Sustainable Insight

CLIMATE CHANGE & SUSTAINABILITY SERVICES

Sustainable Insight

The Nature of Ecosystem Service Risks for Business

Special edition in collaboration with Fauna & Flora International and UNEP FI

May 2011 2 | The Nature of Ecosystem Service Risks for Business

About KPMG, UNEP FI and FFI

KPMG, UNEP FI and FFI have produced this paper together drawing from research and projects they have done individually and together.

KPMG Fauna & Flora International United Nations Environment KPMG is a global network of FFI is the world’s first established Programme Finance Initiative professional firms providing high-quality international conservation body, (UNEP FI) services in the field op audit, tax and founded in 1903. FFI acts to conserve The United Nations Environment advisory. We work for a wide range of threatened species and ecosystems Programme Finance Initiative (UNEP FI) clients, both national and international worldwide, choosing solutions that is a unique global partnership between organisations. In the complexity of are sustainable, are based on sound the United Nations Environment today’s global landscape our clients science and take account of human Programme (UNEP) and the global are demanding more help in solving needs. Through its Global Business & financial sector. UNEP FI works closely complex issues, better integration and Biodiversity Programme, FFI aspires to with nearly 200 financial institutions collaboration across disciplines and create an environment where business that are Signatories to the UNEP FI faster returns on their investments has a long-term positive impact on Statements, and a range of partner through value-added partnerships. biodiversity conservation. organizations to develop and promote linkages between sustainability and KPMG’s Climate Change & www.fauna-flora.org financial performance. Through peer-to- Sustainability Services is a global team peer networks, research and training, comprised of over 700 professionals UNEP FI carries out its mission to who work in the field of climate identify, promote, and realise the change and sustainability - offering adoption of best environmental and advisory, tax and assurance sustainability practice at all levels of services to both public and private financial institution operation. sector organizations. www.unepfi.org www.kpmg.nl/sustainability-english

Abstract

Biodiversity and Ecosystem Services on a range of corporate management (BES) degradation and loss has gained benchmarking studies. business’ attention in recent years. The Economics of Ecosystem and The levels of risks differ according Biodiversity (TEEB) concluded that to the nature of the company, its a higher public awareness of BES products, geographic location and its is leading to changes in consumer ability to mitigate risk by substituting preferences and purchasing decisions, raw materials gained from ecosystem as a result of incontrovertible evidence services or shifting operations to less of a global decline in BES. Global sales sensitive locations. of organic food and beverages for example amounted to US$46 billion in Our analysis showed the following 20071, a threefold increase since 1999. sectors to be high risk, either in It also turns out there are considerable terms of their impact or dependence operational risks for many industry on BES or the level of maturity of sectors that could even lead their management of the issue; food to systemic risks. & beverage, oil & gas, and mining (including minerals) sector. Also banks However, while a few leading should take notice of their exposure businesses clearly understand the to BES risks, due to the low level of challenges, a considerable number awareness and hence response to of businesses that operate in this new challenge. Not all sectors environmentally sensitive sectors, demonstrated management activity such as extractives, construction, proportional to the risks posed by agribusiness, and even finance, do the issue. not appear to have this matter fully on their radar screen. So why have some We aim to show businesses a number companies woken up to the challenge - of ways to move forward on this issue, dependency and impact on BES - whilst based on the recommendations of others are yet to fully understand it? The Economics of Ecosystems and Biodiversity (TEEB) for Business report. In this issue of Sustainable Insight We provide viewpoints and highlight KPMG, Fauna & Flora International (FFI) examples of companies that take and the United Nations Environmental action to turn risk into opportunities, Programme Finance Initiative (UNEP highlighting the importance of a FI) review the extent to which strategic approach and a focus on risk companies are prepared to deal with evaluation and effective monitoring BES challenges and examine whether and communication. We conclude this response reflects the magnitude of that companies with progressive corporate impacts and dependencies thinking will increasingly grasp on BES. In this report we seek to opportunities and gain competitive identify the types of risks companies advantage by proactively managing are exposed to and examine the this issue. extent of corporate response based

