Biodiversity and Business Chalenge - CARLOS ROSSIN

8/7/2019 Biodiversity and Business Chalenge - CARLOS ROSSIN

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CONGRESO ACADMICO

Conferencista: Carlos Rossin

Ttulo: Biodiversity and Business

Chalenge


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Biodiversity

a new business challenge

www.pwc.com/br


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Agenda

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1. GDP and Biodiversity

2. Biodiversity and Financial Risk

3. Types of Biodiversity Loss

4. Industrial sectors (Risks and Opportunities)

5. Are you Bio-Positive?


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GDP and Biodiversity

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The rate of growth of gross domesticproduct (GDP) is the principalmeasure of economic progress andtransformation.

The formula for GDP is:

GDP = C + I + G + (Ex - Im)C = total spending by consumers

I = total investment (spending on goods and services) bybusinesses

G = total spending by government (federal, state, and local)

(Ex - Im) = net exports (exports - imports)

GDP is based on production

In order to do conduct meaningful greenaccounting one needs to understand how

ecological degradation diminishesproduction possibilities.

Superfund clean-up of toxic sites isestimated to cost hundreds of billionsof dollars over the next thirty years,which gets added to the GDP. Since theGDP first added the economic activitythat generated that waste, it createsthe illusion that pollution is a double

benefit for the economy.


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Ecological Creditors and Debtors

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More than 80 percent of the worlds population lives in countries that use moreresources than what is renewably available.

These countries rely for their needs on resource surpluses concentrated in ecologicalcreditor countries, which use less biocapacity than they have.

Source: Global Footprint Network



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Biodiversity and Financial Risk

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Resource scarcity, loss of biodiversity and the degradation of ecosystem services havestarted to present financially material risks and opportunities for bankers, investorsand insurers.

Financial institution are concern with high exposure to or a large client base in

industries that are directly dependent on biodiversity and ecosystems services (BES),such as fisheries, agriculture and tourism, and industries with major BES footprints,such as the extractive sector.

The credit risk models used in the past are no longer applicable to incorporate thecomplexity of the interactions between business, society and ecosystems.

Changing environmental phenomna such as threats to BES, climate change and waterscarcity, and how these translate into tangible financial risk, are also little understoodin terms of financial materiality.

There is a significant lag between a clear picture emerging of such environmentalrisks and the hardwiring of risk into the inner workings of the financial system.


Source: UNEP FI


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Exposure of BES risks for a diversified

financial sector

9material Starting to become material Not material

Risk type:* Reputational Credit Regulatory Operational Market Liquidity Legal Liability/litigation Systemic

Banking

Project finance

Other structured finance

Corporate finance

Investment

Private wealth management

Pension funds

Insurance funds

Matual funds

Sovereign wealth funds

Hedge funds

Private Equity

Insurance

Insurance

Reinsurance


Source: UNEP FI


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Types of Biodiversity Loss

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Coastal flooding - Coastal features such as coral reefs, inter-tidal mudflats, vegetated coastaldunes and mangrove forests create effective buffers against natural disasters, storms, andcoastal erosion.

Example: a 28% reduction in mangrove coverbetween 1980 and 2002 in South East Asia tomake way for commercial shrimp farming hascontributed to a loss of natural protectionagainst tsunamis and cyclones. This wastragically demonstrated during the 2004South Asian Tsunami, when coastal areas still

covered by mangroves were relatively lessaffected.



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Desertification - A process of ecosystem degradation, driven largely by population growth,and the industrialization and intensification of agriculture, beginning with land conversion,and followed by overgrazing or soil degradation, has been a key driver of desertification,resulting in the widespread loss of once productive land. Increasing water scarcity, itselfpartly a result of deforestation or removal of vegetation, is compounding the problem inmany regions.

For example, in certain provinces ofChina, deforestation and landconversion have lead to encroaching

desertification



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Food security - The output of agricultural systems is highly dependant on biologically diversesoils and other key ecosystem services such as water regulation, pollination and climaticstability. By 2050 these agricultural systems will be required to feed a forecasted populationin excess of 9 billion, 50% higher than today.

For example, cattle raising in thefrontier of the Amazon Rain Forest



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Industrial sectors(Risk and Opportunities)

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Business leaders and Biodiversity

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Respondents who were extremely or somewhat concerned about biodiversity loss as athreat to their business growth prospects.

