Chapter 3: E FACTORS Flashcards
Environmental risks, World Economic Forum.
The Global Risks Report 2019 from the World Economic Forum (WEF),1 environmental risks dominated, accounting for three of the top five risks by likelihood and four out of five by impact.
The WEF categorises environmental risks into:
▶ Extreme weather events and temperatures;
▶ Accelerating biodiversity loss;
▶ Pollution of air, soil and water;
▶ Failures of climate change mitigation and adaptation; and
▶ Risks linked to the transition to a low-carbon economy.
2009, the Stockholm Resilience Centre (SRC)
PLANETARY BOUNDARIES
In 2009, the Stockholm Resilience Centre (SRC) led a group of internationally renowned scientists to identify and quantify the first set of nine priorities relating to human-induced changes to the environment that regulate the stability and resilience of the earth system.
This work was presented in a framework known as the planetary boundaries, within which humanity can continue to develop and thrive for generations to come.
Planetary boundaries and The WEF’s Global Risks Interconnections Map 2019
The concept of planetary boundaries and The WEF’s Global Risks Interconnections Map 20193 provide useful ways to understand the linkages and systemic relationship between the major environmental issues and how they affect companies and society as a whole.
Research published in the journal, Science, in 2015, four of nine…
According to an update of the research published in the journal, Science, in 2015, four of nine planetary boundaries have now been crossed as a result of human activity.
These are:
▶ climate change;
▶ loss of biosphere integrity;
▶ land-system change; and
▶ altered biogeochemical cycles (phosphorus and nitrogen).
A. climate change;
B. pressures on natural resources, including water, biodiversity, land use and forestry and marine resources; and
C. pollution and waste.
There are numerous studies and frameworks that identify a range of environmental factors that are relevant to how investors assess risks and opportunities in their decisions. For the purposes of this syllabus, the environmental issues covered will include:
A. climate change;
B. pressures on natural resources, including water, biodiversity, land use and forestry and marine resources; and
C. pollution and waste.
Climate change
Climate change is defined as a change of climate, directly or indirectly attributed to human activity, that alters the composition of the global atmosphere and which is, in addition to natural climate variability, observed over comparable time periods.
It is one of the most complex issues facing us today and involves many different dimensions – science, economics, society, politics and moral and ethical questions. It is a global issue with local manifestations.
(e.g. extreme weather events) and global impacts (e.g. global warming, rising sea levels).
Biggest market failure
The warming of the planet caused by greenhouse gas emissions poses systemic risks to the global economy and will have far-reaching effects.
In 2006, the Stern Review5 concluded that climate change is a unique challenge for economics and the biggest market failure ever seen.
The review went on to state that “no- one can predict the consequences of climate change with complete certainty; but we now know enough to understand the risks”
Since then, the scientific and economic evidence that points to increasing risks of serious, irreversible impacts from climate change has become overwhelming.
2018 report by the Intergovernmental Panel on Climate Change (IPCC)
Physical risk from a changing climate is already present and growing.
In the 2018 report by the Intergovernmental Panel on Climate Change (IPCC), human activities are estimated to have caused approximately
1°C (1.8°F)
of global warming above pre- industrial levels, and global warming is likely to reach 1.5°C (2.7°F) between 2030 and 2052,
if it continues to increase at the current rate.
The report further highlights a number of climate change impacts that could be avoided by limiting global warming to 1.5°C (2.7°F) compared to 2°C (3.6°F), or more.
UN Environment Programme Emissions Gap Report 2019
7.6% per year
The UN Environment Programme Emissions Gap Report 2019 finds that even if all government commitments under the Paris Agreement were implemented, we are still on course for a 3.2°C (5.8°F) temperature rise.
The report tells us that to get in line with the Paris Agreement, emissions must drop
7.6%
per year from 2020 to 2030 for the 1.5°C (2.7°F) goal and 2.7% (4.9°F) per year to meet the 2°C (3.6°F) goal.
