Chapter 3: Environmental Factors Flashcards
According to an update by the Stockholm Resilience Centre from 2017, four of nine planetary boundaries have already been crossed as a result of human activity:
▶ climate change;
▶ loss of biosphere integrity;
▶ land-system change; and
▶ altered biogeochemical cycles (phosphorus and nitrogen loading).
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, including: ▶ science; ▶ economics; ▶ society; ▶ politics; and ▶ moral and ethical questions.
It is an issue with local manifestations (e.g. extreme weather events, such as more frequent and/or more intense tropical cyclones) and global impacts (e.g. rising global average temperatures and sea levels), which are estimated to increase in severity over time.
The main man-made driver of the warming of the planet is rising emissions of greenhouse gases (GHGs). They form a layer in the atmosphere that prevents increasing amounts of the heat reaching the Earth from the Sun from being radiated back into space. Carbon dioxide (CO2) is the most significant contributor to the warming effect, because of its higher concentration in the atmosphere, which is at levels not seen since before Homo sapiens first appeared.
Greenhouse gases
The main man-made driver of the warming of the planet is rising emissions of greenhouse gases (GHGs). They form a layer in the atmosphere that prevents increasing amounts of the heat reaching the Earth from the Sun from being radiated back into space. Carbon dioxide (CO2) is the most significant contributor to the warming effect, because of its higher concentration in the atmosphere, which is at levels not seen since before Homo sapiens first appeared.
Other important GHGs include methane, nitrous oxide and other fluorinated gases. Although the average lifetime in the atmosphere of such gases is shorter than that of carbon dioxide, they tend to “compensate” by having a higher ‘warming potential’ – 30 times stronger, in the case of methane, and over 23,000 times stronger
for sulphur hexafluoride, when compared over a century.
Emissions of GHGs primarily come from energy, industry, transport, agriculture and changes in land-use (such as deforestation), with CO2 resulting from the burning of fossil fuels (e.g. in power plants, gas boilers and vehicles) comprising the highest share – around two-thirds - of all GHGs.
Tipping points
▶ The melting of the permafrost – frozen ground in the Northern hemisphere, the thawing of which would release the vast amounts of carbon it currently holds, thereby further accelerating climate change.
▶ The disintegration of the West Antarctic ice sheet – this holds enough ice to raise global sea levels by over three metres.
▶ The ‘dieback’ of the Amazon rainforest – changes in temperature and deforestation that would render the forest unable to sustain itself, making one of the world’s largest natural stores of carbon emit more carbon than it absorbs.
▶ Melting Arctic ice sheets, causing a shutdown in the system of currents in the Atlantic Ocean that brings warm water up to Europe, which, among other consequences, may lead to ‘widespread cessation of arable farming’ in the UK and parts of Europe.
climate economist Martin Weitzman’s dismal theorem
suggests that standard cost-benefit analysis is inadequate to deal with the potential downside losses from climate change. However small their probability, as long as we cannot completely rule out scenarios of climate-induced civilisational collapse, their expected value must be properly understood as being equivalent to negative
infinity
Responding to climate change is usually presented in terms of two main approaches:
- reducing and stabilising the levels of heat-trapping GHGs in the atmosphere (climate change mitigation); or
- adapting to the climate change already taking place (climate change adaptation) and increasing climate change resilience.
However, this is not a binary option; some of the most effective climate policies pursue both objectives simultaneously.
Climate change mitigation
Climate change mitigation is a human intervention that involves reducing the sources of GHG emissions (for example, the burning of fossil fuels for electricity, heat or transport) or enhancing the sinks that store these gases (such as forests, oceans and soil) in an attempt to slow down the process of climate change. The goal of
mitigation is to:
▶ avoid significant human interference with the climate system;
▶ stabilise GHG 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
The aim of the international Paris Agreement on climate change
To hold “the increase in the global average temperature to well below 2°C (3.6°F) above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C (2.7°F) above pre-industrial levels” by the end of the century.