45%

36%

53%

34%

18%14%

Africa

Middle East

Latin America

Asia Pacific

Western EuropeNorth America

Industrial sectors (Risk and Opportunities)

Q: How concerned are you about thefollowing potential threats to yourbusiness growth prospects?

Source: PwC 13th Annual Global CEO Survey 2010


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Statistics

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63% of ecosystem services degraded

$US$ 4.5 trillion value lost every year

Extinctions at 100+ times the natural level

Source: Millennium Ecosystem Assessment Reports, Ecosystems and Human Well-Being Synthesis(http://www.maweb.org/documents/document.356.aspx.pdf)

The Economics of Ecosystems and Biodiversity (TEEB), Cost of Policy Inaction Report, $2-$4.5 trillion is the present value of netecosystem service losses from land based ecosystems (e.g. forests tundra, cultivated land) caused in 2008 and continuing for 50years, based on discount rates ranging from 1-4%

Millennium Ecosystem Assessment Reports, Ecosystems and Human Well-Being Synthesis(http://www.maweb.org/documents/document.356.aspx.pdf)



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Why bio-positive?

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With strategic foresight, it IS possible toreconcile sustained business growth withthe maintenance or enhancement ofecosystem services.

2010 was the UN International Year ofBiodiversity. Strong global actions toaddress biodiversity loss are now publicand private sector priorities.

In Nagoya, November 2010, the 193parties to the Convention on Biological

Diversity agreed a new strategic plan toaddress biodiversity loss which willaccelerate the development of nationalregulation and increase demands oncompanies.



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Agriculture &Forestry - Risk

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The value at stake from biodiversity loss and

ecosystem degradation in agricultural supplychains is enormous.

70% of the worlds most productive crops areanimal-pollinated.

Around 1.5 billion hectares of cropland has beenabandoned in the past 40 years due to soil

erosion with annual EU alone costs around 1.7 billion a year.

Mismanaged or accidental introductions ofagricultural pests cause estimated losses of $US100 billion annually.

Biodiversity is the foundation of our business Juan Gonzalez-Valero, Head of CorporateResponsibility, Syngenta

Some companies are responding tothe risks. For example, UnileversSustainable Living Plan reports:

Today we source 10% of ouragricultural raw materialssustainably. By 2012 we will source30%; by 2015 50%; and by 2020100%.

Source: WEFWorld Economic Forum and PwC,Biodiversity and Business Risk January 2010Kuhlman et al. (2010), Estimating the costs and benefits

of soil conservation in Europe, Land Use Policy 27International Wood Markets Group, (2010). B.C. Interior

Mountain Pine Beetle Attack: Impact & Outlook on B.C.Timber Availability & Wood Products Production



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Agriculture & Forestry - Opportunity

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Reducing emissions from deforestation and forest degradation (REDD+) is aproposed international mechanism to provide incentives to keep forests standing.

It is estimated that by 2030 US$ 17 to 33 billion per year would be needed to reducedeforestation by half.

By 2020, the EU Emissions Trading Scheme (ETS) and the Californian ETS could

provide US$ 5 billion per year and other markets may yet emerge to fill the gap.

Potential Funding for REDD



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Construction and Real State - Risk

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Between 16% and 19% of the timber importsinto the EU derive from illegal or suspicioussources. WWF

Construction sector value chains are heavilyreliant on natural resources which areimpacted by ecosystem decline and carrysignificant price volatility.

Floods in China in 1998 caused by extensivedeforestation helped to bring about agovernment-imposed logging ban.

Resulting timber shortages led to a 50%

increase in price over the following two years. The Chinese construction and materials sector

which was then absorbing 64% of Chinastimber faced steep cost increases and wasforced to seek alternative supplies.

0%

5%

10%

15%

20%

25%

30%

1996 1997 1998 1999

AnualPriceI

ncrease

Pre-Flood

Post-Flood andLogging Ban

Companies increasingly need to demonstrate sustainablesourcing practices or risk losing contracts as changes toprocurement policy demand. For example, following updatesto the UK governments timber procurement policy, TravisPerkins (a UK building materials supplier) obtained FSCChain of Custody certification, helping it to retain anestimated 60 million British pounds in governmentcontracts.



