In an ecoflation scenario, natural resource constraints could cause a consumer goods company a reduction of up to 50 percent in earnings (EBIT) by 2025. Material?
The opportunity costs of unsustainable resource use have been defined with increasingly clarity in recent years by environmental engineers focussed on resource efficiency and natural resource economists focussed on improved ways of valuing Natural Capital. Drawing parallels between “environmental management” and “human resource management”, the costs of inefficient management of Intellectual and Human Capital are equally stupefying. In both the domains of natural and social sciences, the costs can be quantified and in addition given financial value in ways that are much more evident than many assume.
“Most productivity opportunities today have an internal rate of return (IRR) of over 10 percent.”
Start at the level of societal context. The goal of decoupling rates of natural resource use from economic growth rates can be applied at the level of national economies, cities and enterprises. Through its Sustainable Living Plan, Unilever for example seeks to decouple its growth from its environmental impact while increasing its positive social impact. Why does a global consumer goods company commit itself to decoupling? What time frame applies? How does this relate to value generation?
At the start of the Industrial Revolution, world population was 790 million people. Today, the UN estimates that the current world population of over 7 billion could reach 10.9 billion by the end of this century. Inevitably this, along with rising income levels and related lifestyle choices, puts enormous strain on our planetary resources. The International Resource Panel (IRP 2011, 2014) of the UN has reported that during the 20th century annual extraction of ores and minerals grew by 27 times, construction minerals by 34 times, fossil fuels by 12 times and biomass by 3.6 times. The consequences of this include increasing resource prices, increasing commodity price volatility and price shocks, as well as increase disruption of ecological systems. The latter involves human impact passing ecological thresholds or planetary boundaries, which poses the risk of sudden or irreversible environmental damage. Tipping points or irreversible declines in natural resources have already been illustrated by examples such as fishery collapses and increased desertification.
This global context presents obvious risks as well as transformative opportunities. Consider the implications nationally for the BRICS countries, who represent 42 percent of the world population. Consider also the implications sectorally, notably for those industry clusters or value chains that research in material flows and Natural Capital valuation have found to be the most resource intensive – for example metals & car manufacturing or agrifood & beef production. Analysis by Allianz Global Investors and others point to waves of prosperity since the 19th century as economic growth was boosted, among others, by investment in innovation. This suggests that the ICT revolution of the 1980s onwards may be followed by a resource productivity revolution. Researchers from McKinsey & Company have suggested that since the 1990s we have entered a new industrial revolution, namely that of the Resource Revolution.
Innovative businesses can point to impressive results from resource efficiency improvements, results that are also significant in terms of their threshold impacts on earnings, profit margins, capital expenditure and cost of capital. McKinsey & Company has concluded that companies who succeed in improving their resource productivity are likely to not only develop a structural cost advantage, but also improve their ability to capture new growth opportunities. Its report Resource Revolution: Meeting the world’s energy, materials, food, and water needs (2011) found that 70 percent of productivity opportunities today – from improving the energy efficiency of buildings to moving to more efficient irrigation – have an internal rate of return (IRR) of more than 10 percent at current prices.
In the 1990s the World Business Council for Sustainable Development (WBCSD) argued that eco-efficiency starts at the workplace, introducing a shift in focusing not only on labour productivity but also resource productivity. At the time companies such as Sony and Novo Nordisk introduced their own indices for tracking their resource productivity, comparing their earnings and economic value added with their total resources used and considering the life time of their products. Today the early leaders can report results accumulated over many years. Having run its Pollution Prevention Pays programme for over 30 years, the US conglomerate 3M reports that to date the programme has enabled 3M to avoid 1,9 million metric tonnes of pollutants (waste, air & water pollution) and save US$ 1,8 billion.
Amidst slow regulatory reform and the reality that natural resources today are often priced far below their true economic value, pro-active companies are innovating in the valuation of externalities, in the application of valuation techniques such as setting longer payback periods for resource sustainability projects, applying lower discount rates and setting internal prices (e.g. per tonne of GHG emissions) to prepare them for emerging risks. From a collection of cases in the report Sustainability and the CFO (2015), the Corporate Eco Forum and World Environment Centre concluded that CFOs need to participate more actively in integrated materiality assessments. This would help them to comprehend sustainability challenges and realise the magnitude of their impacts on business. The move to greater involvement of financial managers also signals greater focus on financial asset opportunities.
A more standardised approach to defining the relevant risks and opportunities has been taken on by the Natural Capital Coalition. It is developing and testing a Natural Capital Protocol over 2015-2016. The standard will seek, among others, to clarify for business managers what material impacts should be measured for high impact sectors and what data are required.