Integrating Environmental Costs and Benefits into Sustainable Investment Processes Stewart Armer Head of SRI Fortis Investments TBLI - November 2006
Quantification of Negative Externalities is a necessary starting point <ul><li>Corporations are increasingly being asked to “internalise” formerly “externalised” environmental costs </li></ul><ul><li>Quantification of environmental costs of currents practices is like “turning the light on” </li></ul><ul><li>Quantification is vital but not enough: </li></ul><ul><ul><li>Some negative externalities likely to remain externalised forever </li></ul></ul><ul><ul><li>What are the mechanisms of internalisation? </li></ul></ul><ul><ul><li>Who finally pays? </li></ul></ul><ul><li>Investors need frameworks through which to draw investment meaning from this data </li></ul><ul><li>Investors have only recently started to use environmental cost data, however… </li></ul><ul><ul><li>Cost data tells us about the size of the problem </li></ul></ul><ul><ul><li>It does not tell us about the solution </li></ul></ul><ul><li>Fortis Investments and Trucost “Environmental Benefit” project </li></ul>
How do sustainability issues develop? EMERGING MATURING ESTABLISHED Legislation in place Voluntary Codes Calls for tighter legislation Growing Political/ Media Attention Strong Scientific Evidence Some Scientific Evidence Sustainability Issues
The transition to sustainability DEBATE AS TO INCENTIVE REGIME FRAMEWORK DEBATE AS TO PENALTY REGIME FRAMEWORK INCENTIVE REGIMES PHASED OUT TRANSITION PENALTY REGIMES IN OPERATION STRICT PENALTY REGIMES BUILT INTO LEGAL FRAMEWORK INCENTIVES PENALTIES TRANSITION INCENTIVE REGIMES IN OPERATION EMERGING MATURING ESTABLISHED Sustainability Issues
Identifying sustainability issues Sustainability Issues Greenhouse Gases Waste Nanotechnology Water Abstraction Asbestos Biodiversity Volatile Organic Compounds EMERGING MATURING ESTABLISHED
Company response ABATEMENT Companies achieve competitive advantage through better practices UNCONTROLLED Companies with a defensive or minimalist approach MITIGATION Companies with products or services that solve the problem PRODUCT STRATEGIC WORST PRACTICES BEST PRACTICES
Environmental Costs and Benefits PRODUCT STRATEGIC WORST PRACTICES BEST PRACTICES Business Response Fortis Sustainability Radar™ Greenhouse Gases Sustainability Issues EMERGING MATURING ESTABLISHED Clean technology companies Industry majors undergoing internalisation process Negative externalities quantifiable Positive Benefits ???
Key questions for investors <ul><li>What are the mechanisms of internalisation? </li></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Regulatory </li></ul></ul><ul><ul><li>Procurement </li></ul></ul><ul><ul><li>Penalties or incentives? </li></ul></ul><ul><ul><li>etc </li></ul></ul><ul><li>Which part of the value chain will be targeted by these mechanisms? </li></ul><ul><ul><li>Direct or indirect external costs? </li></ul></ul><ul><li>Which companies can pass on internalised costs to their customers? </li></ul><ul><ul><li>Substitutability of alternative products </li></ul></ul><ul><ul><li>Barriers to entry and industry competitiveness </li></ul></ul>
Missing Link: How to Quantify the Benefits?
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