Universal Ownership: Why environmental externalities matter to institutional investors

(UNEP Finance Initiative, PRI Association, 2011)


Many indicators regarding the health of the world’s environment remain firmly in the red. Trends such as climate change, water scarcity, air pollution, biodiversity loss and ecosystem degradation all continue to threaten humanity’s finite stock of natural capital and the ability of the world economy to provide sustainable growth and prosperity for all.

  • Is it possible to put a price on humanity’s ecosystem degradation and biodiversity loss past, present, future given that all of humanity’s lives, knowledge, experience, wealth… has come from these sources?

Business use of environmental goods and services generates environmental damage that carries significant costs that are largely neglected, ignored, denied, transferred to FSTs… by business.

  • What do the Fossils’ financial statements look like if these costs and liabilities are not externalized?
  • What do the Fossils’ financial statements look like if the costs and liabilities of humanity’s health and welfare are not externalized?

Environmental costs are becoming increasingly financially material. Annual environmental costs from global human activity amounted to US$6.6 trillion in 2008, equivalent to 11% of GDP. Under a “business-as-usual” scenario, annual global environmental costs are projected to reach US$28.6 trillion, equivalent to 18% of GDP in 2050.

  • What are the error bars on these estimates?
  • Do the FSTs almost exclusively pay for these costs and liabilities?
  • Estimates of past and present costs to humanity of Fossil damages may be within the realm of possibility, but how can one even begin to estimate the future costs of the losses: lives, reduced quality of life, lessons, knowledge, wealth, scenarios… that will never be because of those damages?

Reducing greenhouse gas (GHG) emissions, water use and air pollution would have the greatest effect on reducing environmental costs. GHG emissions and resulting climate change impacts account for a large and growing share of environmental costs – rising from 69% (US$4.5 trillion) to 73% of externalities between 2008 and 2050. The expected rise in costs for escalating GHG emissions and climate change impacts results in projected external costs of US$21 trillion in 2050. Water abstraction and air pollution are the other main contributors to environmental costs.

Medium- to large-sized publicly listed companies cause over one-third (35%) of global externalities annually. The largest 3,000 public companies caused over US$2.15 trillion of global environmental costs in 2008, which equates to nearly 7% of their combined revenues. Other actors in the global economy, such as small and private companies, governments, other organisations and individuals contribute the remaining US$4.45 trillion of external costs.

Five sectors account for around 60% of all externalities from the largest 3,000 listed companies. Reducing GHG emissions in the Electricity, Oil & Gas Producers, Industrial Metals & Mining and Construction & Materials sectors would have the greatest effect on reducing carbon costs. Reducing water use from the Food Producers and Electricity sectors could also lower environmental costs significantly.

  • Is it long overdue for humanity to hold the Fossils ethically, legally, financially… accountable for all the damage that they have done to humanity?

Most large, diversified equity funds invest in many companies with significant environmental impacts that undermine the environment’s ability to support the economy. In a hypothetical equity portfolio weighted according to the MSCI All Country World Index, externalities could equate to more than half of the companies’ combined EBITDA, weighted according to Index constituents.

  • What happens to the Fossils’ scorecards of business and investment success if their externalities are put where they belong in the Fossils’ financial statements instead of being dumped on the rest of humanity including the FSTs?

External costs caused by companies can reduce returns to investors. Environmental costs can affect portfolio values by reducing future cash flows for companies held in portfolios and lowering future dividends. For a diversified investor, environmental costs are unavoidable as they come back into the portfolio as insurance premiums, taxes, inflated input prices and the physical cost associated with disasters. One company’s externalities can damage the profitability of other portfolio companies, adversely affecting other investments, and hence overall market return.

  • How complete is the accounting for all the past, present, future losses to the rest of humanity other than business shareholders, including the FSTs, from the decimation of humanity’s: ecosystem more than 4 billion years in the making; welfare including quality of life,  life expectancy…; knowledge, learning, recreational… based scenarios that will never be…?

The costs of addressing environmental damage after it has occurred are usually higher than the costs of preventing pollution or using resources in a more sustainable way. It is in the interests of Universal Owners such as large institutional investors – with stakes in an economy-wide cross-section of publicly traded securities as well as property and other non-listed asset classes – to reduce externalities. It is in the financial interest of fund beneficiaries that Universal Owners address the environmental impacts of investments to reduce exposure to externalities and protect long-term returns.

  • How is it possible that the Fossils have been able to pay little or no taxes and then use FST tax money to pay for their enterprise losses and excesses?
  • How is it possible that the Fossils have been able to decimate Humanity’s ecosystem with impunity?
  • How is it possible that the Fossils have been able to propagate lies about Science and the Truth with impunity?
  • How is it possible that the Fossils have been able to dump the costs of  their externalities, expenses and liabilities, onto the rest of Humanity, the FSTs?
  • How is it possible that the Fossils have not been held financially and legally responsible for the damage they have done?
  • How is it possible that the Fossils have been able to almost completely eliminate independent regulation and oversight of their immoral and illegal actions to the detriment of Humanity?
  • How is it possible that the Fossils have been able to label Corporate Socialism anything else but what it is Socialism, and label the redistribution of FSTs money for Humanity’s education, healthcare, housing, justice, security… as Socialism?
    • Or, equivalently, as long as the FSTs money is given to the Fossils to pay for their losses and liabilities it is not Corporate Socialism, just an investment that increases the wealth of the Fossils that trickles down to the rest of Humanity?
    • Can the Fossils please explain how well their version of trickle down economics is working?
  • A simple example from the laws of physics and thermodynamics follows.
    • The laws tell us that if Humpty Dumpty falls off the wall, all of Humanity can try to put Humpty Dumpty back together again, but at what cost and time?
    • Is it not better in every way to solve the problem of preventing Humpty Dumpty from falling off the wall?
  • Another example from physics and thermodynamics follows.
    • Is it not better in every way including costs and time to solve the problems of how to use all of Humanity’s resources efficiently, sustainably… and not spread the pollution including CO2 throughout Humanity’s ecosystem, and then try to put the pollution back into the natural containers before irreversible damage is done?