Natural capital depletion signals huge risk for investors

It’s a well-known fact that we are depleting the Earth’s natural resources at a faster rate than we are replacing them. Now a report published by an international business coalition has quantified the damage that each primary industry is inflicting on the world’s ecosystem.

The Economics of Ecosystems and Biodiversity (TEEB) for Business Coalition’s estimates the unpriced costs of land use, water consumption, greenhouse gas emissions, air pollution, land and water pollution and waste from primary production and primary processing amounts to $7.3 trillion a year. That’s 13% of 2009 global economic output.

Conducted for the TEEB coalition by Trucost, the report finds coal power generation, rice and wheat farming, cattle ranching and water supply are the biggest culprits in the great drawdown on the Earth’s natural resource bank.

In 2009, these sectors appear most frequently in the top 20 ranking of sectors on total costs from natural resource use, pollution and waste in different regions. At the top of the league, coal generation costs in Eastern Asia ($452.8bn) are slightly higher than those for the sector’s impacts in North America ($316.8bn).

The next highest impacts are driven by agricultural sectors in areas of high water scarcity, and where the level of production, and therefore land use, is high. The high value of ecosystems in South America and Southern Asia contributes to the potential materiality of impacts from cattle ranching and wheat farming in these regions ($358.8bn and $163bn respectively). All this boils down to an astonishing conclusion. Of the top 20 region-sectors (a particular industry in a particular region) ranked by environmental impacts, none would be profitable if externalities were fully integrated.

For investors the risks are huge. They must understand the extent to which companies they invest in are addressing risks from natural capital depletion, which are already the most significant driver of some raw material price fluctuations.

King Coal’s reign on wane
The statement “Coal is King” is perhaps no more true than in Australia, where the world’s second largest coal exporter is also one of the biggest users of coal for power generation. But the tide is turning against coal miners.

Australia’s Uniting Church in May added fossil fuels to its black list of industries it will no longer invest in, joining those in the armaments, tobacco and alcohol sectors.

Now the big four retail banks are coming under pressure to drop financing of coal projects, with campaign group Market Forces – an offshoot of Friends of the Earth – the latest to join urge a boycott.

The move against coal has now caught the attention of Australian based analysts at Citigroup, who say coal reserves face a dramatic devaluation because of potentially stronger action against global warming.

The Citi report finds that half the value ascribed to specialist coal miners could potentially be lost if the world took decisive action on climate change by 2020. 

Image credit: Unsplash/Lukasz Szmigiel