The IPCC affirms that the impact of a 1.5°C (2.7°F) increase in global temperatures will …
…“disproportionately affect disadvantaged and vulnerable populations through food insecurity, higher food prices, income losses, lost livelihood opportunities, adverse health impacts, and population displacements”
Sustainable Development Goal (SDG) number 13
‘Urgent action to combat climate change and its impacts’
However - given the systemic nature of climate change, addressing it with mitigation, adaptation or resilience measures can impact and help address all the remaining SDGs. Such actions are particularly closely related to:
▶ SDG2: Zero hunger through sustainable agriculture and aquaculture;
▶ SDG3: Good health and wellbeing through pollution control;
▶ SDG6: Clean water and sanitation;
▶ SDG7: Affordable and clean energy;
▶ SDG9: Industry, innovation and infrastructure;
▶ SDG11: Sustainable cities and communities;
▶ SDG12: Responsible consumption and production, particularly in the context of waste management and the circular economy;
▶ SDG14: Life below water (including marine conservation and sustainable aquaculture);
and
▶ SDG15: Life on land (including forest conservation, reforestation, sustainable agriculture and sustainable
forestry).
Business sectors that are carbon intensive are judged to be at particular risk from climate change. High
emitting sectors include:
▶ oil, gas and coal;
▶ heavy industrial sectors, such as petrochemicals, steel and cement; and
▶ the buildings and transport sector.
Climate change risk is best understood in terms of transition and physical risks:
Ok…
▶ Transition risks
are a result of changes in climate and energy policies, a shift to low-carbon technologies and liability issues.
▶ Physical climate-related risks
result from extreme weather events, either acute or chronic risks from longer- term shifts in climate patterns, for example, higher temperatures.
As climate change is a cross-cutting and systemic challenge, businesses are exposed to a range of potential impacts, for example:
▶ the risk of stranded assets in the coal, oil and gas, and petrochemical industries because of climate policy action taken to reduce emissions;
▶ growing stress on water resources, with implications for agriculture; and
▶ the physical impacts of climate change, for example the consequences of rising sea levels for installations on the coast such as oil refineries and nuclear plants, but also cities, buildings and infrastructure (e.g. roads, bridges, water supply and other pipelines).
AFOLU…?
Agriculture, Forestry and Other Land Use (AFOLU)
Responding to climate change involves two possible approaches:
▶reducing and stabilising the levels of heat-trapping greenhouse gases in the atmosphere (climate change
mitigation); or
▶ adapting to the climate change already taking place (climate change adaptation) and increasing climate
change resilience.
Climate change mitigation is a human intervention that involves reducing the sources of greenhouse gas emissions (for example, the burning of fossil fuels for electricity, heat or transport) or slowing down the process or enhancing the ‘sinks’ that store these gases, such as forests, oceans and soil.
The goal of mitigation is to:
▶ avoid significant human interference with the climate system;
▶ stabilise greenhouse gas levels in a timeframe sufficient to allow ecosystems to adapt naturally to climate change;
▶ ensure that food production is not threatened; and
▶ enable economic development to proceed in a sustainable manner.
Examples include greater adoption of mitigation strategies and policies to promote sustainability include:
▶ Energy – renewable energy sources (such as wind, solar, geothermal and hydro or biofuels from sustainable sources).
▶ Buildings – retrofitting buildings to become more energy efficient and using building materials and equipment that reduce buildings’ carbon footprint.
▶ Transport – more sustainable transportation and infrastructure, particularly in cities (such as electric vehicles, rail and metro and bus rapid transit), but also decarbonising shipping, road and air transport.
▶ Land use and forestry – improved forest management and reducing deforestation.
▶ Agriculture – improved crop and grazing land management to increase soil carbon storage.
▶ Carbon tax – carbon reduction policies which penalise heavy emitters and promote greenhouse gas emission reductions.
▶ Industry and manufacturing – developing more energy efficient processes and products, as well as equipment and processes to facilitate carbon capture, power storage (e.g. batteries, pump systems), recycling efficiency, etc.
In its 2013 report, Climate Change, Action, Trends and Implications for Business, the IPCC considered four potential futures depending on what policies governments adopt to cut emissions – from a baseline scenario of ‘business as usual’ to varying degrees of climate scenarios that require different levels of mitigation.