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Construction and Real State - Opportunity

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Through their Acres for America program,Walmartis committed to permanentlyconserve at least one acre of priority wildlifehabitat for every developed acre.

Habitat banking, a concept similar tocarbon offsetting, presents significantopportunities for real estatecompanies and associated enterprises.

On the buy-side the potential introductionof habitat banking could help to speed up theplanning and approval process if companiesengage with habitat banking markets toimprove biodiversity outcomes.

On the sell-side - land managementcompanies with the skills required to restoreecosystems could capture a market that todate has been worth $1.1-1.8 billion in theUnited States alone.

Latin America for example has been tipped tobecome a new biodiversity super power.

Vulcan Materials Corporation acquired 130 acres ofland in California, which was later discovered to behome to the endangered Delhi Sands flower-loving fly.As an alternative to the planned aggregate extraction,the company obtained the right to sell fly habitatcredits which are estimated to have been sold forbetween US$ 100,000 to US$ 150,000 per acre todevelopers.



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Financial Services - Risk

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The loss of natural capital (including ecosystems, biodiversity and natural resources) has directand widespread negative effects on financial performance. Colin Mervin, Chief Executive Officer,Hermes Equity Ownership Services

Biodiversity loss and ecosystem degradation present significant risks to companies which

are not currently visible to their financiers.

Equator Principles banks have agreed to apply the International Finance Corporation (IFC)Performance Standards, including conservation of biodiversity, to the projects that theyfinance. Together these 68 banks account for 90% of project financing.

Many banks have also put in place biodiversity policies that apply to other forms of

lending, such as corporate loans, trade finance and asset management.

knowledge of biodiversity risks and mitigation remains low across the financial servicessector.



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Financial Services - Risk

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Biodiversity in the Annual Reports of the 100 Largest Companies in the World

2% 4%

12%

82%

Identify biodiversity as a key strategic issue

Discuss approach to reduce impact on biodiversity

Pasing mention of biodiversity or ecosystems

No mention of biodiversity or ecosystems


Company disclosure does not help banks assess these risks. Of the largest 100 companiesin the world, 82% make no mention of biodiversity or ecosystems in their annual reports


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Financial Services - Opportunity

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Financial institutions have much to gainfrom the projected growth in biodiversityrelated markets.

Equity investment, debt finance, fundstructuring and fund management allpresent opportunities, as do products andservices that will finance the creation ofsustainable land-based commodities, forexample structured trade finance for palmoil, soy, cotton and cocoa.

Banks will also play a central role in

building biodiversity and ecosystemsmarkets such as the nascent market forforest carbon credits.

Some of these biodiversity and ecosystem-related markets have already achievedsignificant scale

BES asset class Market Value (2008)

Biodiversity mitigation/offsets US$ 1.8-2.9 bil lion

Certified agricultural products, including non-timber forest products (NTFPs)

US$ 40 billion

Certified forest products (FSC, PEFC) US$ 5 billion

Payments for water-related ecosystem services(government)

US$ 5.2 billion

Private land trusts, conservation easements (e.g.North America, Australia)

US$ 8 billion

In August 2010 The Sumitomo Trust launched a newBiodiversity Fund with a target for assets undermanagement of US$ 60 million invested in companiesthat engage in biodiversity and sustainabledevelopment, focusing on:1. Companies with technologies that reduce the negative

impacts on biodiversity;2. Companies with technologies that can secure

biodiversity.



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Pharmaceuticals & personal care - Risk

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New rules ABS may initially increase costs anddelays and will require companies to agree ABScontracts before they can extract native geneticresources.

44% of applications for genetic resource access inColombia between 2002 and 2007 were denieddue to unsatisfactory ABS arrangements.

ABS-related impact (revenue sharing or projectdelay) could reduce Net Present Value (NPV) byaround 15% if ABS arrangements are not carefullymanaged.


Access and Benefit Sharing (ABS) aims atsharing the benefits arising from theutilization of genetic resources in a fair andequitable way. It was adopted by theConference of the Parties to the Convention on

Biological Diversity at its tenth meeting on 29October 2010 in Nagoya, Japan.


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Pharmaceuticals & personal care - Opportunity

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The benefits from genetic resources fromnature could be worth billions of dollarsin new funds. Reuters, 29 October 2010

Huge potential remains to exploit genetic

resources and the new ABS deal mayrelease latent bio-prospecting demand byproviding a clear framework for operators.

