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Sustainability at a Profit

Many industries that seem lucrative in fact dump massive environmental and social costs on third parties through their unsustainable production methods. Governments, consumers, and, most of all, companies worldwide must work to transform existing systems and move toward a low-carbon, resource-efficient economy.

NAIROBI – How profitable are the world’s major industrial and agricultural sectors? According to a new report by the London-based consultancy Trucost, when one accounts for these sectors’ costs to third parties in the form of environmental and other damages, the answer is “not very.”

Many sectors seem lucrative when conventional economic calculations are used. For example, pre-tax profit margins for iron, steel, and cement production, and for crude-oil and natural-gas extraction, range from roughly 7% to nearly 20%.

But, after factoring in externalities, the global cement sector has average pre-tax losses of 67%, and crude-oil and natural-gas extraction barely break even. Indeed, Trucost’s report estimates that the top 100 environmental externalities worldwide – including greenhouse-gas emissions, natural-resource depletion, deforestation, climate change, and air pollution-related health problems – cost the global economy roughly $4.7 trillion annually.

But such losses are rarely captured in the balance sheets of the companies concerned. Rather, they are passed on to taxpayers, the poor, and, in the form of a degraded planet, future generations.

Among the sectors with the highest impact in this regard are coal-burning power plants in East Asia and North America, with externalities totaling $453 billion and $317 billion, respectively – higher than the value of the electricity that they produce. Cattle ranching and farming in Latin America is the third most damaging sector, with losses linked to deforestation of $354 billion – more than 20 times the value of the sector’s annual output of $17 billion. Calculations for water-intensive industries, such as corn, rice, or wheat farming in dry regions like North Africa and Southeast Asia, and for energy-intensive sectors, including cement production and iron and steel milling, are similarly sobering.

Although the developing world is generating a significant proportion of these costs, the goods that result are consumed worldwide. Thus, addressing externalities should be regarded as a global challenge, to be addressed jointly by governments, producers, and consumers.

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At last year’s Rio+20 summit in Brazil, leaders of governments, businesses, and NGOs agreed to a range of measures that will expose the costs of major economic sectors’ activities to an increasingly engaged public. At the same time, countries are working to devise a new, comprehensive wealth indicator that extends beyond GDP to account for some of these externalities.

Moreover, several countries, with support from the United Nations Environment Program and the Global Reporting Initiative, have launched programs to boost corporate sustainability reporting. Such reporting will provide pension funds and other investors – as well as ratings agencies – with a better understanding of companies’ long-term risk factors.

Given rising natural-resource scarcity and the escalating risk of supply-chain disruption owing to extreme weather events linked to climate change, companies can no longer afford to ignore their activities’ externalities. Forward-thinking business leaders already recognize that, in the twenty-first century, competitiveness will hinge largely on using natural resources more efficiently and cutting carbon emissions.

In addition to the obvious benefits, this approach will bring reputational advantages, as consumers – whether through education or first-hand experience – become increasingly aware of the environmental and social impact of the goods and services that they purchase. The drought in the United States in 2012 is estimated to have caused soybean and corn losses of around $20 billion with costs to consumers rising more than $50 billion as a result of higher grain and oilseed prices. Companies that adhere to unsustainable, damaging practices – and continue to pass on the associated costs to consumers – may find that their customers start shopping elsewhere.

Externalizing the impact of production – whether in power generation or agriculture – was perhaps easier when the global population was only a few billion; and, with most people living in countries with undeveloped economies, the supply of natural resources seemed unlimited. But, with natural-resource stocks dwindling, economies developing at breakneck pace, and the global population set to exceed nine billion by 2050, the need to decouple economic growth from resource consumption and move toward a low-carbon, resource-efficient green economy has become acute.

From the depletion of fish stocks to the inexorable buildup of greenhouse gases in the atmosphere, there is no shortage of evidence that current systems are unsustainable, and that corporations – which account for two-thirds of the global economy and use the vast majority of the planet’s resources – must transform the way they do business. The Trucost assessment brings into sharp focus why.