November 24, 2014

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No Nature, No Business: The Costs of Climate Change & the Financial Crises

Businesses are beginning to ask government to lower business risk by better protecting the environment.

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By Amy Larkin

No Nature, No Business is the underlying assumption that must guide all financial regulations and international climate treaty negotiations. I can imagine buy-in actually coming from a majority of both the world’s businesses and governments as a new level playing field is built. 

I would never have imagined that my faith in corporations telling the truth would supersede my faith in governments telling the truth. But there is a change in the weather.

Our environment has become so consistently terrible that its effects on business are now undeniable, unpredictable and expensive. In multinational boardrooms and executive suites across the world, environmental problems are now noted as primary risk factors; derailing corporate success —even survival.

And corporations are beginning to step out and speak up.

Governments Fail To Connect Environmental Harm To Business Risks

Governments, not so much.

When extreme weather destroys 15 percent of the world’s cotton crop, corporations are hit with higher costs, shortages and unpredictable P&Ls. But governments do not yet connect the costs of climate change and pollution to the financial crises at hand – or the government’s bottom line.  

Even though the external costs of coal and oil in the U.S. total more than $1.1 trillion (the 2012 investmentdeficit), these costs were not mentioned during the recent U.S. Congressional debate about the sequester. This “environmental debt” has not yet entered our governments’ financial deliberations.

One exception: China recently noted that the cost of its environmental degradation comes to 3.5 percent of the country’s GDP. That’s a game-changing number and most certainly lower than the true cost.

Rewarding Smart Investments Now For Long Term Value

Responding with adequate urgency to the global environmental crisis will cost money. Lots of money.

Unfortunately, this smart spending conflicts with every corporation’s strong imperative to cut costs in the short term. If a company invests heavily in dramatic changes that will secure its environmental and fiscal future through green technology, systems and sourcing, it is likely to endure some lousy quarterly earnings. This is because today’s rules and regulations encourage businesses to separate long- and short-term choices.

What would happen if companies were instead rewarded for smart investments, wherein P&Ls and balance sheets reflected long-term value vs. short-term reporting? Both businesses and governments would benefit and save money in the fairly near term, just not this quarter.

Object Lesson: PepsiCo Makes Progress, But Hits Limits

Perhaps the climate talks to nowhere of the past several years (from Copenhagen to Rio) might instead become Accounting Change Negotiations that empower business to make smart long-term investments with encouragement rather than attacks from stockholders and Wall Street analysts. The additional costs of goods and services would then be spread over long-term accounting cycles so that the higher costs would not cause extreme price spikes. This would avert great social and economic disruption while protecting politicians and businesses.  

Al Halvorsen, senior director of environmental sustainability for PepsiCo, explained with great pride Solar panelsthe state-of-the-art manufacturing facility he helped develop for Frito-Lay (a PepsiCo division) in Arizona. The plant’s innovations include near-net-zero energy use and a three-quarters reduction in water usage compared to plants of similar size. Everything possible is recovered, reused and recycled, and efficiency and conservation are the governing principles.

Halvorsen also noted that he is beginning to use some of these advances in PepsiCo factories globally, and the company is constantly looking for opportunities to use best practices.

When I asked why all the improvements weren’t instituted in all of PepsiCo’s factories, the conservative businessman and engineer replied:

“It’s expensive to make all of these changes. When water costs or limited supply justify these expenses, PepsiCo will deploy all of these advances everywhere. Same goes for energy.”

His story perfectly illuminates the need for a change in the rules. PepsiCo engineers achieved extraordinary advances that will benefit the company and the world. Without any doubt, water and Environmental Debtenergy crises are going to hit PepsiCo factories somewhere in the world soon enough — but it is excruciatingly difficult for all companies to install these kinds of changes in a financially secure way. The extra expenses hurt quarterly reports.

There are thousands of multinationals in exactly the same conundrum as PepsiCo with countless of executives sharing consternation about their companies' inability to invest more heavily in great innovation because of short-term financial reporting considerations. This is why governments and businesses might actually agree on a change in the rules so that businesses reap rewards instead of penalties for transformative R&D and investments. 

Tackling Environmental Debt Will Trim Government Costs

And governments will save as less “environmental debt” is incurred.

As China’s new Environment Ministry report notes, the country will have to spend hundreds of billions of dollars remediating bad choices. Why not start by empowering businesses to make better choices immediately? 

Why can't governments and businesses just support a change in accounting rules wherein external costs (both long and short-term impacts) are priced into goods and services? This fundamental change has the ability to become one of the primary levers to solve both our environmental and financial crises.

About the Author

Amy Larkin is the author of Environmental Debt: The Hidden Costs of a Changing Global Economy, to be published by Palgrave MacMillan in June 2013. In the book, she connects the environmental and financial crises -- both causes and solutions. Amy is an entrepreneur and environmental activist who co-founded one of the first affinity-marketing businesses, and was involved with Greenpeace for 30 years as a Board member, advisor, and from 2005 to early 2012, as Director of Greenpeace Solutions.

Through her consulting business, she has worked with the Agricultural Sustainability Institute of UC/Davis and the Consumer Goods Forum. Amy currently serves as the Chair of the Advisory Board of BiomimicryNYC. Connect with her on Twitter.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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