Reframing Business for the 21st Century

The evidence is finally in. Business transactions do result in significant externalised environmental impact, which, if monetised, would result in a third of all profits from the world’s largest companies being eroded away. A recent report by Trucost to the United Nations has made this finding after modeling the environmental impact of the world’s largest 3,000 companies.

The report comes amid growing concern that businesses are merely paying for a fraction of most of the use, loss and damage of the environment, which is reaching crisis proportions in the form of pollution and the rapid loss of freshwater,fisheries and fertile soils. The long-held business paradigm that you internalise profit and externalise cost, it seems, is still very much the mantra.

The study, conducted by London-based consultancy Trucost (represented by Net Balance in Australia) and due to be published later this year, found the estimated combined damage was worth US$2.2 trillion (£1.4tn) in 2008 - a figure bigger than the national economies of all but seven countries in the world in 2008. The figure equates to 6-7% of the companies' combined turnover, or an average of one-third of their profits, though some businesses would be much harder hit than others.

The biggest line item, accounting for more than half of the total, was emissions of greenhouse gases blamed for climate change. Other major costs were local air pollution such as particulates, and the damage caused by the over-use and pollution of freshwater.

The more concerning issue is that this study is limited to environmental costs alone. So, what does profitability look like once social costs of business, such as labour, health and safety, social impacts from environmental pollution and climate change build a more holistic picture of the impact of business? Would it wipe out all profits, or perhaps another third of profit making bank interest sound very attractive? I’m sure that Tucost would turn their hands to a broader assessment next.

Well, if this evidence is true, and, over time it becomes harder and harder for these externalised costs to be borne by the community and the public purse, it would seem obvious that governments force companies to internalise as much of these costs as possible. One manifestation of this is a global and national cap on carbon emissions. That said, then it seems obvious that the companies that learn how to internalise these costs most efficiently will be best prepared and out-shine others in the 21st century business paradigm.

Source: The Guardian (www.guardian.co.uk accessed 21st February 2010) and Trucost (www.trucost.com accessed 21st February 2010).

Terence Jeyaretnam is a Director of Net Balance (terence@netbalance.com), based in Melbourne.