Business as usual (4Deg) Some Mitigation (Likely 2Deg) Strong Mitigation (Likely 2Deg) Aggressive Mitigation (Unlikely 2Deg)
adaptation and resilience
European Commission describes adaptation as anticipating the adverse effects of climate change and taking appropriate action to prevent or minimise the damage they can cause or taking advantage of opportunities that may arise.
Examples of adaptation strategies include a variety of development plans on how to deal with:
▶ protecting coastlines and adapting to sea-level rise;
▶ building flood defences;
▶ managing land use and forestry practices;
▶ planning more efficiently for scarce water resources;
▶ developing drought resilient crops;
▶ protecting energy and public infrastructure; and
▶ developing clean cooling systems.
Climate change adaptation and resilience measures require location-specific assessment of climate risks
and suitable approaches to address them.
In late 2019, Climate Bonds Initiative published the first Climate Resilience Principles…
In late 2019, Climate Bonds Initiative published the first Climate Resilience Principles, which provide a framework for developing location-specific climate resilience measures and financing them in the green bond market.
A Framework and Principles for Climate Resilience Metrics in Financing Operations,
(multilateral development banks)
A group of multilateral development banks have also put forward A Framework and Principles for Climate Resilience Metrics in Financing Operations….
…. which provide guidance on how to create effective climate resilience projects and how to measure direct outcomes and wider system impacts.
Cities (RISKS)
Cities and municipalities in particular are at the frontline of adaptation and resilience due to their high concentration of people, assets and economic activities.
Representing 80% of global gross domestic product (GDP), cities are heavily exposed to climate change risks in the forms of:
▶ sea level rise;
▶ extreme weather events, such as flooding and drought; and
▶ increase in the spread of tropical diseases.
At the same time, cities are a major contributor of greenhouse gas emissions mainly from transport and buildings.
A 2019 report by C40…
All of these will have an economic and social cost to cities’ inhabitants, infrastructure, businesses and the
built environment. At the same time, cities are a major contributor of greenhouse gas emissions mainly from transport and buildings. A 2019 report by C40 outlines useful best practices of various cities’ climate adaptation strategies.
Pressures on natural resources
The relationship between businesses and natural resources is becoming increasingly important due to the loss of biodiversity and access to natural resources being less secure.
For the purposes of this syllabus,
natural resources covers…
fresh water,
biodiversity,
land use and forestry and
marine resources.
Natural resources also include non-renewable resources (such as fossil fuels, minerals and metals), which cannot be replenished quickly enough to keep up with its consumption.
Governments and businesses are having to deal with increased pressure on natural resources, caused by:
▶ population growth;
▶ health improvements leading to people living longer;
▶ economic growth; and
▶ the accompanying increased consumption in developed and emerging economies.
Simultaneously, these drivers are leading to the risk of **resource scarcity.
These developments are therefore compelling companies to become more efficient in the way that they use natural resources if they are to remain competitive and become more sustainable …
… this can help drive better financial management of resources…
… but also spur technological innovations that can have a beneficial impact on the bottom line…
… in support of a more sustainable and resilient economy and society.
Over-consumption of natural resources
According to the United Nations, the current world population of 7.6 billion is expected to reach:
▶ 8.6 billion in 2030;
▶ 9.8 billion in 2050; and
▶ 11.2 billion in 2100.
The planetary boundaries model sets out the limits of the earth’s natural resources and naturally plays into
this debate.
Over-population has tended to be a taboo subject, especially because it is sensitive in developing countries.
Recently, as the interlocking trends of population increase, food production, non-renewable resource depletion and pollution generation have become more prominent,
…organisations have shown more
of an inclination to address the risks of over-population.
Club of Rome
(The Limits to Growth) 1972
The Club of Rome, an organisation of eminent
global experts ranging from scientists to politicians, has continued – following the publication of what was a landmark book in 1972, The Limits to Growth – to focus on this theme.