The Business of Biodiversity

The Global Picture water in the right quantity and quality. the consequences of BES loss would World output will treble by 2050, as Biodiversity is essential to enable the affect growth objectives of most industry growth accelerates linked to emerging world to mitigate and adapt to climate sectors in the developed and emerging markets2. We are currently using the change, whether it is through reducing economies. equivalent of ‘1.5 planets’3 to meet emissions from deforestation and our needs. While energy availability degradation, or maintaining coastal BP has incurred significant costs as and security may or may not hinder marshes, mangroves and coral reefs in a result of the Deepwater Horizon development – depending on major order to adapt to coastal surges. accident in the Gulf of Mexico with investments in energy efficiency and severe impacts on ecosystem services low-carbon alternatives – a whole suite Affecting the bottom-line such as fisheries and tourism. Mining of ecosystem services that are essential Corporate impacts on biodiversity and company Vedanta was prevented from to business as usual, are becoming ecosystem services have historically developing a US$ 2.7 billion mine in increasingly scarce. We predict a future been a source of reputational risk for Orissa, India due to concerns about where a lack of ecosystem services companies. Such risks, arising from environmental impacts and human will act as a constraint to economic NGO campaigns such as campaigns rights5. Clearly, this issue is beginning growth, where perverse subsidies targeting retailers and food producers to hit the bottom line beyond the may be overturned, and where on soy, fish and palm oil, impact largely occasional anecdotal example. policy and regulation encourages the on intangible assets with only a weak internalisation of environmental costs connection to financial value. Recently, Companies that anticipate and prepare currently born by society. however, attention has shifted to how for a resource constrained future are companies are dependent on biodiversity likely to protect margins by reducing Global interlinked and reinforcing and ecosystem services. This shift has costs in the supply chain, gaining access phenomena such as biodiversity loss, given rise to a much wider array of risks to new markets and creating customer water scarcity, extreme weather events with a tangible impact on the bottom leverage. and other climate change impacts line, ranging from tightening regulation, have profound business relevance. to challenges in accessing finance and a Demystifying Biodiversity and Food security is fundamentally linked narrowing of operating margins through Ecosystem Services for Business to continued access to ecosystem increased costs of raw materials. The Biodiversity is commonly defined as ‘the services such as pollination, nutrient World Economic Forum (WEF) in its variability among living organisms, which cycling in soils and the provision of global review of risk4 concluded that includes the diversity at ecosystem, species and genetic levels’ – as stated in article 2 of the Convention on Biological Diversity. Humankind benefits from a Financial stability may already be affected by environmental multitude of resources and processes phenomena that manifest themselves through ‘slow failures and that are supplied by natural ecosystems. creeping risks’ in the context of ecosystem loss and degradation. Collectively, these benefits are known as ecosystem services and include UNEP FI, 2010. CEO Briefing – Demystifying Materiality 8 products like clean drinking water and processes such as the decomposition

of wastes. The Millennium Ecosystem Assessment 6 identified four main categories of ecosystem services: provisioning, regulating, cultural and supporting. In the context of this publication, and to aid clarity these terms are combined under the term biodiversity and ecosystem services or ‘BES’.

Many businesses already deal with BES, without thinking about it or naming it so. Pharmaceutical companies and biotechnology companies, for instance, depend on the availability of genetic diversity for their products. The pharmaceutical industry derived 25-50% of the US$ 640 billion from genetic resources7.

Figure 1: Conservation and Business Terminology Business Terminology

Sector Forestry / pulp Food & beverages Pharmaceuticals Commodity & paper e.g. meat, soy medicines e.g. timber, pulp

Ecosystem level (e.g. wetlands, Impact: Impact: Impact: drylands, rainforest, e.g. water, e.g. soil fertility, e.g. water, coral reef, etc) land conversion, water, land extraction greenhouse gas conversion, of genetic Species level emissions deforestation resources (marine and terrestrial species) Dependence: Dependence: Dependence: e.g. soil, e.g. pollination, e.g. biopro- pest control water,fisheries, specting, sourcing Genetic level crops raw materials, Conservation Terminology Conservation (biomedicals, water natural medicines, pharmaceuticals)

