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Calculating the Hidden Risks of Environmental Damage

A new analysis reveals that some business activities do not generate sufficient profit to cover their natural resource use and pollution costs, creating large, hidden risks that affect some industries operating in certain regions of the world. The analysis can help businesses and investors take account of natural capital costs to help manage risk and gain competitive advantage.

The analysis, undertaken by Trucost on behalf of the TEEB for Business Coalition, is based on the premise that depleting ecosystem goods and services through damages from climate change or land conversion imposes economic, social and environmental costs. These costs are often not borne by companies in the absence of government regulations or until a crisis such as a drought occurs (economists call such costs “externalities” because they appear to be external to the economic system that gives rise to them). Because of these costs, companies in many sectors are exposed to “natural capital” risks through their supply chains. For example, the analysis found that the profits of apparel retailers were cut by as much as a half in recent years as a result of volatile cotton prices.

The analysis calculated that natural capital costs of economic activity exceeded $7 trillion, or 13 percent of global economic output in 2009. Regional variations in production intensity and resource efficiency mean that similar economic activities may impose different costs per unit of revenue in different regions. Companies and investors can use information on the regions and sectors that have the largest natural capital costs to assess their supply chain and investment risks. Variations in natural capital costs across regions and sectors present opportunities for businesses to enhance competitive advantage, and for investors to improve relative returns.

Analysis of this type is part of an emerging trend in which businesses are beginning to factor environmental costs into decision making. Companies that incorporate this type of analysis into their decision making will enjoy a strategic advantage in coming years.

Fewer than half of supply chain execs say supply chain sustainability is highly important today, but two-thirds say sustainability will play a more important role in the supply chains of the future. This is one of findings from PwC’s annual global supply chain survey of 500 executives in Asia, Europe and the Americas. According to the study, respondents see four main reasons for investing in sustainable supply chain management: to manage the risk of unintended environmental or social damage; to manage their company’s reputation and the expectations of its shareholders; to reduce costs and realize productivity improvements; and to create sustainable products, thereby increasing revenues and enhancing the corporate brand. The study says most firms have done very little to improve sustainability in their supply chains, yet demand for sustainable products manufactured with sustainable raw materials is increasing and now outstrips supply. It found significant differences in the importance placed on supply chain sustainability across industries. Among pharma and life sciences executives, two-thirds rated sustainability important or very important versus just 38 percent of executives in industrial products manufacturing.

Given the risks present in global supply chains, it may seem surprising that more companies have not made supply chain sustainability a priority. But, as the study suggests, this is changing. In recent years a series of natural disasters, humanitarian tragedies and resource scarcity alarms are beginning to change the supply chain agenda.

Professionals working in corporate citizenship are better educated, better paid and have more experience than in years past according to a new study by the Center for Corporate Citizenship at Boston College (click here to view the executive summary). According to the study, which is based on a survey of over 600 professionals in late 2012, corporate citizenship professionals have more advanced degrees and more years of experience in the field than those in earlier surveys. Forty-four percent of all respondents have attained advanced degrees and 58 percent have more than five years' experience. They are also making more money than in years past. Forty-five percent earn more than $100k.

This study documents the increasing professionalization of corporate citizenship. Most corporate citizenship positions are filled internally, though — a sign that company knowledge and strong relationships with leaders inside companies are crucial in these roles.


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