Population, Affluence and Technology
The prognosis is, particularly in the face of climate change and associated environmental pressures, that it is finally time to redefine growth in a more balanced fashion, addressing three factors in particular:
population,
affluence and
technology.
Central to the UN’s Sustainable Development Agenda 2030, is the importance of shifting to a more sustainable consumption and production model (SDG12), which is about meeting the needs of all whilst using fewer resources, including energy and water and producing less waste and pollution.
Water
Nearly 70% of the planet is covered by water, but only 2.5% of it is fresh water. Water is a vital natural resource, not only for human consumption but also for a range of agricultural, industrial, household, energy generation, recreational and environmental activities. It is critical to many industrial processes, including minerals extraction and cooling for industrial plants. Water demand is set to increase in all sectors.
World Economic Forum, water - connects - sectors - to broader economic system - must balance social development and environmental interests.
According to the World Economic Forum, water also connects these sectors into a broader economic
system that must balance social development and environmental interests.
As the world continues to face multiple water challenges, a decision to allocate more water to any one sector implies that less water will be available for other economic uses, for the public water supply and other social services, or for environmental protection.
Water scarcity
Water scarcity is the lack of freshwater resources to meet water demand.
Water scarcity is present on every continent and is one of the largest global risks in terms of potential impact over the next decade.
UN WATER
UN Water reports that over…
…two billion people experience high water stress across different countries, and about
…four billion people experience severe water scarcity …
…at least one month of the year.
UN’s Sustainable Development Goal 6
The UN’s Sustainable Development Goal 6 is the need “to ensure availability and sustainable management of water and sanitation to all”.
Water scarcity – caused either by economic factors such as lack of investment or by physical impacts related to climate change – continues to cause major concern, especially among the developing and emerging economies.
Biodiversity!!
Biodiversity, land-use and associated ecosystems provide a range of invaluable services to society that underpin human health, well-being and economic growth.
Ecosystem services are the benefits that people, including businesses, derive from ecosystems. Biodiversity (or biological diversity), as defined by the Convention on Biological Diversity, means the “variability among living organisms from all sources including, among other things, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems”
International Union for Conservation of Nature (IUCN)
According to the International Union for Conservation of Nature (IUCN), biodiversity underpins ecosystem services, provides natural resources and constitutes our ‘natural capital’.
Some of these ecosystem services include food, clean water, genetic resources, flood protection, nutrient cycling and climate regulation, amongst many others.
Natural capital
Natural capital is defined as:
“the world’s stocks of natural assets which include
geology,
soil,
air,
water and
all living things.
It is from this natural capital that humans derive a wide range of services, often called ecosystem services, which make human life possible.”
The importance of taking a natural capital approach is explained in more detail in Section 7, which discusses investment opportunities.
In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES)….
In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) published a landmark report, which showed that around one million animal and plant species are now threatened with extinction,
many within decades, more than ever before in human history.
The IPBES report provides a stark and comprehensive set of scientifically proven findings that highlight the deterioration of biodiversity and its ecosystem functions and services.
According to the report, humans have impacted over 75% of Earth’s land areas and 66% of the oceans.
This deterioration is caused by a combined result of land/sea use change, direct exploitation, climate change and pollution.
The WWF’s 2018 Living Planet Report shows an overall decline of 60% in species’ populations …
The WWF’s 2018 Living Planet Report shows an overall decline of 60% in species’ populations between 1970 and 2014, a trajectory it claims will likely be exacerbated by global warming. A major driver of this decline is loss of habitat, linked to overexploitation due to large-scale infrastructure and agriculture activity.
The Organisation for Economic Co-operation and Development (OECD) Environmental Outlook to 2050 projects a further 10%….
…loss in biodiversity by 2050 under a ***business-as-usual scenario, threatening the provision of these services.
Biodiversity loss is already causing severe problems for land use and marine industries, such as the fishing sector.
Other sectors that have potential risk exposure to biodiversity loss include:
▶ agriculture;
▶ the extractives industries (cement and aggregates, oil and gas, and mining);
▶ forestry (palm oil and timber); and
▶ tourism.