Turning Risk into Competitive Advantage

In this Sustainable Insight we aim to Types of Risks Operational risk provide an overview of the impact and There are numerous ways of labelling Operational challenges can manifest dependence on BES for a number of risks and to integrate them in general themselves in a myriad of ways, industry sectors versus the level of and more tailored corporate risk and including a disruption of inputs preparedness of that sector to respond compliance models. To maintain a in company processes, like water to the issue. general perspective in this edition, we availability and quality, the potential focus on some of the most common of provisioning services like fish, and Impact and Dependency types of risks related to BES issues. other forms of ecological degradation Modern day risk management and These include: or natural disasters that lead to loss of strategy development require a outputs. holistic perspective to identify, manage Reputational risk and price environmental, social and Companies that are associated with Legal liability risk governance (ESG) issues. To date, a adverse impacts on BES are exposed Businesses can be held liable for their somewhat limited perspective has been to damage to a company’s brand and impacts on BES. The most noteworthy taken of BES as an issue. Corporate reputation and subsequently their development is the EU Environmental impact on biodiversity has been the ability to sell products or gain access to Liability Directive. During the CBD focus of concern, rather than corporate finance. In the United States, a growing COP 10 an agreement was reached dependence on ecosystem services. number of banks, such as Credit on ‘access and benefit sharing’, a A focus on dependence gives rise to a Suisse, Morgan Stanley, JPMorgan contentious issue discussed for many whole range of risks, which vary from Chase, Bank of America and Citigroup, years. The agreement stipulates that sector to sector. In this Insight, we have increased scrutiny of lending the financial benefits arising from the look at both. to companies involved in mountain sourcing of genetic materials need to top-removal mining, or have ended the be shared in a fair and equitable way lending altogether.9 that includes indigenous and local communities. Regulatory risk Governments can restrict company Systemic risk access to areas that are important from BES may become a systemic risk when “As of today, an accurate a biodiversity perspective, require (new) it has far reaching implications for the methodology, or range of environmental impact assessments, profitability and survival of a sector. In methodologies, for measuring or require compensation for damage the case of fruits and vegetables, a sub the business risks of biodiversity to ecosystems. For example, during sector within agriculture, many crops and ecosystem services still the Convention on Biological Diversity depend on pollination by bees and (CBD) biannual conference in Nagoya in other insects. When pollinator colonies needs to be established. October 2010 – CBD COP 10 – govern collapse it can have far reaching Until then, it will be difficult for ments agreed on 47 decisions, some implications for this sub-sector. It could companies to develop ways of of which are relevant for businesses. even affect lenders with large loan addressing or offsetting these One concerned a decision to increase portfolios in such sub-sectors. risks” terrestrial protected areas to 17 percent (from around 11 percent) of land area Matt Hale, Bank of and marine protected areas to 10 America Merrill Lynch percent (from around 1 percent).10

Preparedness and opportunity, and guidance/ Over the years, a number of analyses standards to aid implementation. “The three main areas of have been undertaken by the Natural interest for business to Value Initiative (NVI),11 Insight Invest Governance identify risks related to ment12 and others (see Appendix B) The extent to which there are biodiversity and ecosystem on the quality of corporate manage processes in place to engage with services concern the ment of biodiversity and ecosystem stakeholders, and undertake a formal services. KPMG, UNEP FI and FFI risk and opportunity evaluation following: 1) The need for have used the results from analyses linked to impact and dependence on companies to insulate of 123 companies across 9 sub biodiversity and ecosystem service. themselves against short- sectors as a proxy for the level of term market pressure preparedness or response in the Management and implementation to look at the long-term respective sectors. The extent to which tools, training and horizon; 2) build group-wide assurance processes are in place for The following criteria are commonly managing biodiversity and ecosystem engagement on this issue; used to assess preparedness and services at site level or within the and 3) build consumer form the basis of our analysis. supply chain. preference and reflect it Depending on the sector other criteria in the brand value of your have been added to these as well. Reporting company.” They can be found in Appendix A. The extent to which the company has internal and external reporting Herman Mulder, Policy and strategy processes, policies and indicators Worldconnector, Advisory Board The extent to which there is a which report progress against stated consistent policy and strategic targets and standards on sustainable TEEB, former DG, framework in place for driving sourcing (focusing on impacts and Head group risk management improvement, managing risk dependence on biodiversity and ABN-AMRO ecosystem services).

Figure 2: Summary of Findings on Impact and Dependence low risk zone versus Preparedness relatively high

Utilities Pharmaceuticals

Oil and gas Beverages Food retail Mining Food processors and minerals medium risk zone Food producers Percieved level of preparedness per sector of preparedness level Percieved Banks

high risk zone relatively low relatively high relatively low Percieved level of impact and dependence per sector

The Risk Landscape Given the differences in the methodo or preparedness to deal with this issue. The overall level of risk faced by a logies of the reports analysed, though, Utility companies, whilst considered company or sector is may be more the present results should be seen as high risk in terms of impact and susceptible to a combination of a starting point for debate, rather than dependence alone, are featured in the reputational risks, operational risks and a comprehensive, sector by sector medium risk zone due to their relative regulatory risks. Companies further scientific analysis of risk and risk high level of preparedness. up the supply chain or that operate management activities. For more ‘upstream’ may be more susceptible to details on our methodology, sources The preparedness within the operational and regulatory challenges, and the limitations of our analysis see pharmaceutical industry is only analyzed while companies down the supply chain Appendix B. with regard to high risk issues. Therefore often have a greater degree of public the results for preparedness in this exposure and therefore to potential Our analysis showed the following industry might be overestimated. reputational risks. Until now, however, sectors to be high risk, either in this link has not been systematically terms of their impact or dependence The risk of the oil & gas sector may be reviewed for all sectors. on BES or the level of maturity of underestimated because the sources their management of the issue; food available do not yet take into account The analysis, therefore, is meant to & beverage, oil & gas, and mining recent spills and the movement of the foster the discussion on this issue (including minerals) sector. Compared industry to sensitive environments such within sectors and companies to to other sectors with a ‘moderate’ risk as the Arctic or deepwater locations. consider and discover competitive profile such as the pharmaceutical and advantages by managing impacts and food retail sectors, the banking sector dependencies systematically. shows a relatively low level of response

