Business and the Risk Framing of Environmental Issues

The World Economic Forum brings out the Global Risks Report every year ahead of its annual Davos event. The report features the potential impact and likelihood of 29 global risks. One of the categories is environmental risks. For example, ‘water crises’, ‘failure of climate change mitigation and adaptation’ and ‘extreme weather events’ were featured as the top 3 risks for the next decade in the 2016 Global Risks Report.

global-risks-report-2016

Source: WEF

 

The framing of environmental issues as risks is not new, but such framing is being increasingly used to make the  business case for sustainability.  The various operational, regulatory, reputational, financial and market risks to businesses, resulting from unsustainable extraction and use of resources (viz. water, biodiversity, materials and energy), and from the impacts of wastes and emissions (viz. air emissions, solid wastes, wastewater, carbon emissions) are often underscored to drive home the importance of corporate environmental management. The business case of sustainability, according to a number of recent studies, lies in managing these risks effectively and in harnessing any opportunities that arise in the process (e.g. green products, cost savings from energy/raw material conservation, product differentiation, improved brand image etc.).

typology-of-risks

A Typology of Biodiversity Risk to Business – Source: WEF

 

But why is there a need to frame environmental issues as risks? Why don’t environmental problems such as climate change, biodiversity loss or water crisis by themselves evince enough alarm to galvanize business into action? It would be naive to think that corporations are altruistic entities and that solving global environmental problems is on their agenda. Corporations operate in such fiercely competitive environments governed by brute market forces,  that pragmatism is the only consideration which drives decision-making – the bottomline is the only thing that matters. But, the fact is that environmental problems do affect the bottomline. Raw material scarcity, extreme weather events and contamination (and the associated costs, litigation and consumer backlash) can lead to disruption and closure of operations and can make entire supply chains come crashing down. Therefore even if businesses think that saving the planet is not their business, from a risk perspective, it very much is. Thus, framing environmental problems as real risks to their profits and their very viability is the only way sustainability can appeal and make sense to corporations, rational dispassionate market entities that they are. Sustainability can sneak into corporate boardrooms disguised only as risk!

 

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Rio Tinto’s Exit from India: Did Tigers Trump Diamonds?

In the year 2004, Rio Tinto discovered a massive deposit of diamonds in India, one that would catapult the country among the top 10 diamond producers of the world. Over the next decade, the Australian mining giant invested more than $120 million prospecting for diamonds in what was called the Bunder mine (Bunder is Hindi for monkeys, which are abundant in the area). In August last year, however, the company suddenly and unexpectedly announced its exit from the mine, citing the need to ‘conserve cash and cut costs’. Regulatory delays proved to be too much for Rio Tinto, who was repeatedly denied the requisite environmental approvals (Forest Clearances) – the increasing cost of capital was squeezing the profit margins. The mine, in addition to its usual livelihood and environmental impacts, was located in the buffer zone of the celebrated Panna Tiger Reserve and would entail clearing of 971 hectares of tiger corridor and axing of 492,000 trees. In declining approvals to Rio Tinto, prima facie, the Environment Ministry deemed tiger habitat more precious that the diamonds underneath. For once, biodiversity concerns trumped the ‘development rhetoric’. But, did they?

tiger

(Image Source)

In 2009, local extinction of tigers in Panna had made headlines. A decade-long cost-intensive programme of re-introduction and conservation resulted in a thriving population of 32 tigers and Panna has since been feted as a rare tiger conservation success story. Although the Bunder mine would have disrupted tiger dispersal and migration in Panna, it’s potential impact dwarfs in comparison to another proposed project, the Ken-Betwa river interlinking which will be a death knell for tigers in Panna.

Ken-Betwa interlinking which has been in the pipeline since the 1980s and has been recently resurrected by the new government, is slated to submerge ten times the tiger habitat as would have been affected by Rio Tinto’s mine. It will completely block the only tiger corridor out of Panna Tiger Reserve, turning it into a virtual island for tigers. The Ken-Betwa interlinking is supposed to bring water to the chronically drought-ravaged Bundelkhand region, a claim questioned by experts. The project is largely being seen as driven by political mileage than by national interest. The only thing it is believed to irrigate is the dwindling political career of a certain politician.