The ability to conserve nature and improve the sustainable use of natural resources can only be achieved …
...through transformative changes across economic, social, political and technological factors.
Land Use and Forestry
Land use management practices and forestry (also known as Agriculture, Forestry and Other Land Use (AFOLU)),
have a major impact on natural resources including water, soil, nutrients, plants and animals.
AFOLU sector is responsible for 23%
According to the IPCC, the AFOLU sector is responsible for 23% of total net anthropogenic emissions, mainly from deforestation, and agricultural emissions from livestock, soil and nutrient management.
The protection and management of land resources plays a vital role in ensuring the balance of nature and health of the ecosystem.
If not managed sustainably…
…it will negatively affect biodiversity, ecosystems and all the natural resources that humans depend on and underpin economic growth.
2019, IPCC, Special Report on Climate Change and Land, which highlighted notable findings. Among them…..
….the stability of food supply is projected to decrease as the magnitude and frequency of extreme weather events that disrupt food chains increases.
Forests. 30%. 4 billion hectares.
Forests cover approximately 30% of the world’s land area, or just under 4 billion hectares.
Forests are a vital part of the carbon cycle.
They convert the CO2 in the air to oxygen, through the process of photosynthesis, and, in this way, they can be considered a natural regulator of carbon dioxide
(which is underlined by the important role that the world’s tropical forests play in sequestering carbon from the atmosphere).
The more trees, the less carbon dioxide in the atmosphere, and the more oxygen there is.
Deforestation and Forest Degradation. 10–15%.
IPBES
Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services
Deforestation and forest degradation account for approximately 10–15% of the world’s greenhouse gas emissions.
The IPBES report states that:
“100 million hectares of tropical forest were lost from 1980 to 2000, resulting mainly from cattle ranching in Latin America
(about 42 million hectares)
and plantations in
South-East Asia
(about 7.5 million hectares)
(of which 80% is for palm oil, used mostly in food, cosmetics, cleaning products and fuel)
among others.
$$$ linked to deforestation (CDP)
According to CDP, up to US$941bn (£751.5bn) of turnover in publicly listed companies is dependent on commodities linked to deforestation, including: soy, palm oil, cattle and timber.
Soft commodity supply chain risks from these industries can affect standard financial metrics such as revenue, asset valuation or costs, which can impact the credit worthiness or market value of the debt or equity of investee companies.
Exposure to Deforestation = Material Risks
Companies with exposure to deforestation in their supply chains may face material financial risks, such as:
▶ supply disruption;
▶ cost volatility; and
▶ reputational damage.
shifting business practices allows:
By contrast, shifting business practices to adopt more sustainable land management approaches contributes to:
▶ agricultural and economic development, both locally and globally;
▶ the health and stability of forests and ecosystems, and the continued provision of ecosystem services at an
increasing scale; and
▶ the reduction of greenhouse gas emissions from deforestation and degradation.
Marine resources!!!
The ocean is the planet’s largest carbon sink, producing over half of the world’s oxygen and absorbing 50 times more carbon dioxide than the atmosphere. It is one of the most valuable natural resources, providing seafood and is also widely used for transportation (shipping). The UN’s Sustainable Development Goal 14 is ‘life below water’
(OECD) Ocean-Based Value Add?
The Organisation for Economic Co-operation and Development (OECD) estimates that ocean-based industries contribute roughly €1.3 trillion (£1.2tn) to global gross value added.
What are the Ocean-Based Industries?
Oceans are also mined for minerals
(salt, sand and gravel as well as some manganese, copper, nickel, iron and cobalt, which can be found in the deep sea)
and drilled for crude oil.
The oceans’ resources are a source of economic growth and are also known as the blue economy.
the blue economy.
According to the World Bank, the blue economy is the
“sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”.
SIDS and COASTAL ZONES
680 M People to 1 Billion by 2050.
Communities in close connection with coastal environments, small islands (including Small Island Developing States (SIDS)), polar areas and high mountains are particularly exposed to ocean change, such as sea level rise.
