this section sets out the rational behind investor interest in this issue. In it we outline why BED is an issue for business and the factors that interplay to create differing levels of corporate risk.
What are ecosystems services?
Biodiversity (the variability within and between species and habitats) underpins the functioning of ecosystems, enabling them to provide the services that business require to operate. Such services range from water cycling and purification to the regulation of the climate and formation of soil.
As set out within the 2005 United Nations Millennium Ecosystem Assessment (MA), ecosystem services are broadly divided into the following categories:
- Provisioning Services: the goods or products obtained from ecosystems, for example, food, fibre, biomass fuel, freshwater, genetic resources, biochemicals, natural medicines and pharmaceuticals.
- Regulating Services: the benefits otained from an ecosystem's control of natural processes, for example, air quality regulation, climate regulation, water regulation, erosion regulation, water purification and waste treatment, disease regulation, pest regulation, pollination, and natural hazard regulation.
- Cultural Services: non-material benefits from ecosystems services, for example, recreation, spiritual values and aesthetic enjoyment.
- Supporting Services: natural processes that maintain other services, e.g. nutrient cycling, primary production and water cycling.
The link betwenn climate, biodiversity and ecosystem services
Deforestation responsible for approximately 20% of annual greenhouse gas emissions due to the loss of the carbon storage function of forest and the release of stored carbon into the atmosphere. Other natural habitats such as grasslands and peat swamps play a similar role in storing carbon. Global Climate policy is beginning to recognise the link between land use, land use change, release of greenhouse gas emissions and climate change. Furthermore, in addition to regulating greenhouse gas emissions, natural habitats play a vital role in regulating soils, nutrients and rainfall.
Demand for food is projected to increase 70-80% by 2055. As demand for basic commodities increases, this raises the pressure to convert natural ecosystems into farmland and to increase the intensity of production from already converted land. This may have implications for yield in the long term.
It is estimated that each year we are losing ecosystem services with a value equivalent to around € 50 billion, from land-based ecosystems alone.
Policy changes are under discussion to capture these costs, which are likely to strongly influence the cost-benefit analysis for further natural habitat conversion.
Why are biodiversity loss and ecosystem service degradation business issues?
According to the MA, more than 60% of these ecosystem services - including freshwater provision, climate regulation and soil fertility - are being degraded or used up faster than they can be replenished. World demand for food is forecast to increase by 70-80% within 50 years. Use water for agriculture is expected to double by 2050. Freshwater use and fisheries capture is beyond sustainable levels with all the world's commercial fisheries likely to have collapsed in less than 50 years unless current trends are reversed. This downward trend in ecosystem services is likely to intensify, as demand for raw materials continues to grow.
As the world's population increases from 6.7 billion (2006) to a predicted 9.2 billion by 2050, we are likely to face considerable shortages of food, conflicts between poeple concerning in the availability of land for fuel, food and biodiversity, and increasingly erratic water supplies caused by global changes in the climate. The degradation of ecosystem services dearly has implications for the long-term viability of the businesses that depend upon them.
A spotlight on the agricultural sector
Agricultural systems are dependent on BES:
- Soil microorganisms, natural predators and natural genetic diversity are essential to maintain yields.
- 35% of the global food production from plants benefits from animal pollination. The value of this ranges from $ 112 billion to $ 200 billion annually. Bees are in decline globally, linked to escalating levels of pollution, disease, and loss of habitat.
- Natural habitats play a vital role in regulating climate, water flow and nutrient cycles, thus stabilising environmental conditions for crop growth.
Agriculture itself is a key cause of BES loss. Agriculture uses 70% of all available freshwater, it can result in depletion of soil nutrients, soil erosion, the introduction of invasive species and desertification. Cultivated land covers now one quarter of the world's land. This has resulted in loss or degradation of natural habitats such as forests and wetlands. It is estimated that a further 10-20% of grassland and forest will be converted to agriculture between 2000 and 2050 with associated loss of biodiversity and ecosystem services.
Changing consumer preferences are exacerbating this trend. Changing dietary preferences, for example, are resulting in an increase in meat within the diet. This requires greater amounts of land and water for production. Already the shift towards higher meat and livestock product consumption is one of the most important causes of deforestation worldwide. When the price of both products drops, deforestation rates reduce significantly in the following year.
An emerging area of risk and opportunity
A recent report from Eurosif and Oekom identified the agricultural sector as one with high risk associated with impacts on biodiversity and ecosystem services and high dependence. Such risks includes:
- Opertational: Increased scarity and cost of raw materials such as freshwater or fish (including associated price effects throughout the supply chain) may narrow operational margins and result in disruption to production. Natural hazards may cause disruptions to business operations. Higher insurance costs may be experienced for disasters such as flooding where natural defences have been compromised.
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