Moving Forward

To facilitate further integration of BES 5. Grasp emerging BES business oppor- companies in understanding their risk into key processes within companies, tunities, such as cost-efficiencies, new and opportunity profile, there is no The Economics of Ecosystems and products and new markets commonly accepted roadmap for Biodiversity (TEEB)11 study made companies to address, integrate and the following recommendations for 6. Integrate business strategy and manage BES risks and opportunities in corporate action: actions on BES with wider corporate a systematic way. social responsibility initiatives 1. Identify the impacts and dependen The Natural Value Initiative’s analysis of cies of your business on biodiversity 7. Engage with business peers and the food, beverage and tobacco sector, and ecosystem services stakeholders in government, for example, revealed that, despite a clear NGOs and civil society to improve reliance of the companies evaluated on 2. Assess the business risks and BES guidance and policy. an agricultural supply chain dependent on opportunities associated with these healthy biodiversity and continued access impacts and dependencies Central to the TEEB recommen- to ecosystem services, only 48 percent of dations is the need for a analysis of the companies had a well-communicated 3. Develop BES information systems, risks and opportunities and effective risk and opportunity assessment in set targets, measure and value communication to stakeholders. place.12 performance, and report your results We outline below some of the steps business can take in following these Without a clear roadmap for action, 4. Take action to avoid, minimize and recommendations. based on a comprehensive analysis of mitigate BES risks, including in-kind the business impacts and dependence compensation (‘offsets’) where Analysis of Risks and Opportunities on ecosystem services, it is challenging appropriate Although a number of tools and for companies to adopt a proactive rather approaches have emerged to assist than a reactive approach to the issue.13

While we recommend the use of more “There should be improved reporting and disclosure to mitigate sophisticated tools tailored to their investor risk. Companies that are listed on our major stock exchanges holistic Governance Risk and Compliance (GRC) models over time, we suggest should as a minimum be obliged to report how they are dependent on companies start using simple checklists ecosystem services and how they are impacting on it.” as shown in appendix C or one of the available tools to evaluate the level of risk Courtney Lowrance, Director of Environmental and Social Risk and opportunity within a company. Management, Citi

Report quantitative KPI’s and financial There are also numerous ways to • Environmental markets implication turn BES risk into opportunities to Sale of specific (financial) products The information on BES presented in enhance overall business performance. to gain from the need for business most company reports is rarely set Either after analysis of risks and to globally address BES issues. out in a way that communicates that opportunities, or more brutally, key risks have been identified. Policy incurred by a sudden wake-up call from • Markets for certified products and position on the issue is frequently stakeholders and quick changes in the Production for the fast growing unclear, strategies to manage risks and availability of ecosystem services. market for certified products that realize opportunities are undisclosed Good examples are known in the ensure full consideration of BES and unaudited. The terms biodiversity following categories: issues. and ecosystem services are not always used in CSR reports even if • Market differentiation • Sustainable and continued the content clearly reflects the issues. Companies create a specific niche sourcing This is not a bad thing – indeed, BES is in the market with new (lines of) Finding ways to continue or improve a difficult concept to communicate to products inspired by nature or crucial ecosystem services by stakeholders and for many stakeholders with a consideration of BES issues ensuring the integrity of the supply reporting on BES related issues makes far beyond their competitors, chain thereby avoiding (future) a lot of sence. This, however, makes it for example through the use of reputational risk and maintaining more difficult and time consuming to biomimicricy. profit margins. benchmark or identify the number of companies that report on BES using one single and widely accepted definition. “The ultimate aim is to try to make sustainable production It is clear that more quantitative KPIs and greater disclosure on the issue is a practices and biodiversity conservation as or more profitable than first step in securing a more complete unsustainable practices or the conversion of biodiversity. We are understanding of impacts of managing still a long way from that and I think some entrepreneurs and (or mismanaging) BES on the corporate investors are trying to show that that can be the case and have bottom line. Work is currently underway some good progress in some sectors.” by the Global Reporting Initiative (GRI) to define ecosystem services indicators Joshua Bishop, Chief Economist, IUCN and this is an encouraging first step towards more consistent disclosure on this issue.

Sustainability’s main drivers are changing. Although regulatory requirements, brand enhancement and risk management remain key drivers of sustainability, cost reduction is also a key rationale. The primary focus is on the environmental side, in particular with regard to resource and energy efficiency. Forty-four percent of executives agree sustainability is a source of innovation, and 39 percent see it as a source of new business opportunities.14

Figure 3: Summary of Actions to turn Risk into Opportunities

Competitive BES issue Sector Company Type of action Advantage

Decline of Food and Innocent Projects and marketing campaign around the honey bee. Link Market pollination Beverages and Haagen concerns regarding declining pollinators and continued ability to differentiation Dazs15 source ingredients.

