Businesses unprepared for risks of dwindling natural resources

Businesses aren’t doing enough to prepare for potential threats to healthy soils, pollination and water (pdf), all of which are crucial “ecosystem services” for companies with agricultural supply chains, according to a report released today.

The report — prepared by the United Nations Environment Programme Finance Initiative, conservation charity Fauna & Flora International and Brazilian business school Fundação Getulio Vargas evaluates 31 multinational and Brazilian companies in the food, beverage and tobacco industries against a new tool – the Ecosystem Services Benchmark. The benchmark is designed to enable investors to assess the level of risk of investing in companies that rely heavily on certain ecosystem services.

The Ecosystem Services Benchmark highlights companies’ dependence on the ecosystem and allows investment analysts to rank companies based on the level of sophistication of supply chain management of biodiversity and ecosystem services.

“Companies and their investors have long taken ecosystem services for granted, as if they came for free,” said Karina Litvack, head of Governance and Sustainable Investment for F&C Investments. “Yet recent pressures on natural resources suggest that in future such services will start to command a premium, or, worse, become unavailable. This could have a profound impact on the strategies and valuations of companies in high-risk sectors.”

The survey finds that many companies are in the earliest stages of preparing to respond to ecosystem services threats. Some have pilot projects in place, but no plans to roll them out. Others have management systems that tackle the issue in part, but are incomplete — perhaps applied only to a single commodity or region. Overall, businesses have a wealth of activity but no clear rationale or risk assessment process underlying it.

The survey results suggest many businesses are taking a reactive rather than proactive approach to managing ecosystems services. While organisations aren’t generally inactive or disengaged, they can’t readily demonstrate that the extent of their activity is appropriate for the risks involved.

“Almost two thirds of the companies were attempting to address the issue through some form of pilot programme, but often these were small initiatives at local level rather than company-wide schemes that deal with natural resource issues at a scale equivalent to the company’s global footprint,” said Mario Monzoni, director of the Centre for
Sustainability Studies at the Brazilian business school Fundação Getulio Vargas. “Such programmes often reflected a reaction to immediate risks rather than being part of a longer-term strategic risk assessment that anticipates the ‘natural resource’ crunch before it becomes a reality.”

“Perhaps the most telling result from the survey was the fact that less than half of the companies evaluated incorporated the full range of ecosystem services within their corporate risk assessments,” said Annelisa Grigg, project director of the Natural Value Initiative for Fauna & Flora International. “Hence, risks may be unmanaged and
opportunities to build shareholder value missed.”

It is not all bad news, however, as many of the companies in the analysis have started working to understand and address their impacts and dependence on ecosystems.

“Investors concerned about long-term performance will examine the sustainability of a company’s business
model,” said Steve Waygood of Aviva Investors. “Companies that monitor their dependence on ecosystems and ensure the security of raw material supply have a competitive advantage in a resource-constrained world.”

Dutch food giant Unilever was the only company to fall within the realm of best practice within the survey. The UK retailer, Marks and Spencer also performed well. Both companies were distinguished by their well-documented, strategic and risk-focused approach which indicated they had understood and were managing many aspects of their ecosystem services footprint.

“The sustainable sourcing of raw materials is a key pillar in our sustainability plan, Plan A,” said Lauren Orme, the manager responsible for UK retailer M&S’ sustainable sourcing policies. “For us this means identifying those areas in which we have the biggest impact and the biggest opportunity to influence. As resources become increasingly scarce, building resilience in our supply chain will become more and more important. It is critical that we take action now for the future.”

Each year, it is estimated that we are losing ecosystem services valued around €50 billion from land-based ecosystems alone. This loss has important implications for the long-term viability of the businesses dependent on these services, in particular those with agricultural supply chains. As biodiversity and ecosystem services decline, this is increasingly translating to business risk and opportunity linked to reputational risk, security of supply and legal compliance.