The Natural Cost of Business

Think that depletion of natural resources hurts only individuals? Think again. Companies are at risk too. A new report identifies the sectors most vulnerable to natural capital risks...

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Time and again, movies have flirted with the idea of a dystopian world brought on by environmental changes. In many of these, humans are shown suffering the consequences of having ravaged natural resources for centuries.

But it’s not just individuals that stand to suffer as the Earth’s resources deplete. Big business, especially in certain industries, is set to feel the pinch too, cautions a new report by Allianz Global Corporate & Specialty (AGCS).

Last year, the world’s top mining companies warned that water scarcity poses a severe risk to the industry. The food and beverage industry isn’t immune to this either. The French town of Vittel, which is the source of Nestle’s popular mineral water brand, is reportedly at the risk of running dry.

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These industries have reasons to worry. According to the AGCS report, they lie in the “danger zone”, where the risks linked to natural capital impact and dependency are significantly raising the cost of doing business. Transportation, and oil and gas are the others in the danger zone, shows the ‘Measuring and Managing Environmental Exposure: A Business Sector Analysis of Natural Capital Risk’ report.

“Natural capital is the global stock of natural resources that we all enjoy and take for granted – soil, biodiversity and clean air and groundwater,” says Chris Bonnet, the Environmental, Social and Governance Manager for Business Services at AGCS and the lead author of the report.

“Unfortunately, by many indicators, it is becoming increasingly clear that these resources are being depleted at a far faster rate than the planet can replenish them.”

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In the “middle zone” are seven sectors including construction, utilities, clothing and chemical. Companies in these sectors are also challenged by natural capital risks but are better positioned to avoid future losses through relatively smaller precautionary spending today.

Only one sector, telecommunications, is seen as safe in the study.

New realities

By 2050, environmental damages could push down global economic output by 18 percent, the report said, citing data from the Trucost research group and the United Nations-backed Principles of Responsible Investment network. Part of this would come from increasing exposure to seven risks linked to the use of natural capital for producing goods. These include greenhouse gas and other emissions, waste production and the impact of industries on biodiversity and water.

The new business reality, warns the report, is that companies will increasingly face costs associated with local water shortages and soil pollution or indirectly by resource scarcity, regulatory action, liabilities or supply chain disruptions.

Bonnet explains that social pressure can mount as the effects of natural resource exploitation become obvious. This can force companies to take expensive corrections, or risk incurring regulatory responses.

Nestlé Waters was accused by Vittel’s residents of exploiting the spring water that supplies the town and its bottling plant. The company denied the allegation, but Nestlé Waters CEO Maurizio Patarnello said in June that all its sites would be certified by the Alliance for Water Stewardship by 2025. “Water is one of the most critical sustainability challenges facing society and our business,” Patarnello said.

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Another industry coming under the spotlight is transportation. Carbon emissions from transportation have risen 250 percent since 1970, now accounting for nearly a quarter of global emissions.

“Shipping emissions can degrade the air quality in coastal areas, as well contribute to global air pollution,” Bonnet says. “There is growing awareness of the issue and the International Maritime Organization has a specialist working group grappling with the idea of a cap.”

It is possible that maritime transportation companies face stricter regulations concerning toxic emissions. This might force them to write off part of their fleets sooner than expected.

How risks emerge

Natural capital risks rarely come unannounced. They build up over time in three phases. In the first, a growing awareness can be observed, generally triggered by changes in the physical natural landscape, such as less stable water patterns, or through public pressure on governments to act.

In the second phase, such risks will affect individual companies via their supply chains, their operations or at site level, through regulatory changes, scarcity of resources or social pressure. Bonnet says it is in the first two phases that risks can be mitigated through measures that are broadened to include future and non-financial risks.

If the risks cannot be mitigated in these phases, then they will ultimately lead to a financial cost by either becoming a liability or triggering a business interruption.

“We believe that sustainable use of natural resources will have a decisive influence on the future success of companies,” says Bonnet. “But while there is growing awareness of sustainability and its relationship to the economy, many companies still do not understand what natural capital risks they are exposed to, how they affect their business performance, and how they can help manage natural resources better.”

Sectors and businesses that take steps against the consequences of natural capital destruction will benefit. These are companies that act against a risk that has a reasonable chance of materializing through a relatively small expenditure today to avoid larger losses in the future.

About Allianz Global Corporate & Specialty

Allianz Global Corporate & Specialty (AGCS) is the Allianz Group's dedicated carrier for corporate and specialty insurance business. AGCS provides insurance and risk consultancy across the whole spectrum of specialty, alternative risk transfer and corporate business: Marine, Aviation (incl. Space), Energy, Engineering, Entertainment, Financial Lines (incl. D&O), Liability, Mid-Corporate and Property insurance (incl. International Insurance Programs).

Worldwide, AGCS operates with its own teams in 34 countries and through the Allianz Group network and partners in over 210 countries and territories, employing almost 4,700 people of 70 nationalities. AGCS provides insurance solutions to more than three quarters of the Fortune Global 500 companies, writing a total of 7.4 billion euros gross premium worldwide in 2017.

AGCS SE is rated AA by Standard & Poor’s and A+ by A.M. Best.

About Allianz

The Allianz Group is one of the world's leading insurers and asset managers with more than 88 million retail and corporate customers. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing over 650 billion euros on behalf of its insurance customers while our asset managers Allianz Global Investors and PIMCO manage an additional 1.4 trillion euros of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we hold the leading position for insurers in the Dow Jones Sustainability Index. In 2017, over 140,000 employees in more than 70 countries achieved total revenue of 126 billion euros and an operating profit of 11 billion euros for the group.

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AGCS (Munich)
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