Climate change adaptation and resilience
Researchers have observed that some of the most effective climate policies (such as the protection of coastal wetlands or the promotion of sustainable agroforestry) contribute to both adaptation and
mitigation simultaneously.
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.
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 GHG emissions, mainly from transport and buildings. Useful best practices of various cities’ climate adaptation strategies include:
▶ incorporating flood risk into building designs (in New York) and planning for enhanced water absorption rates into city infrastructure (‘sponge cities’ like Wuhan);
▶ modelling the impact of natural disasters on energy supply (in Yokohama); and
▶ analysing the resiliency to disruption of food supply systems (in Los Angeles and Paris).
Natural resources
▶ fresh water;
▶ biodiversity loss;
▶ 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 their 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.
Biodiversity
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”.
Ecosystem services
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
“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.”
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 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 GHG emissions from deforestation and degradation.
The blue economy
The “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean
ecosystem”
Circular economy
The circular economy is an economic model that aims to avoid waste and to preserve the value of resources (raw materials, energy and water) for as long as possible. It is an effective model for companies to assess and manage their operations and resource management as it is an alternative approach to the usemake-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.
Physical risks
These are risks resulting from extreme weather events, either acute or related risks chronic risks from longer-term shifts in climate patterns, for example, higher temperatures.
Transition risk
Transition risk relates to risks that result from changes in climate and energy policies, a shift to low-carbon technologies and liability issues.
Transition risks are multiple in nature, including:
▶ policy risks – such as increased emissions regulation and environmental standards;
▶ legal risks – such as lawsuits claiming damages from entities (corporations or sovereign states) believed to be liable for their contribution to climate change; and
▶ technology risks – such as low-carbon innovations disrupting established industries.
These risks are interlocking in nature and potentially have far-reaching impacts, which underscore their systemic relationship to business and financial activities.
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.
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 on biodiversity.
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
▶ agriculture, aquaculture, fisheries and food production;
▶ extractives, infrastructure and activities or projects involving large-scale construction work;
▶ 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.
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 GHG 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 is a useful model for companies to assess and manage their operations and resource management.
Circular Economy Action Plan
In March 2019, the EU Commission adopted an ambitious Circular Economy Action Plan to address the challenges of climate change and pressures on natural resources as well as ecosystems. This was followed by EU guidelines under the Non-Financial Reporting Directive which introduced the concept of ‘double materiality’
– in other words, asking companies to report both the impact of climate change on their activities as well as, conversely, the impact of a company’s activities on climate change and the environment, stipulating that ‘companies should consider their whole value chain, both upstream in the supply-chain and downstream’.
Supply chain sustainability
Supply chain sustainability is the management of ESG impacts and practices beyond the factory gates, looking at the broader lifecycle of goods and services, particularly with regards to the sourcing of raw materials and components.
Supply chains are complex to understand due to the fact that they are heavily interdependent. As such, the relationships between products and services and environmental risk factors are intertwined across sectors and throughout every level of the supply chain.
Companies are increasingly expected to understand, manage and disclose their exposure to supply chain ESG risks or be left exposed to reputational, operational and financial risks. As such, it is becoming increasingly important for investors to factor into their due
diligence and active stewardship a stronger understanding of the supply chain management of their portfolio companies.
Traceability
Traceability is a useful practice to identify and trace the history, distribution, location and application of products, parts and materials. This ensures the reliability of sustainability claims in the areas of human rights, labour (including health and safety), the environment and anti-corruption.
Investors should assess whether a company in their portfolio has policies and systems in place which:
(i) clearly explain the environmental (and social) requirements that suppliers are expected to meet via a procurement policy (such as a supplier code of conduct); and
(ii) enable it to assess environmental (and social) risks throughout its supply chain and discuss whether it has a mechanism in place to improve poor practices.
Achieving full transparency and traceability across all stages in a supply chain in order to undertake a complete assessment of a company’s environmental risks is often complex. This is a result of multiple actors involved with different systems and requirements in a supply chain that are required to produce an end-product, often across international borders.
