Environmental Risk and its Economic Implications
For a long time in human history, we have continued to perceive environmental risks in isolation. In 1962, it was Rachel Carson who first drew the world’s attention towards the alarming effects of industrialization on the environment. 57 years later, though we have effectively realized our contribution to the magnanimity of the global environmental crisis, we fall far behind the required amount of effort that needs to be put to derive sustainable solutions. The inherent nature of environment risks is such that its long-term implications reach far beyond geographic boundaries, economic sectors and racial identifications. Grim global statistics on water scarcity, weather abnormalities, resource depletion and the like highlight the diverse nature of these risks.
Risk Management of any business situation would be impossible without a proper analysis of the various externalities a business interacts with. To put it simply, we need to examine those aspects of the business that are dependent on external variables for their survival. One of those aspects is environment. In order to understand the relationship between the environment and business, let’s focus on the interfaces in the value chain where the economic interests of a business interact with the environment. This interaction is of a threefold nature.
First, nature provides resources to industries who in turn use these resources as raw materials to produce goods that humans consume in their daily lives, hence driving the economy. These raw materials are a part of core processes of several industries. For example, Rare Earth Minerals are an integral and irreplaceable component of the electronic industry; fossil-fuel based energy sources like petroleum, oil, gas and coal are resources which give products that form the backbone of the economy.
Second, the environment provides services which are directly used by consumers. These services might be vital (oxygen, water, nitrogen etc), aesthetic (Tree-lined shady roads, clean rivers and beaches), recreational (surfing, trekking) or even transactional (mining, lumbering, agriculture) in nature. Nevertheless, they form an essential part of our daily existence as we have known it since forever. The environment also acts as a natural sink to all the waste that is produced as a part of the process of production and consumption. ‘This Economic-Environment Interaction’ can be best expressed in the below diagram by Prof Gautam Gupta1.
Fig 1. The Economic-Environment Interaction
The natural processes of the environment have always acted as a waste sink. Our level of economic interaction with the environment is completely governed by our production and consumption levels. However, with the rise in population and the increase in consumption of goods and services, the rate at which we are using natural resources is far more than the rate at which the environment can replenish itself.
Now that we have safely established that business functions and the environment are closely interlinked and co-dependent, let’s look at the types of environmental risks that could result potentially harmful economic implications if not checked in time. Below are some common environmental risks that businesses face in the long run:
- Sustainable replenishment of raw materials
- Accidents and Spills
- Stranded Assets
- Supply chain Inefficiencies
- Climate Change
All the above-mentioned points are issues that all contemporary businesses have either encountered or are eventually going to. Environmental risks, if not taken care of in time, can have huge financial implications. For example, water is getting scarcer and hence more expensive by the day. It has been estimated that globally by 2030, our demand for clean water will be 60% more than what nature could provide. This assumption has been made by a study2 undertaken by the Water Resources Group in collaboration with McKinsey. The study also accounts for the average water demand that is going to be offset with expected upcoming sustainable practices. Water being an essential commodity has a widespread use and has multiple utilities. If demand for an essential resource is going to far exceed its supply, we are going to witness a general rise in the basic cost of production in various sectors. This would eventually translate to a general rise in cost of goods and services. In the production phase, several industries are dependent on the environment to provide resources in the form of raw materials. Availability of clean water, air and amiable weather conditions are factors that immensely affect the productivity of business and its resources. These factors are usually taken for granted as we cannot really put a price on their utility. Which is why these resources are more prone to be misused and exploited.
A striking example of how environmental risks can result in an economic impact is the case of fast-food giant McDonald’s. In 2006, Greenpeace released a report exposing the links between deforestation in the Amazon, soy and meat (between 70 percent and 90 percent of the world’s soybean crop is used as animal feed). The Greenpeace research showed that companies like McDonald’s and other fast food and supermarket chains were serving meat which was most likely fed soy that was grown on destroyed Amazon rainforest. This caused a global uproar with McDonald’s losing sales and customer trust. On further investigation it was discovered that it was one of McDonald’s suppliers who were reportedly linked to the destruction of the Amazon forests via exploitative soy production. Nevertheless, McDonald’s had to pay the economic cost of not being aware of their potential environmental risks.
In another example closer to home, we can cite Coca-Cola’s case. The beverage giant has been involved in several litigations where local stakeholders have testified that Coca-Cola’s operations have exacerbated their already existing water woes. Official documents from the government’s water ministry show that water levels remained stable from 1995 until 2000, when the Coca-Cola plant became operational. Water levels then dropped by almost 10 metres over the following five years. This was observed and reported in the village of Kaladera (Rajasthan), Varanasi (Uttar Pradesh) and in Plachimada (Kerala). Of all the cases reported, the one at Plachimada had grave consequences for Coca-Cola where the plant was forced to shut down in March 2004 after the village council refused to renew the company’s licence, on the grounds that it had over-used and contaminated local water resources. In 2003 the independent Centre for Science and Environment tested Coca-Cola beverages and found levels of pesticides around 30 times higher than European Union standards. Levels of DDT, which is banned in agriculture in India, were nine times higher than the EU limit. In February 2004 Indian MPs who investigated CSE’s studies upheld these findings and the Parliament went on to ban Coca-Cola from its cafeterias.
The implications of environmental risks are quite clear and profound. In most cases than not, environmental risks do eventually result in grave economic consequences. It is thus imperative for businesses to deliberate on their environmental footprint to be cognizant of all possible threats and opportunities that arise as a result of their daily functioning. In our next series of articles, we are going to further deliberate on how technology and sustainability can be used to achieve promising economic outcomes and ensure a resiliency in businesses.
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1 Environment Ecology and Economy ; Environmental economics : An Indian Perspective, edited by Rabindra N. Bhattacharya