Low-lying coastal zones are currently home to around 680 million people (nearly 10% of the 2010 global population), projected to reach more than one billion by 2050
OVERFISHING!!!
Due to the increase in the human population, the oceans have been overfished, with a resulting decline of fish critical to the economy.
In 2015:
▶ 33% of marine fish stocks were being harvested at unsustainable levels;
▶ 60% were fished to maximum capacity; and
▶ only 7% harvested at levels lower than what can be sustainably fished.
The control of the world’s fisheries is a controversial subject, as production is unable to satisfy the demand, especially when there aren’t enough fish left to breed in healthy ecosystems.
C. Pollution, waste and a circular economy!!
AIR POLLUTION!!!
Air pollution
Clean air is essential to health, the environment and economic prosperity. Increased air pollution:
▶ adversely affects the environment; ▶ has a negative impact on human health; ▶ destroys ecosystems; ▶ impoverishes biodiversity; and ▶ reduces crop harvests as a result of soil acidification.
World Health Organization (WHO) Evidence (More than 1/10th!!)
MEGACITIES
Indoor and outdoor air pollution are together responsible for more than one-tenth of all deaths globally each year, according to the World Health Organization (WHO).
Evidence by the WHO further shows that more than 90% of the world’s population live in areas with levels of air pollution that exceed WHO guidelines.
Urban air pollution is predicted to worsen, as migration and demographic trends drive the creation of more megacities.
Pollution is the largest environmental cause of disease and premature death in the world today!!!
October 2017 by the Lancet Commission on Pollution and Health)
Compared to AIDS, tuberculosis and malaria, and to WAR???
Pollution is the largest environmental cause of disease and premature death in the world today.
According to findings published in October 2017 by the Lancet Commission on Pollution and Health, diseases caused by pollution were responsible for an estimated:
- ** 9 million premature deaths in 2015 –
- **16% of all deaths worldwide –
- **three times more deaths than from AIDS, tuberculosis and malaria combined, and
- **15 times more than from all wars and other forms of violence.
Water Pollution
Water is essential to all living organisms.!!
Yet water pollution is one of the most serious environmental threats faced.
Water pollution occurs when contaminants
**(such as harmful chemicals or microorganisms) **
are introduced into the natural environment – through the ocean, rivers, streams, lakes or groundwater.
Water pollution can be caused by spills and leaks from untreated sewage or sanitation systems and industrial waste discharge.
Plastic waste has also found itself in waterways.
Flint Water Crisis
n 2014, the Flint city water service in the state of Michigan (USA) changed its water source to
the local Flint River in an effort to cut costs. However, the water in the river failed to be properly treated and dangerous levels of lead leached from old pipes. This caused a public health crisis that endangered thousands of children and adults, and continues to have long-term health implications.
Flint residents have since filed more than a dozen lawsuits against the city, the state and the federal government. The state attorney general, on the other hand, filed a lawsuit against the companies that were involved at the time, including Veolia, a global utility company.
Waste and waste management
In view of the concerns about growing pressures on natural resources – combined with opposition to all types of pollution – waste and waste management has, in recent decades, become a bigger priority for policymakers, businesses and citizens.
Increasing consumption and waste levels are putting more pressure on space for landfill waste, which in turn is causing landfill taxes to rise.
Alongside tougher regulation on how waste is handled and managed, businesses are becoming increasingly incentivised to help economies, notably through recycling and by adopting a
**circular economy business model.
Campaign Against Plastics
Ellen MacArthur Foundation and the UN Environment Programme (UNEP) ‘best practices’ to address the plastic waste and pollution system.
A recent striking example of the public’s concern over excessive waste is the campaign against plastics, especially in relation to the serious damage that they are doing to our oceans.
This has led to actions by national and local authorities on waste management, and greater responsibility conferred on businesses to manage their waste responsibly.
A global commitment by companies led by the Ellen MacArthur Foundation and the UN Environment Programme (UNEP) has set a benchmark for ‘best practices’ to address the plastic waste and pollution system.
Commercial Recycling Incentives??
In most developed countries, domestic waste disposal is funded from national or local taxes, which may be related to income, or property values.