Despite these challenges, attempting to conduct this full value chain analysis is important for investors to obtain an accurate picture of investee companies, and for companies to ensure that their own policies are not undermined by actions taken elsewhere in their supply chain.
Examples of sectors with particularly complex and/or high-risk supply chains include:
▶ oil and gas; ▶ mining; ▶ beef; ▶ cocoa; ▶ cotton; ▶ fisheries; ▶ leather; ▶ palm oil; ▶ agriculture; and ▶ forestry.
Some of the main environmental risks in the supply chain include:
▶ material toxicity and chemicals; ▶ raw material use; ▶ recyclability and end-of-life products; ▶ GHG emissions; ▶ energy use; ▶ water use and wastewater treatment; ▶ air pollution; ▶ biodiversity; and ▶ deforestation.
Not-for-profit organisations offer measurement frameworks and tools that can help trace critical sustainability issues in company supply chains. These include:
▶ The Sustainability Consortium (TSC), which has built a set of performance indicators and a reporting system that highlights sustainability hotspots for more than 110 consumer-product categories, covering 80–90% of the impact of consumer products.
▶ The WWF offers more than 50 performance indicators for measuring the supply-chain risks associated with the production of a range of commodities, as well as the probability and severity of those risks.
▶ CDP and the GRI have created standards and metrics for comparing different types of sustainability impact.
▶ The Sustainability Accounting Standards Board (SASB) has developed standards that help public companies across eleven sectors, including consumer goods, to give investors material information about corporate sustainability performance along the value chain.
▶ The EU Taxonomy for Sustainable Activities and the Climate Bonds Sector Criteria provide sector-specific metrics and indicators to assess if assets, projects and activities across energy, transport, buildings, industry, agriculture and forestry, water and waste management, etc., are compliant with the goals of the Paris Agreement.
▶ The Transparency for Sustainable Economies tool (TRASE), a partnership between the Stockholm Environment Institute and Global Canopy.
▶ The Exploring Natural Capital Opportunities, Risks and Exposure (ENCORE) tool, an initiative of the UN Environmental Program World Conservation Monitoring Center (WCMC), UNEP Finance Initiative and Global Canopy
▶ The Terra Carta (Earth Charter), an initiative under the patronage of the Prince of Wales, providing a roadmap for business action on climate change and biodiversity.
Examples of global traceability schemes include:
▶ the Forest Stewardship Council (FSC);
▶ the Marine Stewardship Council (MSC);
▶ Roundtable for Sustainable Palm Oil (RSPO); and
▶ the Fairtrade Labelling Organizations International (FLO).
Kyoto Protocol (2005) - main GHGs
- CO2;
- methane (CH4);
- nitrous oxide (N2O);
- hydrofluorocarbons (HFCs);
- perfluorocarbons (PFCs);
- sulphur hexafluoride (SF6); and
- nitrogen trifluoride (NF3).
Kyoto Protocol (2005)
The Kyoto Protocol was adopted in 1997 and became effective in 2005. It was the first international convention
to set targets for emissions of the main GHGs.
It established top-down, binding targets, but only for developed nations, recognising the historical links
between industrialisation, economic development and GHG emissions. The protocol’s first commitment period
began in 2008 and ended in 2012, but was subsequently extended to 2020. Negotiations on the measures to be
taken after the second commitment period ends in 2020 resulted in the adoption of the Paris Agreement.
Paris Agreement (2015)
At the 21st Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) in Paris in 2015 (COP21), a landmark agreement was reached to mobilise a global response to the threat of climate change in the form of the Paris Agreement.
The agreement’s long-term goal is to keep the increase in global average temperature to well below 2°C (3.6°F) above pre-industrial levels, and to limit the increase to 1.5°C (2.7°F), since this would substantially reduce the
risks and effects of climate change.
Although the Paris Agreement is not legally binding under international law, it serves as a significant landmark in tackling climate change on a global scale.
