Forget deflation, it's "ecoflation" businesses need to worry about

The World Resources Institute (WRI) has this week warned that the cost of many commodities could rise by up to 45 per cent over the next decade as the result of global environmental damage, accelerating climate change and new green legislation - resulting in a potentially devastating impact on businesses' bottom lines.

The Washington-based think tank teamed up with consultancy AT Kearney to study how six unnamed companies from across the US consumer goods sector would be impacted by rising commodity prices over the next decade. It concluded that "ecoflation" - commodity price hikes resulting from environmental damage - could result in a serious dent in their profitability.

Speaking at a conference yesterday on sustainable business hosted by business software firm SAS, Liz Cook, vice president for institutional strategy and development at the WRI, said that the study had assessed the likely impact of climate change, biofuel policy, increased demand for sustainable timber products, carbon prices and water scarcity on a wide range of commodities.

It predicted that by 2018 oil prices would climb 22 per cent, gas prices would rise 40 per cent and wholesale electricity prices would climb 45 per cent, while the cost of cereals and soy would climb 13 per cent and three per cent respectively.

Cook added that assuming the six businesses analysed did not act to address environmental issues and did not seek to pass the price hikes onto customers, then their pre-tax profits would fall by between 11 and 18 per cent.

"Businesses need to understand their exposure to ecoflation and where they are at risk," she advised.

Cook also said that the WRI was continuing to press ahead with work to develop a standard to help firms measure the carbon footprint of so-called scope three operations that generate emissions through activities that are external to the business, such a corporate travel, contractor vehicles and supply chains. She said that the organisation was aiming to publish the full standard within two years.