In 2016, both Rio Tinto’s diamond mine and the Ken-Betwa interlinking project were simultaneously vying for forest clearances in Panna Tiger Reserve. The Forest Advisory Committee (the authority that takes decisions on Forest Clearances) deferred Rio Tinto’s Forest Clearance stating “… the project can potentially disrupt landscape character vis a vis tiger dispersal around Panna landscape … this may be taken only when Ken-Betwa (river) interlink is finalised”. Upon submission of a revised proposal, Rio Tinto was asked explore the option of underground mining instead of surface mining. The cost of underground mining would be too prohibitive for the project to make any business sense.  This was the last straw – Rio Tinto decided to not proceed with the mine and handed it over to the state government, which hopes to find new investors for it. Meanwhile, the Ken-Betwa interlinking project is on track to receive the forest clearance.

Environmental approvals are far more complex than being black-and-white conservation vs. development decisions. Real-world environmental decision-making is as much about vote-bank politics as it is about biodiversity. Armed with the development-rhetoric, politics often trumps biodiversity.

The ‘Ease of Business’ Trap

Last month, Trump administration attempted to trim down the permitting process for building new dams to 4 months. “That’s less than half the time that a sixteen year old needs to have a Learners’ Permit before applying for a Maryland Driver’s License”, reads the story. Thankfully though, the advisors were able to  talk some sense into the President, who settled for one year for the permitting process. One year, points the article, is still not enough to carry out all the environmental and social impact assessments and the public consultations, and plan appropriate compliance and mitigation measures, on which the permit is contingent.

This is not a one-off case of government trying to fast-track environmental approval process in a supposed bid to cut ‘green tape’. Such legislative manipulation seems to be typical of right-wing governments (led by religion-pandering nationalist strongmen). The Modi government in India, for instance, has been trying to bring down the turnaround time for environment and forest clearances to 100 days from the earlier average of 600 days. There is no way a 100-day timeframe can provide even a decent assessment of the seasonal patterns in the ecosystem such as those of nesting, breeding and migration of species. Needless to say EIAs conducted in such haste are nothing more than a checkbox activity and fail to capture the full impact of the project on species.

However, systematically but incrementally and gradually diluting environmental regulations to accommodate corporate interests, while all the time staying under the public radar, seems to be working very well for such governments. While Trump at least maintains a facade of job creation, India’s Modi government openly touts such dilution of environmental requirements as a move to ensure ‘ease of business’ and such proclamations come from none other than the Environment Minsitry (see this). The Environment Minister has openly flaunted how faster environmental clearances have unlocked investment worth billions. And one would think the job of the Environment Ministry was to protect the environment.

But businesses would be naive to assume that such relaxing of norms is going in their favor. Clearances accorded so recklessly allow for little assessment of environmental and social risks associated with projects. An overwhelmingly large number of such projects get mired in protests and litigation, causing inordinate delays, financial losses and even project cancellation. The losers in the end are the investors and if they are public banks, then the tax payers. The swelling Non Performing Assets of India’s public banks are a case in point. Many of the loan defaults have been attributed to failed infrastructure and mining projects. Their failure, in turn, has been ascribed to inadequate environmental and social risk assessments by banks. A 2014 civil society report Down the Rabbit Hole: What Bankers Aren’t Telling You presents six cases of big-ticket projects from India that were “stayed, delayed or stopped because of mass resistance by affected communities or proceedings and court cases stemming from environmental and social concerns and violations”, the most controversial being that of Lavasa, an Italian-style private city for India’s elite.

Comprehensive environmental and social impact assessments aid effective project risk assessment. Hurried and sloppy impact assessments benefit no one. Businesses and investors overlook environment and social risks associated with development projects at their own peril.

 

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Of Free Trade Agreements, Corporate Power and Suing Countries for Protecting Biodiversity

Last month, Mongabay ran a story about how IFC, the private-sector lending arm of the World Bank, was forced to divest its stake from Canadian mining giant Eco Oro’s goldmine in Colombia, in view of the mine’s potential threat to newly-protected moorland ecosystem. The seemingly positive news had a disturbing side – Eco Oro is suing the Columbian government for ‘limiting the company’s future prospects’ by according protection to moorlands, in an apparent violation of the Colombia’s obligations under the Canada-Colombia Free Trade Agreement. Colombia recently passed a law that prohibits mining in moorlands, an important watershed providing water to a million people.  Three other mining companies (one American and two Canadian) have also sued the Colombian government for a total of $16.5 billion in compensation claims based on clauses in various free trade agreements as mining titles granted to these companies fall in newly-created protected areas

It is well known that the globalization of trade in commodities (agricultural, mineral as well as energy) has taken habitat conversion driven biodiversity loss to an entirely new level, by ratcheting up demand, creating mass markets and driving down prices. What is not so well known, though, is the impact Free Trade Agreements can have on biodiversity. A Free Trade Agreement entails cooperation between two or more countries to reduce trade barriers e.g. import quotas and tariffs, with a view to boost trade.  However, free trade agreements have been criticized for granting inordinate amounts of power to corporations vis-à-vis national governments. The investor-state dispute settlement (ISDS) provisions contained in several bilateral trade agreements and certain multi-lateral trade agreements (such as NAFTA, CETA, the proposed TPP and TTIP) allow corporations to sue governments over policy decisions that may affect their profits. Examples abound of countries being sued for passing laws to protect their biodiversity. What is even more troubling is that the liability created under ISDS continues even if a country decides to pull out of the free trade agreement.