Loss of Financial New Financial products linking biodiversity and ecosystem services to Environmental threatened Sector Forests16 the markets. Value of biodiversity mitigation or offsets: US$1.8 - markets species 2.9 billion in 2008. A number of investors, such as New Forests, are active in US wetland mitigation and conservation banking.

Deforestation Tobacco British Biodiversity risk and opportunity assessment tool showed Sustainable American deforestation in critical Indonesian watersheds. Reduced water and continued Tobacco17 supply to agricultural areas including the tobacco growing area. sourcing British American Tobacco and local partners are now developing a plan for the protection of the watershed through measures including reforestation.

Deforestation Food and Friesland- Solidaridad, World Wide Fund and the Roundtable on Sustainable Beverages Campina18 Responsible Soy have established the Soy Producer Support and continued Initiative (SOYPSI) to support small farmers and agricultural sourcing workers, and help them prepare for certification. Through the programme, FrieslandCampina supports farmers in southern Brazil and India so that they can make their soy cultivation more sustainable by paying the farmers a fair price, limited use of pesticides, avoidance of soil depletion and not buying soy from areas where valuable habitats have been cleared. Certificates are traded separately from the product itself. FrieslandCampina buys certificates that correspond to a volume of milk. The revenue from the certificates goes to a NGO to help farmers produce soy more sustainably.

Loss of Cosmetics Natura19 The Brazilian cosmetic company Natura developed an entire Market biodiversity product line (Ekos) to leverage its brand in the marketspace. differentiation

Loss of Food and Marine Consumer sales of certified products are growing rapidly; sales Markets biodiversity Beverages Stewardship of MSC products worldwide grew by 67% from April 2008 to for certified Council March 2009. products (MSC)20

Loss of Land Extractive Review the value of ecosystem services within their land Environmental ecosystem intensive industries holdings to identify potential assets as well as risks. markets services industies

Loss of Consumer Marks & Corporate responsibility programme to substantially increase Sustainable ecosystem Markets Spencers21 M&S’ sourcing of sustainable raw materials. Focus on and continued services agriculture, marine and freshwater issues. Important elements sourcing include: detailed risk assessments for fish, palm oil, timber, cotton and water. Implementation of standards on biodiversity management and action plans; water management; integrated pest management with responsible pesticide use; non-GM and organic produce.

Resource Diversified InterfaceFlor Strong profiling on sustainable carpets. Desso has several Market Scarsity Industrial and Desso22 cradle-to-cradle certified products and InterfaceFlor develops differentiation products products that utilise techniques and ideas inspired by the natural environment. Their TacTile line uses non glue adhesive technology to stick on surfaces – inspired by the ghecko’s convoluted feet. They have also developed a tile design based on random patterns found in the natural environment, thereby reducing wastage in carpet tile laying.

Expert Viewpoints – Financial Perspective

For this issue of Sustainable Insight in ineffective – or more costly – risk It could become a brand enhancer KPMG consulted independent experts mitigation strategies. leading to greater market share and who look at biodiversity from a financial reputational benefits. Companies (risk) perspective within UNEP FI, A second key area of concern is linked that are more progressive in their Banks and NGOs. We were especially to reputational risk or loss of social thinking may create value and save interested in their viewpoints on the license. When a company is converting costs by working with their supply way companies should move forward natural habitat to an alternative land chain to improve the resilience of the and in particular the keys areas of use, this may attract attention of NGOs supply chain inputs to their business. interest for companies looking to or local communities. Land conversion Ideally, group wide engagement identify their business risks related to and carbon emissions – in particularly on the issue of ecosystems should biodiversity and ecosystem services, the implications of land conversion be reflected in internal approval and cost-saving opportunities or and habitat loss for food production - procedures, risk self-assessments, key increased market share. We feel are becoming increasingly important. performance indicators and research fortunate to being allowed to include 24-hour news services and the use and development (i.e. finding natural their quotes. The overall viewpoints can of social media networks can act to solutions). In general, there is a great be summarised as follows. amplify an issue within a couple of need for an accurate methodology hours. for measuring the business risks Focus on water, reputational risk and associated with BES, which will supply chain issues Thirdly, companies need to understand support the ability for companies to The overall three main areas of interest impacts and dependence throughout incorporate these risks and value for companies that want to identify their value chain. Lack of an ability to potential reputational benefits. their business risks related to BES influence an issue is not seen as a are water, reputational risk and supply sufficient reason for a company not There will be winners and losers on chain issues. Firstly, water is clearly to act – the retail sector and the issue this issue. Any company which is causing global concern as fresh water of palm oil illustrates this very clearly. proactively investing natural capital scarcity might affect companies’ own Companies that look at the impacts – e.g. through impact investing or operations and their supply chain. of their supply chain as a result of through sustainable certification of Delivery of water in the appropriate BES factors often learn surprising products – must accept that cost price quantity and quality is closely linked to things, exposing new risks or hidden goes up initially. However, those who the presence of healthy, functioning opportunities. are proactive and strategic in their ecosystems. Forests play a role in approach can realise cost savings. regulating rainfall; vegetation more Progressive Thinking Creates Value In the long term, companies that have broadly prevents soil erosion and Many companies first come across their impacts and dependencies laid siltation of waterways. Wetlands play the issue of biodiversity from a risk out, evaluated and anticipated will win a vital role in maintaining water quality. perspective. But they quickly see that in a more mundane profit-and-loss point Failing to consider BES, as part of a when risk is well managed it can be of view. broader management plan will result turned into an opportunity.