Commercial and industrial waste disposal is typically charged for as a commercial service, often as an integrated charge that includes disposal costs.
This practice may encourage disposal contractors to opt for the ***cheapest disposal option such as landfill rather than the best environmental solution such as re-usage and recycling.
Landfill and Incineration BAD.
**Hypothecated taxes, including the plastic bag charge, are designed to discourage waste and promote recycled usage and are becoming more popular.
Landfill remains the most common means of waste management globally. Incineration of waste is carried out in some countries; but it is a controversial practice owing to its generation of gaseous pollutants.
This has led to a rise of recycling waste in developed and, increasingly, developing countries.
Many consumer products (such as metal cans and glass bottles) are recyclable, although the practice varies by city and country.
A financial mechanism, which is growing in popularity in the consumer space, is the use of hypothecated taxes, including the plastic bag charge, designed to discourage waste and promote recycled usage.
Circular Economy
The circular economy is an economic model that aims to avoid waste and to preserve the value of resources for as long as possible.
That’s:
raw materials,
energy and
water.
It is an effective model for companies to assess and manage their operations and resource management as it is an alternative approach to the
use-make-dispose economy.
The circular economy is based on three principles:
- design out waste and pollution;
- keep products and materials in use;
and - regenerate natural systems.
The government of the Netherlands has developed a programme for a circular economy…
The government of the Netherlands has developed a programme for a circular economy, aimed at
“preventing waste by making products and materials more efficiently and reusing them.
If new raw materials are needed, they must be obtained sustainably so that the natural and human environment is not damaged”.
Ellen MacArthur Foundation: The importance of a circular economy.
A recent report from the Ellen MacArthur Foundation, stresses the importance of a circular economy as a fundamental step towards achieving climate targets.
To illustrate this potential, the paper demonstrates how applying circular economy strategies in just five key areas
1. Cement.
2. Aluminium.
3. Steel.
4. Plastics.
5. Food
can eliminate almost half of the remaining emissions from the production of goods – 9.3 billion tonnes of CO2e in 2050 – equivalent to cutting current emissions from all transport to zero.
- SYSTEMIC RELATIONSHIPS BETWEEN BUSINESS ACTIVITIES AND ENVIRONMENTAL ISSUES
This Chapter EXPLAINS
The systemic relationships and activities between business activities and ecosystem services, including:
climate change and other environmental issues;
supply, operational and resource management issues;
supply chain transparency and traceability;
systemic impact of climate risks on the financial system.
Much of the understanding of key environmental factors in respect of business and investment centres on specific issues,
such as **climate change and **unsustainable natural resource consumption and production –
and on the negative impacts that businesses, consumption habits and investment demand are having on the health of natural capital stocks.
There is, however, less of an understanding of how businesses and financial activities depend on natural resources and properly functioning ecosystem services.
This is due to the difficulty in valuing and measuring natural resources and so, this has not been fully priced into the costs of doing business.
This is also known as the
**cost of pricing externalities*
Climate change and other environmental issues.
Physical Risks
Over the last 20 years, physical risks have become an increasingly more important consideration of the business agenda.
The physical risks of climate change are a major theme and outcome of the science,
manifested in:
▶ more extreme weather effects, such as unprecedented rainfall (Houston in 2017) or severe drought and bushfires (southern Australia in 2018 and again in 2019);
▶ rising sea levels caused by the melting of glaciers (in Antarctica and Greenland), and the well-documented roll- back of Arctic ice;
▶ the acidification of the oceans and degradation of marine life, notably on coral reefs and plankton ecosystems; and
▶ the impacts on food and crops (The World Food Programme (WFP) sees major risks to food availability and access to food for developing countries. This is because lower food production could negatively affect incomes and increase the prices of major crops in some regions.)
All these impacts are set out in IPCC’s Special report: Global warming of 1.5 °C.
A manifestation of the economic consequences of climate change can be seen in the growing evidence of direct linkages between climate-derived catastrophes and business risks.
Intergovernmental Panel on Climate Change
Energy Performance Certificate of E or better.
