Is Credit Risk Affected By Environmental Degradation ?

Most people in the natural resource and environment or sustainable development sectors are aware of the linkages between environmental degradation, the unsustainable use of natural resources and economic costs.

However, it has been quite difficult to highlight the impact of the above on the costs of funding as well as the availability of credit. An exacerbating factor is the difficulty often encountered in ensuring that environmental risks are effectively considered in development and credit assessments.  Most businesses, banks and DFIs are beginning to pay more attention to environmental and sustainability issues. However, this often takes the form of mere lip service, green washing, or a basic compliance approach. In many cases the integration or mainstreaming of sustainability issues are left to the marketing department, and regarded as an add on or fringe department.

The impact of this has been a dilution of what was meant to be the mainstreaming of environment and sustainability considerations into business and the economy. This has also resulted in external risks to the financial and economic system being underestimated. One such risk is environment related credit risk, which has the potential to negatively impact multiple financial markets and have potentially significant economic and social impacts.

Some of the potential impacts and risks have been identified in the UNEP FI report titled; A New Angle on Sovereign Credit Risk. While focused on sovereign credit risk, the report raises issues that are not necessarily new or restricted to the sovereign credit risk sector. This is due to the fact that the findings of the report are based on bio-capacity and ecological footprint concepts that highlight some of the key development and economic related risks and issues.

Interesting points raised in the report are:

  • Natural resources, both renewable, such as biological resources (food and fiber), as well as nonrenewable resources (fossil fuels, ores and minerals) are critical to each nation’s economy.
  • To date, risks stemming from renewable resources in particular are not well-considered in sovereign credit risk assessments.
  • Traditional sovereign credit risk analysis appears to inadequately reflect pressures from increasing global natural resource scarcity, environmental degradation and vulnerability to climate change impacts
  • This report addresses how and why natural resource and environmental risks are becoming financially material for sovereign credit risk, not just in the medium term, but even in the short run.
  • A 10 per cent variation in commodity prices 0.2 and 0.5 per cent of a nation’s GDP. Given the recent fluctuations in commodity prices investors should take note of these issues in the short-term (0 – 5 years).
  • A 10 per cent reduction in the productive capacity of renewable, biological resources, and assuming that consumption levels remain the same, could lead to a reduction in trade balance equivalent to between 1 and over 4 per cent of a nation’s GDP. Given the growing body of scientific evidence on ecosystem degradation and climate change impacts, governments, bondholders and credit rating agencies should take note of these issues in the short to medium term.

Despite the implementation of sustainability reporting and compliance measures within organizations and the banking sector issues such as sovereign and credit risk seem to have been sidelined, diluted and or overlooked. The report is a great place to start the discussion on effective and integrated environmental risk assessment  and will hopefully encourage the type of planning and assessments measures at all levels and in all sectors which do in fact ensure sustainable development.

 Click here to read the report!

Water Scarcity And Your Virtual Water Consumption ?!

A renewable resource is a natural resource with the ability to reproduce through biological or natural processes and replenished with the passage of time. Renewable resources are part of our natural environment and form our eco-system. One such resource is water. Water is able to regenerate and is part of our natural environment. However water may only be considered a renewable resource when carefully controlled usage, treatment, and release are followed.  (www.en.wikipedia.org, 2012)

UN research indicates that we are facing a serious water scarcity problem.

  • Approximately 700 million people in 43 countries suffer as a result of water scarcity.
  • By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world’s population could be living under water stressed conditions.
  • With the existing climate change scenario, almost half the world’s population will be living in areas of high water stress by 2030, including between 75 million and 250 million people in Africa. In addition, water scarcity in some arid and semi-arid places will displace between 24 million and 700 million people.
  • Sub-Saharan Africa has the largest number of water-stressed countries of any region

(www.un.org/waterforlifedecade/scarcity.shtml)

So if water is meant to be renewable why are we in this problem?