Conclusion

Although current research and Key strategies for companies to move trends show that BES is moving forward will, therefore, include a up the business agenda, increased thorough analysis of their risks and communications between companies, opportunities as part of their holistic investors and other stakeholders governance, risk and compliance is needed before the issue will be models and more comprehensive and managed effectively. A logical starting quantitative reporting using audited point for companies wishing to move performance indicators. Tools are forward on this issue is to consider emerging to assist this, such as the how BES can impact on existing WBCSD’s Corporate Ecosystem strategies on climate change or water. Services Review or Ecosystem Valuation Initiative or site based risk While a number of asset owners and and opportunity evaluation tools such mutual funds now evaluate companies as those produced by Fauna & Flora on the sophistication and strength International and others. of their sustainability programs and include the outcomes in their While market conditions are still investment decisions, a consistent tough for many sectors due to the framework to analyse and measure financial crisis, we foresee that risks and opportunities related to BES companies with progressive thinking within and across sectors from the will increasingly grasp opportunities perspective of investors and other and gain competitive advantage. stakeholders is missing.

“I think that if financial institutions – particularly institutional investors – are able to value biodiversity and ecosystem services criteria in investment holdings, we may be able to manage these in a much better way than we currently are.”

Richard Burrett, Partner at Earth Capital Partners and Co-chair UNEP FI

References

No Date Title Organisation

1 2010 The Economics of Ecosystems and Biodiversity: Report for TEEB Business - Executive Summary

2 2011 The world in 2050 – Quantifying the shift in the global economy HSBC

3 2010 Ecological Footprint Atlas Global Footprint Network

4 2011 Sixth Global Risks 2011 report World Economic Forum

5 2010 India rejects Vedanta’s Orissa mine plan 25th August 2010 The Telegaph http://www.telegraph.co.uk/finance/newsbysector/epic/ ved/7962276/India-rejects-Vedantas-Orissa-mine-plan.html

6 2005 Ecosystems and Human well-being: Biodiversity synthesis report Millennium Ecosystem Assessment

7 2010 Biodiversity and ecosystem services - Risk and opportunity analysis Robeco, Natural Value Initiative, KPMG within the pharmaceutical sector

8 2010 Demystifying Materiality: Hardwiring Biodiversity and Ecosystem UNEP FI Services in Finance

9 2010 Banks Grow Wary of Environmental Risks New York Times (30 August 2010)

10 2010 CBD COP documents. http://www.cbd.int/cop10/doc/ Convention on Biological Diversity

11 2010 The Economics of Ecosystems and Biodiversity: TEEB Report for Business

12 2009 Linking shareholder and Natural Value - Managing biodiversity and The Natural Value Initiative (Grigg et al.) ecosystem services risk in companies with an agricultural supply chain

13 2005 Protecting shareholder and natural value - 2005 benchmark of Insight Investment and Fauna & Flora biodiversity management practices in the extractive industry International (FFI)

14 2011 The Economics of Ecosystems and Biodiversity: TEEB Report for Business - Chapter 7

15 http://www.innocentdrinks.co.uk/bees/map.cfm and Innocents http://www.helpthehoneybees.com/ Haagen Dasz

16 2010 State of Biodiversity Markets Report: Offset and Compensation Ecosystem Marketplace (Madsen et al.) Programs Worldwide.