There is also growing awareness that the transition to a low-carbon economy entails policy, legal, technology and market risks related to climate change,
and can be particularly acute for high-emission businesses and economic activities that are highly vulnerable to climate change impacts.
For example, in the UK, a minimum level of energy efficiency standards introduced in 2018 prohibits private landlords from letting residential units if their
***EPC (Energy Performance Certificate) rating is E **
or lower, effectively creating stranded assets unless the landlord invests in energy efficiency upgrades to their properties.
In 2019, some of the UK’s leading commercial property owners representing more than $305 billion in AUM and +11,000 commercial properties globally signed a groundbreaking commitment to tackle climate change through the delivery of net zero carbon real estate portfolios by 2050.
According to the UN Environment Programme, policy and regulatory measures backing green finance have more than doubled since 2015.
According to the UN Environment Programme, policy and regulatory measures backing green finance have more than doubled since 2015,
and reporting and disclosure are a focal point for policy and regulatory action
– comprising roughly 25% of all measures implemented.
As multilateral organisations, central banks and governments step up their efforts to tackle climate change, the rate of policy action and demands on disclosure around climate change risks and risk mitigation are expected to increase,
posing a business risk in their own right if not or inadequately addressed.
Relationship between natural resource and business.
In general, businesses and investment activities impact and depend on natural resources and ecosystem services in both direct and indirect ways.
The Global Reporting Initiative (GRI) — which is a global sustainability reporting framework —- explains the causes of
*****direct and indirect impacts and dependencies of businesses on biodiversity resources.
▶ A direct impact:
An organisation’s activities directly affecting biodiversity.
For example when degraded land is converted for the benefit of production activities, surface water is used for irrigation purposes, toxic materials are released, or local species are disturbed through the noise and light produced at a processing site.
▶ An indirect impact: the impact is caused by parties in an organisation’s supply chain(s).
For example, when an organisation imports fruits and vegetables, produces cotton shirts, sells construction materials or publishes books, the production of the inputs for these goods will have indirect impacts.
Indirect impacts can also include those from activities that have been triggered by the operations of the organisation.
For example, a road constructed to transport products from a forestry operation can have the indirect effect of stimulating the migration of workers to an unsettled region and encouraging new commercial development along the road.
***Indirect impacts may be relatively difficult to predict and manage, but they can be as significant as direct impacts and can easily affect an organisation.
Impacts on biodiversity can be either negative
(degrading the quality or quantity of biodiversity)
or positive (creating a net contribution to the quality or quantity of biodiversity)
Examples of sectors that rely significantly on natural resources and ecosystem services, with the potential to negatively affect biodiversity, include:
▶ agriculture, aquaculture, fisheries and food production;
▶ extractives, infrastructure and activities or projects involving large-scale construction activities;
▶ fast-moving consumer goods (FMCG) companies – primarily through the sourcing of raw materials in products;
▶ forestry;
▶ pharmaceutical (in some cases);
▶ tourism and hospitality (in some cases); and
▶ utilities, including those involved in hydropower or open-cycle power plants generating significant thermal discharges.
Supply, operational and resource management issues.
Companies need to measure, manage and disclose the environmental impact (both positive and negative) from their direct operations.
Investors need to assess the extent to which companies understand the impact of their operations and manage resources, which are material to their business.
Environmental impacts from direct operations can include:
▶ toxic waste; ▶ water pollution; ▶ loss of biodiversity; ▶ deforestation; ▶ long-term damage to ecosystems; ▶ water scarcity; ▶ hazardous air emissions and high greenhouse gas emissions; and energy use.
Failure to address these challenges will expose businesses to additional risks, while working on solutions presents a business opportunity to develop climate-resilient business strategies.
The circular economy described in Section 1 is a useful model for companies to assess and manage their operations and resource management.
The UK Government updated its Environmental Reporting Guidelines in March 2019… KPIs!!
Providing guidelines for businesses to measure and report their environmental impacts, including greenhouse gas emissions. The guide emphasises the use of environmental key performance indicators (KPIs) to capture the link between environmental and financial performance.