While most corporate behemoths are listed in developed countries, they operate in resource-rich (and biodiverse) developing countries – the asymmetric free trade agreements that force developing countries to relinquish their legislative powers have been often been branded as instruments of neocolonialism.  But even developed countries do not remain untouched by lawsuits under ISDS. Canada, which faces $2.6 billion in ISDS claims, is a case in point.

National legislation is the only effective means of defending critical ecosystems against industrial expansion, as international conventions and regulations (such as CBD, UNESCO World Heritage Convention, Ramsar Convention etc.) are only advisory in nature and do not hold statutory force. By curtailing countries’ right to enact and enforce stricter no-go restrictions, free trade agreements undermine their sovereignty and limit their ability to protect biodiversity. This does not bode well for biodiversity. As it is, most national governments are inclined to dilute laws and redraw protected area boundaries to accommodate corporate interests. Thanks to the ISDS provisions of free trade agreements, countries that do manage to put biodiversity concerns before the development imperative are faced with a dismal choice: either let an multinational extractive company ride roughshod over your biodiversity or compensate them for not doing so. In fact, the very threat of lawsuits becomes a factor in decision-making – much environmental legislation doesn’t even see the light of the day because of potential lawsuits under ISDS, as governments hesitate to risk millions of dollars in claims, a phenomenon termed as the chill effect.

International trade is governing biodiversity policy in more sinister ways than we can imagine. It is important to understand the unseen yet powerful overarching system that impinges biodiversity, if we are to make even a decent attempt at protecting it.

 

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How the Infrastructure Silver Bullet for SDGs will Spell Doom for Biodiversity

Infrastructure is often seen as a panacea for development. While investment in infrastructure is only one of UN’s 17 SDGs (Goal 9) (a set of globally-agreed aspirations that will define world’s development agenda over the next decade and a half), infrastructure is being seen to have a much bigger role – it has been proclaimed by the UN and others (see this and this) as a silver bullet for achieving the various Sustainable Development Goals. As per UNCTAD’s World Investment Report 2014 on Investing in the SDGs, the total investment in economic infrastructure – power, transport (roads, rails and ports), telecommunications and water and sanitation –  in developing countries, currently stands at $1 trillion per year and will need to rise to between $1.6 and $2.5 trillion annually over the period 2015-2030, in order that the SDGs are achieved. When disaggregated, one-third of this investment (i.e. $300 billion at present, another 260 million by 2030) is meant for transport and energy.

breakup-of-infra-investment

Image result for roads amazon

This global push for infrastructure development may spell doom for global biodiversity. Ecosystems across the world
are already reeling under the devastating impacts of both large-scale hub  (i.e. ports, dams, mines, oil rigs) and linear infrastructure (roads, railways lines, canals, oil and gas pipelines and power lines). Linear infrastructure such as roads are known to have a disproportionately high impact not only in the form of wildlife roadkills and disruption of animal movement/migration but more importantly because they open up intact habitat leaving it more vulnerable to other drivers such as poachers, invasive species, wildfires and human-wildlife conflict. Roads have fragmented the earth’s land surface into 600,000 pieces, half of which are smaller than 1 sq. Km and 70% of forests now lie within one kilometer of an edge. The Amazon basin already has 100,000 Km of roads. Thanks to the global thrust on infrastructure development, the next few decades will see an unprecedented proliferation in roads. 25 million Km of new roads are expected to built by 2050 (a 60% increase), with 90% of them to be constructed in developing countries – the last bastions of biodiversity. More than 11,000 kilometers of roads and railway projects have already been planned through tiger landscapes in Asia, in addition to canals, oil and gas pipelines and power lines.

