Globally, Profits Don't Begin to Cover Environmental Externalities

Imagine if businesses had to pay for their impacts on natural resources such as clean water, air quality, and land. Many advocates and research organizations have pointed out that cheap products, including food, would be much more expensive if these environmental costs were considered.

Trucost, a consulting firm that crunches the numbers on environmental externalities, delved into this question by investigating whether global industries are really making a profit in the long run if environmental impacts are considered.

Trucost’s report Natural Capital At Risk: The Top 100 Externalities of Business,”commissioned by The Economics of Ecosystems and Biodiversity(TEEB) program of the United Nations Environmental Program (UNEP), found that every single impactful sector of the world’s industries was in the red. Not one major industry is making a profit that exceeds its economic impact on the natural environment.

The study ranks the top impacts in each sector, breaking down the results by region so that companies and investors can assess impacts on unpriced natural capital, both through direct activity and through supply chains and holdings. The researchers used a method called True Cost Accounting (TCA) to measure both inputs and outputs for many types of industries, using data from all over the world. To measure natural capital, which is the sum of ecological materials and ecosystem services that businesses don’t pay to consume, the researchers integrated data across industries and regions.

Trucost found that across the globe, the true value of the unpriced natural capital consumed every year by the top industrial sectors amounts to US$7.3 trillion, or 13 percent of the global economic output in 2013.

The Report

TEEB commissioned the report to obtain the most recent and comprehensive estimates of the economic impact on natural capital, realizing that rising demand from 3 billion new members of the middle class will continue to grow rapidly across the globe.

According to the report, health impacts and water scarcity will likely continue to shrink the supply of many products, leading to tipping points for action by governments. TEEB AgFood is a sub-program focused specifically on the environmental and health costs associated with agriculture across the globe.

Wheat farming in Southern Asia and cattle ranching in South America and Southern Asia were especially impactful on the environment, yet generated insufficient profits to cover these societal costs. Across all sectors around the world, the majority of environmental costs were incurred by greenhouse gas emissions admissions (38 percent), water use (25 percent), and land use (24 percent).

Furthermore, shocks in agriculture affect other industries that rely on agricultural products. For example, Trucost’s analysis found that profits of clothing retailers were impacted up to 50 percent by volatility in the price of cotton. Agricultural trade is increasingly global, and “these risks are sufficiently large that the World Economic Forum cites ‘water supply crises’ and ‘failure of climate change adaptation’ along with several other environmental impacts among the most material risks facing the global economy,” according to the authors.

"Recent soft commodity price volatility due to drought, and its impacts on company profits, nation's trade balances and inflation has underscored the dependency of investment returns on natural capital,” says Alastair MacGregor, Chief Operating Officer of Trucost. “This trend will accelerate in the future on a number of fronts."

Despite the high environmental costs associated with many of the world’s industries, the report concluded that businesses and investors could work to incorporate these costs through risk management and enhancement of competitive advantage. “Government policies to address the challenge include environmental regulations and market-based instruments which may internalize natural capital costs and lower the profitability of polluting activities,” according to the authors of the report.

"We need undoubtedly to change how we do business, but we cannot manage what we do not measure - and at present only a handful of businesses measure their externalities,” says Pavan Sukhdev, Chair of the Advisory Board of TEEB for Business Coalition. “Resolving this is at the heart of the green economy and sustainability itself."

Trucost has published many other articles, reports, and infographics that seek to educate businesses and consumers about the real costs of industrial agriculture. The “true cost of a Thanksgiving dinner” found that if environmental costs were considered, families would pay 22 percent more than expected for a typical Thanksgiving dinner. Trucost has also analyzed the impacts of everyday products such as coffee, breakfast cereals, fruit, and cheese. By offering services to governments, investors, and companies, the organization hopes to spur change across sectors in accounting for the full costs of production.

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