Study: The Environmental Cost of Doing Business Could Erase a Third of Corporations' Profits

Knowing they will face climate legislation sometime in the future, a number of U.S. corporations have already begun to offset their greenhouse gas emissions. The utility giant American Electric and Power is buying forest projects in Brazil and the disposal company Waste Management is recovering methane from landfills to use in its trash trucks in California.

But a preliminary report commissioned by the United Nations has found that the cost of environmental damages could erase at least one third of the profits major corporations make around the world, if they had to pay for these damages. The study looked at 3,000 of the world's top publicly traded companies, and calculated that their environmental impact amounted to at least $2.2 trillion in 2008. More than half of the damage was caused by greenhouse gas emissions.

The full report, due out this summer and first reported by the Guardian in February, was conducted by the British consultancy firm Trucost, and commissioned by the United Nations Principles for Responsible Investment. Trucost's CEO, Richard Mattison, told the Guardian that industries are facing a completely new paradigm: "Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them," he said.

What economists call externalities, are industry byproducts such as air pollution, soil erosion, and water pollution. These costs to the environment (and the surrounding communities) are not included in the price of producing energy, timber or food, for example, but are "paid for" by those who suffer from the effects.

The Guardian reported that the $2.2 trillion figure could be much higher, since the study only included the impact from major corporations, and not the business and consumer practices of governments or the general population.

The authors of the study hope it will be used by growing numbers of institutional investors who want to back companies with a good track record in environmental, social and corporate governance, and drive home to business leaders and policy makers that environmental costs will increasingly be part of a corporation's bottom line.

The Securities and Exchange Commission delivered a similar message in January, when it released guidelines on what public companies should disclose as potential material risks from climate change.

The four main areas included the economic costs of meeting international emissions treaties and other pending regulations, staying competitive as consumer and business trends shift to adapt to climate change, and mitigating the potential physical challenges of a changing climate, such as water scarcity and soil degradation.

Whether these risks are caused by "increased competition or severe weather," said SEC Chairman Mary Schapiro, companies must disclose to their shareholders "the significant risks they face."

James Salo, the head of research and strategy at Trucost's U.S. office, told Carbon Watch that the guidelines "put the onus on companies to understand those risks in those four key areas and manage them."

In a recent editorial, Pavan Sukhdev, a former Deutsche Bank executive, who is now working with the U.N. to develop new economic models to protect biodiversity, argued that a value has to be placed on nature for businesses to change the way they produce goods and services.

"We cannot manage what we do not measure and we are not measuring either the value of nature's benefits or the costs of their loss," he said.

Here is Sukhdev describing the role "natural capital" can play in the global economy.

Under Sukhdev's leadership, the U.N. is expected to release another influential report later this year that will lay the economic foundations for putting a price on environmental impact and offer a broad set of solutions to reduce it.