Presentation on theme: "Presentation of the joint study Dr Richard Mattison, CEO Trucost Plc"— Presentation transcript:
1 Quantifying the natural capital risk exposure of financial institutions in brazil Presentation of the joint studyDr Richard Mattison, CEOTrucost PlcDecember 2014
2 Contents Introduction to Trucost Importance of this study What is natural capital and how to we account for it?Why is this relevant for Brazilian financial institutions in particular?What are the drivers for internalising environmental costs and why is it a risk now?Key findings of the reportCase studyIntegrating natural capital analysis in equity analysisRecommendations
3 About TrucostTrucost helps investors to understand the economic consequences of natural capital dependency in order to identify risk and opportunity from growing natural resource pressures and environmental costs.
4 Importance of this study Some drivers take a long time to materialize and require government intervention but there are other mechanisms by which external costs can be rapidly internalised by economies, companies, investors.This study is a first step to demonstrate how natural capital accounting can be used to analyse companies, portfolios and loans.Investors and banks will need to apply the approach to their own investments in order to quantify the risks.Risk teams need to anticipate these material issues, first quantifying risks to investments and then financing.A recent example is the 2014 drought in the south-east of Brazil - the worst drought in 80 years - which affected approximately 70 municipalities in Sao Paulo state alone. Estimated losses just to the agribusiness sector in the region have already reached R$30,000m. (Estadao, 2014)
5 What is natural capital and how do we account for it?
8 $2.2tn >50% WHAT IS THE SCALE? Environmental damage caused by world’s largest 3,000 companiesLink to report:According to Trucost analysis, Global Environmental Impacts are valued $6.6tr or 11% of global GDP – 18% more than the combined losses of OECD pension funds by the end of 2008 as a consequence of the Global Financial Crisis (see for reference statistics)The top 3000 listed companies and their supply chains are responsible for a third of that or $2.2tr. If these companies had to pay for their pollution and use of ecosystems this would amount to greater than 50% of their profit.>50%Proportion of company earnings that could be at risk from environmental costs
9 VALUING NATURAL CAPITAL HELPS US TO: DETERMINE IMPACT MATERIALITYASSESS ENVIRONMENTAL TRADE-OFFSUNDERSTAND REGIONAL RISK DIFFERENCESINTEGRATE THE RESULTS WITH BUSINESS METRICSCOMMUNICATE THE RESULTS TO A GENERAL AUDIENCELCAs are greatLife cycle thinking is a holistic and systematic way to address environmental performance. It enables companies to…
10 TRENDS IN NATURAL CAPITAL ACCOUNTING LEADERSHIP INITIATIVESINVESTORSSOVEREIGNNGOsCORPORATIONSMULTI-STAKEHOLDER GROUPS
11 Why is this relevant for Brazilian financial institutions in particular?
12 LACK OF A FRAMEWORK FOR TAKING ACCOUNT OF NATURAL CAPITAL RISK Relevance for Brazilian financial institutionsEconomic reliance on natural capitalAgriculture accounted for 22% of Brazil’s GDP in 2012Demand and supply side pressuresRapidly growing populationStrengthening legislationPotential compliance or litigation costsEquity investments28% of PF assets invested in equities - high exposure to companies facing natural capital costsThe economy is predicted to continue to grow strongly, but this growth is dependent on these industries continuing to thrive, fueled by natural capital as the engine of the Brazilian economy.Deforestation not only depletes natural capital, it also exacerbates the stresses on it through climate change. Even though Brazil has low levels of carbon emissions per capita, if the emissions relating to deforestation are taken into account, the country is one of the largest carbon emitters (UNDP ).Corporate bondsInternalising costs could lead companies to defaultCorporate lendingFood and bev = largest sector for lending and highly dependent on natural capitalLACK OF A FRAMEWORK FOR TAKING ACCOUNT OF NATURAL CAPITAL RISK
13 What are the drivers for internalising environmental costs and why is it a risk now?
15 why is internalisation a risk now? Changing demographicPublic awarenessIncreasing regulation/voluntary commitmentsMarket dynamicsStakeholder actionClimate risksResource depletionPopulation and wealth growth are increasing negative externalities (such as pollution and ecosystem damage) due to higher consumption patternsDigital connectivity is spreading information widely and rapidly, therefore our understanding of corporate externalities is growingOffering financial incentives for companies to increase positive externalities or imposing fines for corporate negative externalitiesResource pressures and market disruption are creating new risks and opportunitiesActions of NGOs, communities and other stakeholders are becoming from frequent and impactfulRisks includes adaptation and mitigations risks from factors such as global warming leading to shifting production zones and disruption to roads and transport infrastructure caused by changing weather patterns and extreme weather events. This may require major investment in irrigation, flood defences or new land.Risk from resources on which a company depends being depleted or degraded so the asset base is eroding or input costs are likely to increase. This is particularly likely to affect the agricultural commodities and forestry sectors.
17 Key findings from the report Unpriced natural capital costs of companies could be as much as R$1,646bnBanks are most exposed through financing of cattle ranching, fishing, food and beverages and agriculturePension funds are most exposed through investments in food and beverage companiesThe natural capital risk exposure of financial institutions can vary significantly
18 Key findings from the report The sectors cattle ranching, soya bean farming, crude petroleum and natural gas extraction have the highest natural capital costsThe highest natural capital intensity sectors (unpriced natural capital costs per R$m of production) include cattle ranching, fats & oil refining, aquaculture, cotton farming, sugarcane farming and cement manufacturingThe North of the country has the highest land use conversion cost because it is principally made up of Amazon rainforestThere is a marked difference in the natural capital impacts of soy production in the two principal production zones
33 Recommendations Quantify portfolio-level natural capital exposure Identify drivers for cost internalizationDemand better data from companiesConsider the potential future natural capital risk that a company may faceCapitalise on changing market demand for more sustainable goods and servicesHelp customers transition to a more resource efficient and sustainable business modelThey can use the data in this report about the natural capital intensities of key sectors and regions to map their investments and identify hotspots within their portfolios which require further assessment.Looking at scale, speed and strength of drivers for each individual investment under different scenariosInvestors can use their position to demand better data from companies, either through management engagement as an equity investor or in the due diligence process for a corporate lender.because this can impact on the current valuation of an investmentThese companies should be more insulated from their sector’s risks and could deliver better returns.This could be in the form of project finance, working capital solutions or advisory services for customers operating in or exposed to natural resource sectors. In so doing, investors can be central to supporting the transformation to a more sustainable and financially resilient economy.