GLOBAL - The cost of environmental damage caused by global businesses was 20% in 2008, higher than losses incurred by pension funds during the financial crisis, a new report by the UNEP Finance Initiative and the UN Principles for Responsible Investment (UNPRI) has estimated.
Both organisations estimated that if companies did not change their approach, the cost would more than quadruple by 2050, accounting for 18% of global GDP.
According to the report 'Universal ownership: Why environmental externalities matter to institutional investors', the cost of environmental damage reached $6.6trn (€4.7trn) in 2008, taking into account the impact of greenhouse gases, as well as water abstraction and pollution by metals such as mercury.
The estimate was 20% above losses of $5.4trn incurred by pension funds during the 2007-08 downturn, according to the report commissioned by Trucost.
The organisations noted that the full cost of environmental damage caused by businesses was not always fully paid for by them, arguing they were, therefore, external from financial accounts.
It continued: "Institutional investors can exercise ownership rights and encourage the protection of natural capital needed to maintain the economy and investment returns over the long term."
Liesel Van Ast, research editor at Trucost, noted that some countries, including the UK, had begun estimating the capital value of the environment. The recent National Ecosystem Assessment calculated that UK forests were worth £30bn to the economy annually.
James Gifford, executive director of UNPRI, explained that it was difficult to deliver effective cross-border regulation, unlike developing regulation only applied to a single country.
"We have to think of collective solutions," he said, arguing that engaging with corporations and sectors, as well as industry associations and individual regulators, was the way to achieve this goal.
"We really encourage you as investors to commit to recognising that environmental and other externalities are bad for the economy - therefore, they are bad for you as investors - and explicitly recognise this," he said, referencing what he deemed the "visionary" Hermes Principles, published in 2002, as well as efforts by the Universities Superannuation Fund to address the issues.
The report estimated that the leading 3,000 companies in Trucost's database lost 7% of combined revenues to these external costs, with greenhouse gasses accounting for the lion's share of these costs.
Overall, it estimated that the external cost would rise to $28.5trn by 2050 if current trends continued, although Trucost calculated this could be lowered by almost a quarter of clean and resource-efficient technologies became more prominent.