Between 1981 and 2006, almost half of allcancer drugs were derived directly fromnatural products.

At current rates of plant and animalextinction, we may be losing the potentialto create one major drug every two years.

ABS revenues should provide incentives toprotect genetic resources and help toreduce this loss.

Although the industry has moved away

from reliance on natural product discoveryin recent years, it nonetheless continues toplay an important part in drugdevelopment and manufacturing.


Natura, a leading cosmetic company in Brazil hasdeveloped its business strategy based on a sustainablesupply chain. The company has an access benefit sharingpolicy aimed to support natural conservation, communitydevelopment and cultural preservation. This strategy hasthe objective to minimize risks in their supply chain inthe long term and at the same time help build and valuetheir brand.


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Mining - Risk

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Water shortages are preventing the expansion of production in many of the world's miningareas imposing ever greater costs on [existing] mining operations. BerndZehentbauer, SeniorVice-President of Mining Technologies at Siemens VAI

Ecosystem degradation can lead to water scarcity which is a serious concern for manymining operations.

Water scarcity can limit production, increase costs, lead to stricter regulation and

result in a suspension or withdrawal of abstraction licenses.

More than 45% of the worlds mining operations are located in regions of high orextreme water stress.

It requires an average of 716 m3 of water to produce atonne of gold. Desalination is an option to provide

reliable water supply in areas of shortage. Adesalination plant can cost anything from a US$ 100million to as much as US$ 3.5 billion, with operatingcosts of US$ 2 per m3 of production. For goldproduction this would mean operating costs for waterof US$ 1,400 per tone of gold before consideringcapital costs.



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Mining - Opportunity

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Improved land management (including proactive water management) can increase operationalsecurity, reduce costs and help maintain a license to operate.

In Madagascar, Rio Tinto has launched astrategic project to protect biodiversity and

ecosystem services in forests around its ironoxide mining operation. The local communitiesare engaged to maintain the forest environment,such that the company can reduce its exposureto biodiversity and ecosystem (water supplyservices) risks, as well as regulatory andreputational risks. Rio Tinto is also striving for a

positive impact on biodiversity in all its areas ofoperation through its Net Positive Impact policy,involving biodiversity offsets and impactreduction activities.

Anglo Platinums joint venture BafokengRasimone platinum mine outside Rustenburg in

South Africa reuses the water from its return-water dam for its operational process. Themonthly amount of potable water used by theprocess plant has decreased from nearly150,000 cubic meters in September 2008, toless than 60,000 cubic metres in June 2009.The projects R2.8 million ($0.33 million) phase

one investment has already been offset by thesesavings.



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Are you Bio-Positive?

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Are you bio-positive?

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Biodiversity positive companies understand their relationship with nature and how this presentsboth opportunities and risks for business growth.

The link between ecosystem health and the business bottom line is not always obvious.

Impacts:Adverse impacts on ecosystems and biodiversity can damage companies reputations, leading toboycotts, legal claims, delays or regulatory action, with dramatic impacts on operating costs andprofits.

Dependence:

Companies depend on biodiversity and ecosystem services for key inputs to production or

assimilation of waste. Increasing scarcity and declining quality of natural resources can havesignificant financial consequences. Environmental management systems and due diligenceprocesses often ignore ecosystem dependencies.

What are ecosystem services?

Ecosystem services are benefits provided by nature, often free of charge, which all businessesdepend on to some degree.



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Prioritizing Ecosystem Service Dependencies in

a Hypothetical Agricultural Supply Chain

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How can your business become bio-positive?

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Identify and value ecosystem services on whichyou depend, assessing the likelihood of ecosystemdecline and resilience to this.

Measure and report your direct and indirectimpacts on biodiversity and ecosystems acrossthe value chain.

Set long-term goals of ecological neutrality orzero impact, or Net Positive Impact onbiodiversity.

Increase biodiversity on company-controlledareas and work with business peers andstakeholders in government, NGOs and civilsociety to maintain or enhance ecosystem healthon broader scales.



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2011 PricewaterhouseCoopers Brazil. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Brazil, which is a member firm ofPricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.

Carlos Rossin

PwCSutainable Business [email protected]


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Biodiversity and Business Chalenge - CARLOS ROSSIN