The reality is that water in our current societal context is not really renewable because we have compromised the ability of the water resources to regenerate.  Water affects all of us all the time and in every way possible. For the purposes of readers (assuming that most readers/ people with access to the internet of this post have easy and regular access to potable and piped water); water scarcity doesn’t just impact on how many baths or showers we take or how often we flush the toilet or whether we drink bottled or tap water or if you have a low flow shower head etc

Water is an integral and critical component of the environment and is therefore fundamentally important for the survival of humankind and society as we know it (not meaning to be alarmist…. but it is true).

“Water is one of the primary barometers of climate change: A rise in sea-levels, flooding, and extreme storms combined with general water stress and more severe and frequent droughts will escalate crises in municipal infrastructure, requiring continual upgrades for water purification, stormwater drainage, and sewage treatment, all of which will dramatically raise the price of water at the retail level. ( Bond, 2011) 

It has been predicted by the Water Resources Group that the global demand for water will outstrip supply by 40% by 2030 (CDP, 2011), this indicates that something is very wrong with the way that we are using our water resource considering the fact that water, despite being a finite resource is a renewable resource.  Water use has increased exponentially and has been driven by increasing water demand from industrialization, economic development and population growth. This has resulted in increasing competition for our water resources, which has resulted in increased tensions and challenges around the management, allocation and sustainable use of water resources.

In many instances the water needs of large-scale agriculture and industry end up competing for the water that essential for the sustaining local communities and ecosystems. Ecosystems are an essential component of the hydrological cycle as they are not only reliant on water for survival but also provide a key role in water purification and provision, thus ecosystems maybe seen as nature’s natural “green” infrastructure and service providers.  In addition ecosystems also provide us with the very important ability to adapt to climate change impacts and environmental degradation. It is therefore obvious that we need healthy and functioning ecosystems in order to ensure that we have a sustainable water source.

We all know that we need water to survive however the fact that water contributes in some way to the production and use of everything we consume and use is often overlooked. Everything that forms part of our lifestyle and society has a virtual water value. Virtual water refers, in the context of trade, to the water used in the production of a good or service (www.en.wikipedia.org, 2012). It should however be noted that specific measure of virtual water can be more or less depending on regional context, climatic conditions and agricultural practice. The virtual-water content of a product, commodity, good or service may be defined as the volume of freshwater used to produce the product, measured at the place where the product was actually produced”. (www.en.wikipedia.org, 2012). This definition is important as many of the goods and service produced in water poor areas are consumed in water rich areas, resulting in the true water value not being fully considered or accounted for by the consumers.

For example, a liter of potable water in “water-rich” Scandinavia is unlikely to be as precious/valuable as a liter of potable water in water-scarce Namibia (CDP 2011). Consequently the 70 liters of water it takes to make 100 grams of apple may have more value in Namibia than it does in Scandinavia. This combined with the fact that a large proportion of the food you eat, the clothes you wear and the goods and services that you consume often not produced locally increased the virtual water value of the product.

An example of this would be 100% organic cotton t-shirt has a virtual water value 2700 liters! The 2700 liters mean a great deal more to someone living in an arid environment and having to draw water from a communal well than it does for someone living an a water rich area who has access to piped potable water.

Examples of virtual water values are:

  • 2400 liters of water to make 100 grams of chocolate.
  • 70 liters of water to make 100 grams of apple
  • 5000 liters of water to make 500 grams of paper
  • 2499 liters of water to make 150 grams of burger
  • 4650 liters of water to make 300 grams of beef (about one steak)

(www.virtualwater.eu)

Our economy and society are dependent on water and the virtual water associated with the production of goods and services. If the cost of water went up so would the cost of all our goods and services. How we use and pollute our water is therefore a critical issue especially since the amount of water that is clean and drinkable is steadily decreasing due to pollution (UNEP WHO 2012) arising from our unsustainable use of water and the inability of ecosystems to effectively purify water due to environmental degradation.

In the UK, for example, “it has been estimated that two-thirds of all the water that its population of 60 million people consume actually comes embedded within the imported food they eat, the clothes they wear and industrial or chemical goods they purchase. The result is that local water management issues affecting disadvantaged communities around the world may be significantly exacerbated and influenced by consumption patterns in more affluent countries.(CDP 2011)

How are we, a society that is entirely dependent on water, who’s wasteful and inefficient use is the reason we are in this problem meant to respond to the water resource challenges? Especially as the water problem will undoubtedly result in associated environmental, economic, political and social problems?