A global map of roadless areas. The blue color indicates especially large tracks.The red areas are completely roaded: covered by roads and 1 km buffers alongside either sides of the road. (Credit: P. Ibisch et al., Science (2016)

Global conservation efforts are no match for this imminent onslaught of infrastructure proliferation promoted by the global development agenda. Proactive zoning for keeping critical habitats out of bounds for infrastructure development has its role but also its limitations. Even as the global conservation community is rallying for stricter ‘no-go’ restrictions on industrial and infrastructure development for protected areas (e.g. IUCN’s Amman Resolution on Protected Areas), countries around the world are undergoing increasing Protected Area Downgrading, Downsizing, and Degazettement (see: www.padddtracker.org), with wildlife being cramped into ever smaller habitats that have little connectivity. Mitigation measures such as re-routing to avoid critical habitats and corridors, again, can only go so far – with the sheer scale of roads being planned, there will be no ‘elsewhere’ to re-route the roads. Wildlife crossing structures (underpasses and overpasses) are important but don’t address the indirect impacts of roads on biodiversity.

What we need is a complete rethinking of our reliance on centralized large-scale infrastructure to achieve our development goals. We need to evolve growth models that decentralize avenues for prosperity. We need a strengthening of rural and sub-urban economies so that people don’t have to clamour to metropolises for employment opportunities.  We need to develop small-scale decentralized infrastructure like local watersheds, solar microgrids and rural roads instead of building dams and highways. There needs to be a shift in focus from economic infrastructure (that is intended to boost the industrial production) to social infrastructure (that is intended to boost social well-being) such as educational institutions, medical facilities and housing for the poor.  If we fail to reinvent our very development model, all our conservation efforts will come to naught. The global conservation community can no longer take a reactionary approach to the impacts of infrastructure development, it has to actively advocate for ‘limits to growth’ for infrastructure!

 

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The Financial Sector: An Unlikely Ally for Conservation

A recent study published in Nature traced commodity production induced species loss back to over-consumption in major economies such as the US, EU, China and Japan. A similar exercise could be carried out for the threat to species resulting from mineral and fossil fuel extraction. In both these cases, the main enablers of consumption are giant multi-national corporations and their extensive supply chains. Aided by globalization, big corporations have been ratcheting up consumer demand for imported commodities (soy, corn, beef, palm oil, timber) by creating mass markets for products which had no markets or only niche/local markets before globalization.

Global hotspots of species threat linked to consumption in the United States.

Global hotspots of species threat linked to consumption in the United States Source

I recently had the privilege to attend a lecture by Prof. Gordon Clark, Director of the Smith School of Enterprise and the Environment at the University of Oxford during a training programme on ‘Enterprise and the Environment‘. The insightful talk helped me put into perspective my notions about consumer capitalism and the role of MNCs. Until then, I had believed in the convenient binary – big corporations are always bad for the environment and the key to sustainability is small-scale decentralized local production. Upon listening to Prof. Clark, I realized that this may not always be the case.

Big food/big oil/big coal is undoubtedly putting unsustainable levels of pressure on our limited resources. Mass production of commodities through monocultures and large-scale extractive industries have enormous carbon, water and biodiversity footprints. While it is true that the problem lies with multi-national corporations and the infinitely elastic demands they keep stretching, it is also true that they are the only ones commanding enough cash flows to transition to more sustainable practices and exert enough pressure on their local suppliers to follow suit. Smaller local businesses may not have the financial wherewithal to renew their capital stock and make the switch to more sustainable technology/practices.

Smaller businesses in the unorganized sector are often hidden from the public eye and it is difficult for non-government actors like the civil society and the consumers to make them accountable for their environmental performance. On the contrary, big corporations have more sensitive brand images and reputations, which makes them more accountable to their customers and civil society through their shareholders. This is aided by the fact that corporations have steered away from the classic ‘profit motive’ to a ‘shareholder value’ objective. In major public corporations, the top 20 owners own just 30% of the total shares, at the most. The rest are owned by retail and institutional investors. Herein lies the power of the financial sector. It would be fallacious to think that big corporations are entirely invulnerable. Financial investors wield enough power to bring the mightiest of them to their knees for their environmental transgressions. Erring companies (e.g. BP, Volkswagen, Vedanta) have faced eroding share prices, investor pullout and even bankruptcy (e.g. Peabody Energy).

Financial investors do not have an intrinsic interest in corporations. If corporations continue to regard the environment merely as a risk, failing to realize its intrinsic value and integrate it into core decision-making, then investors will readily take their money elsewhere. They are already redirecting their investments from fossil fuels to renewables. 2016 marked the first year in history when green energy surpassed fossil fuels in total electricity generation capacity of the world, as per the IEA. New corporations that build natural capital rather than eat into it are set to attract more investment in the future (e.g. natural infrastructure and conservation finance). Conservation projects (e.g. sustainable forestry/agriculture/fisheries, landscape restoration, mitigation banking, watershed protection etc.) are set to attract $200 – 400 billion in private capital investment over the next four years, according to a recent Credit Suisse report.

