an account of functioning wetland credits.

** Conservation banks are specific structures for biodiversity conservation that are found in a number of countries: they follow the polluter-pays principle and use market mechanisms for flexible and efficient investments.

Link to PWC study click here