17 2010 Biodiversity risk and opportunity assessment British American Tobacco

18 2010 CSR report 2009 FrieslandCampina

19 2008 Natura’s Ekos: Perfume Essences Produce Sustainable Boechat, C. and Mokrejs, R. Development in Brazil

20 2009 MSC labelled seafood in shops and restaurants Marine Stewardship Council

21 2011 http://plana.marksandspencer.com/ Marks and Spencer

22 2011 http://interfaceflor.eu and http://www.desso.com InterfaceFLOR and Desso

23 In press Hardwiring Green – How Banks Account for Biodiversity and Mulder I. and Koellner T. Ecosystem Services

Appendix A

Reports reviewed for the cross-sector analysis

Date Titles impact-dependence perspective Organisation

2004 Is biodiversity a material risk for companies? F&C Management

2008 Bloom or Bust UNEP FI

2010 Demystifying Materiality: Hardwiring Biodiversity and Ecosystem UNEP FI Services in Finance

2010 Biodiversity – Theme report – 2nd in a series Eurosif – Oekom

2010 ‘COP’ Out? Biodiversity loss and the risk to investors EIRIS

Forthcoming The Economics of Ecosystems and Biodiversity Report for Business TEEB

Environmental Health and Safety; sector guidelines World Bank / IFC

Date Titles preparedness perspective Organisation

2009 Linking shareholder and Natural Value - Managing biodiversity and The Natural Value Initiative (Grigg et al.) ecosystem services risk in companies with an agricultural supply chain

2005 Protecting shareholder and natural value - 2005 benchmark of biodiversity Insight Investment and Fauna & Flora management practices in the extractive industry International (FFI)

In press Hardwiring Green – How Banks Account for Biodiversity and Mulder I. and Koellner T. Ecosystem Services

2010 Biodiversity and ecosystem services - Risk and opportunity analysis within Robeco, Natural Value Initiative, KPMG the pharmaceutical sector

Experts consulted

Name Function Organisation

Bishop, J Chief Economist International Union for the Conservation of Nature (IUCN)

Burrett, R Partner Earth Capital Partners Co-chair UNEP FI

Hale, M Managing Director Bank of America Merrill Lynch

Lowrance, C Director of Environmental and Social Risk Management Citi

Mulder, H Worldconnector, Advisory Board TEEB Former Director-General, Head Group Risk Management ABN Amro

Appendix B

The methodology used to analyse the ‘impact and For example, the TEEB report (chapter 4, table 4.1) lists dependence versus preparedness’ is derived from an earlier 5 categories of risk: operational, regulatory, reputational, KPMG International publication – Climate Changes your market/product and financing. For the categories “food Business. We analysed authoritative reports that either focus producers” and “food processors” we calculated the on the impact or dependence of businesses to BES or the level of risk as: 2 (operational risk) + 0 (regulatory risk) + 2 extent to which they manage it. (reputational risk) + 2 (market/product risk) + 0 (financing) / 5 = 1.2 = 60%. The average level of risk for this sector is the How impact and dependencies were analysed sum of the scores of each report analysed divided by the We looked at the overall risks as a combination of exposure sum of the reports. to the different risk categories, which may be incurred by either impact or dependencies. A number of reports How preparedness has been analysed were reviewed that provided a calculation, assessment Within each sector a number of companies have been or indication of the level of risk that a particular sector or benchmarked on their performance of the above-mentioned sectors face in relation to BES. Some of the reports reviewed categories. The overall result was calculated from a were quite specific in the level of individual risks, whereas combination of these categories using equal weights for the some reports – such as EIRIS (2010) – expressed the level different categories. of impact on BES as a measure of risk. Our methodology assigned different scores to each risk category: For example, in the “food retail” sector 7 companies were benchmarked. The average score can be calculated by • High risk = 2 points. A description in an analysed report taking the sum of the average per criteria multiplied by its indicating that the sector is running a high risk in the respective weight: 60% (competitive advantage) x 20% + concerned risk category. 59% (governance) x 20% + 52% (policy/strategy) x 20% + 41% (management and implementation) x 20% + 45% • Medium risk = 1 point. A description in an analysed (reporting) x 20% = 51%. report indicating that the sector is running a medium risk in the concerned risk category. Differences between the benchmarking approaches In this edition of Sustainable Insight we highlighted how • Low risk = 0 points. Where the risk is negligible or not corporate preparedness has been assessed using a number mentioned of common criteria used by the NVI and others. In addition to the common criteria that have been explicitly mentioned in Each of the risk categories received an equal weight, which this Insight, each benchmarking framework also used slightly means that the overall level of risk for a certain sector is the different criteria: average of the different categories. The overall level of risk is the average over the reports that were reviewed. This means • Leadership: Demonstrate biodiversity best practice that the maximum average score is 2, and the minimum in emerging issues. This criteria was used by Insight average score is 0. To translate this into a percentage we Investment and FFI to analyse the oil and gas sector, divided the average score by 2 and multiplied it with 100%. mining and minerals sector and utilities.13