Thus, whether they like it or not, conservation organizations have found an unlikely ally in the financial sector and they will do well to harness its power.

 

 

 

Protecting India’s conservation offsets

This article first appeared in Science.

India, a megadiverse country and fast growing emerging economy (1, 2), endures a constant tug-of-war between conservation and development. Biodiversity offsetting, an increasingly popular but controversial conservation tool, seeks to counterbalance biodiversity impacts associated with economic development (3). To provide a biodiversity offset, developers compensate for developed land by supporting conservation actions such as reforestation of degraded forests.

To be valid, biodiversity offsets must support conservation that would not otherwise be implemented, not conservation already planned or under way. This is the principle of “additionality”: Only added conservation can counterbalance development (3). In violation of this widely accepted principle, the Indian government has sought to divert offset funds toward established conservation commitments. As a result, development remains uncompensated, and India suffers a net loss of biodiversity (4).

Biodiversity offsetting was codified in India’s Forest Conservation Act (FCA), 1980, which requires projects that cause deforestation to pay for compensatory afforestation (5). Successive government administrations, however, have failed to implement this offsetting mechanism, leaving more than INR 38,000 crores (about USD 5.7 billion) sitting unused in a government account, even as deforestation continues. A proposed new law, the Compensatory Afforestation Fund (CAF) Bill, 2015, which is up for debate in the Indian parliament, seeks to resolve this inertia (6).

India’s FCA, 1980, is explicit about the concept of additionality: “The compensatory afforestation should clearly be an additional plantation activity and not a diversion of part of the annual plantation programme” (5). The CAF Bill, 2015, proposes diverting compensatory afforestation funds to implement the Green India Mission (GIM), a separate afforestation program stipulated under India’s National Action Plan on Climate Change to fulfill its international climate change mitigation commitments (6). This falls under the category of established conservation, and therefore does not qualify as compensation according to the principle of additionality. forest

Initially, INR 6000 crores (about USD 900 million) are proposed for diversion (7). This sum could be used to afforest about 1.2 mha (8). Thus, compensatory afforestation of 1.2 mha will be forgone, in effect, leaving an uncompensated net loss of almost all of the 1.48 mha deforested under FCA since 1980 (9). For effective mitigation of development impacts on India’s forests and biodiversity, compensatory afforestation funds must not be diverted to the Green India Mission. The funds should be used strictly for compensatory afforestation, and the resulting forest cover gains should be measured and reported against a baseline that includes afforestation planned under the Green India Mission. To avoid double counting, there should be separate accounting for the spending on compensatory afforestation and that on the Green India Mission.

References

  1. Ministry of Environment and Forests, Government of India, “National Biodiversity Action Plan” (2008); www.cbd.int/doc/world/in/in-nbsap-v2-p1-en.pdf.
  2. International Monetary Fund, “World Economic Outlook Update” (2016); www.imf.org/external/pubs/ft/weo/2016/update/01/pdf/0116.pdf.
  3. B. A. McKenney, J. M. Kiesecker, Environ. Manage. 45, 165 (2010).
  4. M. MaronA. GordonB. G. MackeyH. P. PossinghamJ. E. M. Watson , Nature 523, 401 (2015).
  5. Ministry of Environment and Forests, Government of India, “Handbook of Forest (Conservation) Act, 1980 (With Amendments made in 1988) Forest (Conservation) Rules, 2003 (With Amendments made in 2004) Guidelines & Clarifications” (2004); http://wrd.bih.nic.in/guidelines/awadhesh02c.pdf.
  6. “The Compensatory Afforestation Fund Bill, 2015” (as introduced in Lok Sabha) (2015); www.prsindia.org/uploads/media/Compensatory%20Afforestation/Compensatory%20afforestation%20fund%20bill,%202015.pdf.
  7. Ministry of Environment and Forests, Government of India, “National Mission for a Green India (Under The National Action Plan on Climate Change)” (www.moef.gov.in/sites/default/files/GIM_Mission%20Document-1.pdf).
  8. Ministry of Environment and Forests, Government of India, “Implementation Guidelines for National Mission for a Green India (GIM)” (2014); www.moef.gov.in/sites/default/files/GIM_Implementation_Guidelines.pdf.
  9. Summary of FCA Projects, Website of e-Green Watch (http:// egreenwatch.nic.in/FCAProjects/Public/Rpt_State_Wise_Count_FCA_projects.aspx).