Simply stated we need to change the manner in which we consume and produce goods and services. As consumers we need to question and refuse to consume products and services with high virtual water values. Also we need to recognize that not everything is a necessity and we can do without some/ a great many of the extras and luxuries that we consume.

We can’t change our habits overnight (though it would be great if we did….), instead we need to make a difference where we can and build up to making the big changes that we need to make in our consumption and production patterns.

A few pointers to help you reduce your water and virtual water consumption:

Water reduction tips for dummies:

  • Shorter bath and shower time
  • Close tap while brushing teeth
  • Recycle water in the home.
  • Plant indigenous plants in your garden
  • Check and fix any leaks in your home

 Virtual water reduction tips for dummies:

  • Buy local and seasonal produce grow your own veggies
  • Eat less meat: become vegetarian, meatless Mondays etc
  • Eat less chocolate …(difficult I know….)
  • Waste less
  • Reuse and recycle organic products like paper, cotton etc
  • Don’t be a slave to fashion: Buy good quality and timeless clothing that can take you from season to season reducing the need to keep replacing your clothes etc
  • Download a virtual water application to help you make smarter choices.

Patrick B (2011) Durban’s Water Wars, Sewage Spills, Fish Kills and Blue Flag Beaches.

UNEP WHO 2012 Progress on Drinking Water and Sanitation 2012

 CARBON DISCLOSURE PROJECT (2011):CDP Water Disclosure South Africa Report 2011: Assessing the value of water

UN Water For Life Decade http://www.un.org/waterforlifedecade/

UNDP Human Development Report 2011: A Super Quick Summary

Here is some information and findings from the summary report that I found to be of interest:

 

UNDP HDR 2004

 

 
  • Sustainability is inextricably linked to equity. Understanding and exploring the links between environmental sustainability and equity is critical.
  • Un-sustainability and in-equality should be the focus of all development initiatives. Consequently resources should be directed towards the critical challenges of un-sustainability and in-equality.
  • Environmental degradation stunts people’s capabilities and goes beyond income impact to issues such as livelihoods, health, education and other dimensions of well-being.
  • Fossil fuel driven consumption and growth is not a prerequisite for development.
  • Development does not have to be fueled by high carbon emissions. For example: Norway’s per capita carbon emissions (11 tonnes) are less than those of UAE (35 tonnes). Both countries have high incomes.
  • Environmental trends show deterioration which will impact human development.  Those particularly at risk to environmental deterioration are the millions of people who depend directly on natural resources for their livelihoods.

    Link between Ecosystem Services and Human Well being (from MEA)

  • Globally, nearly 40 percent of land is degraded due to soil erosion, reduced fertility and overgrazing. Land productivity is declining, with estimated yield loss as high as 50 percent in the most adverse scenarios.
  • Agriculture accounts for 70–85 percent of water use, and an estimated 20 percent of global grain production uses water unsustainably, imperiling future agricultural growth. 
  • Deforestation is a major challenge. Between 1990 and 2010 Latin America and the Caribbean and Sub-Saharan Africa experienced the greatest forest losses.
  • Transformation in gender roles and empowerment is a way to improve environmental sustainability, equity and facilitate development.
  • There exists a need to integrate equity into green economy policies.
  • The relationship between public and private sector finance is key in enabling sustainability and equity. Public sector commitments and efforts are an important leverage tool to catalyze private sector investment.  
  • The Report proposes an emphasis on 4 country-level sets of tools that are necessary to facilitate equitable and sustainable development these are:
  1. Low-emission, climate-resilient strategies— to align human development, equity and climate change goals.
  2. Public-private partnerships— to catalyze capital from businesses and households.
  3. Climate deal-flow facilities— to bring about equitable access to international public finance.
  4. Coordinated implementation and monitoring, reporting and verification systems— to bring about long-term, efficient results and accountability to local populations as well as partners.

The UNDP 2011 HUMAN DEVELOPMENT REPORT can be read here.

You can view individual country profiles here.