• Competitive advantage. Measures the extent to which • The results do not provide an indication of differences business value is created or protected through company within a sector. A growing number of companies are taking activity to ensure sustainable sourcing with a focus steps to better understand and manage their impacts and on biodiversity and ecosystem services. This criterion dependence on BES, thereby aiming to reduce exposure to was used by the NVI in its evaluation of a number the above-mentioned risks, while many of their peers are of sub sectors in food and beverages, as well as the only taking basic steps or none at all. pharmaceutical sector.12 • For some sectors, embedding the management of BES • Engagement and acknowledgement of indirect into the heart of business models and core strategies is BES impacts. In a benchmarking study of the banking vital for long-term growth and success. sector23 ‘engagement’ and ‘acknowledgement of For others, it will never be a material issue. We have indirect BES impacts by the banking sector’ were used chosen sectors that are frequently related to exposure as additional criteria. to BES risks and opportunities. However, we are clearly aware that a considerable number of sectors have not We have translated the underlying issues into other risk been assessed, predominately because there was not categories to avoid leaving out important data for the overall data available. This is not to say that those sectors are scores. not exposed to BES risks.

Number of companies per sector • Readers should take notice that the studies that were Our analysis is based on the following number of companies used to assess corporate preparedness to deal with per sector: BES issues were limited in sample size.

• Beverages (6) • We used the level how companies manage BES as • Food retail (7) a proxy for how prepared they are to deal with the challenges that arise from ecosystem degradation and • Food processors (8) biodiversity loss. It should be stressed that a company • Food producers (6) that manages BES is not by default prepared to deal with its risk exposure to BES. • Pharmaceuticals (10) • Banks (50) • In addition, we stress that results will quite likely differ by geography. Generally laws in Europe are stricter than • Utilities (10) in many other regions, making regulatory risks more imminent for business (similar to climate change policies • Oil and gas (13) in Europe). Operational risks on the other hand can occur • Mining and minerals (13) anywhere in the world.

Limitations of the methodology and the use of data • The results come from reports that were published The extent to which companies are currently exposed to between 2005 and 2011. Given that a growing number risks associated with BES is a function of the nature of the of companies are addressing this issue, there may be an company, its geographic location and the sophistication of its underestimation of the level of preparedness from older management approach. reports (before 2009).

Appendix C: Basic BES Checklist12

Risk • Are key company operations or suppliers located in areas which are heavily exploited and use of ecosystem Reputational risk services is unsustainable? • Is the company sourcing from areas in, near or containing areas of known ecological sensitivity either protected • Is this giving rise to conflict over resource use? by law or highlighted by key stakeholders,e.g. NGOs, as important? If not known, this remains a risk. Systemic risk • Is the company particularly dependent on ecosystem • Does the company have strong relationships with key services such as water, natural pollinators which are likely stakeholders such as NGOs? to become scarce? If reliant on such services, are there substitutes?

Regulatory risk • Do products or ingredients that may be impacted by • Does the company source raw materials from regions shortages in such services form a significant volume or that have laws or regulations which limit or require value for the business? payments for resource use? • Is the company dependent on a small number of • Does the company require access to finance? If so, customers who could impose stringent performance what safeguards are required by providers of finance on requirements on them? biodiversity and ecosystem services?

Legal liability risk Opportunity • Does the companies engage in activities related to the sourcing of genetic materials and ‘access and benefit Market differentiation sharing’? • Can the company differentiate its brand or product through improved environmental efficiencies? • Is the company aware of the implications of the EU Environmental Liability Directive? • Is market demand increasing or declining for goods produced with efficient resource inputs?

Operational risk Access to new revenue streams • Does the company sell to a customer base that is • Does the legal and operating environment allow engaged, aware and concerned about use and impact on investigation into new sources of revenue, e.g. organic biodiversity and ecosystem services? products, carbon credits or water rights?

Acknowledgements

This publication The authors would also like to thank was written by: the following colleagues for their contributions: Jerwin Tholen Annelisa Grigg (Globalbalance), Associate Director Karlijn Steinbusch, Charlotte Linnebank KPMG Advisory N.V. and Stephanie Hime (KPMG). T: +31 (0)20 656 4504 More information E: [email protected] For more information on the topic of sustainability, please go to: Ivo Mulder www.kpmg.nl/sustainability-english Programme Officer, Biodiversity and Ecosystem Services / Water & Finance United Nations Environment Programme – Finance Initiative (UNEP FI) T: +41 (0)22 9178690 E: [email protected] I: http://www.unepfi.org/work_streams/biodiversity

Pippa Howard Director of Corporate Engagement Fauna & Flora International (FFI) T: +44 01223 579 593 E: [email protected] I: http://www.fauna-flora.org/initiative/business-and-biodiversity/

KPMG Laan van Langerhuize 1 1186 DS Amstelveen The Netherlands

P.O. Box 74555 1070 DC Amsterdam The Netherlands

T: +31 (0)20 656 7890 E: +31 (0)20 656 7700

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2011 KPMG Advisory N.V. is a subsidiary of KPMG Europe LLP and a member firm of the KPMG-network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks of KPMG International Cooperative. 099_0511