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 © 2011 KPMG Advisory N.V. 3 | The Nature of Ecosystem Service Risks for Business 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 © 2011 KPMG Advisory N.V. 4 | The Nature of Ecosystem Service Risks for Business 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 © 2011 KPMG Advisory N.V. 5 | The Nature of Ecosystem Service Risks for Business of wastes. The Millennium Ecosystem Assess ment6 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