Companies not protecting oceans pose systemic risks

Federated Hermes’ Kamhi says litigation, reputational damage and regulatory failings lie in store

Leon Kamhi

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Leon Kamhi, head of responsibility, Federated Hermes

As discussions at Geneva’s crucial biodiversity negotiations, ahead of the COP15 summit, came to an end towards the end of March, protecting and conserving the marine environment is at the forefront of many minds. The oceans play a central role in regulating our climate and provide key ecosystem services, such as the production of oxygen and carbon sequestration. The biodiversity of our oceans could become a key source of innovation and medical advances and it is also essential for the economy.

Sectors such as shipping, tourism and fishing are highly dependent on the oceans, with most global trade occurring by sea and about 80% of tourism occurring in coastal areas. It is estimated more than three billion people depend on the oceans for their livelihoods and that the natural capital of our oceans is valued at $24tn.

Yet these vast resources are dwindling fast. Climate change, pollution, and overfishing are threatening the sustainability of our oceans. Human activity has had severe ecological consequences for marine ecosystems. The oceans are a prime example of a tragedy of the commons, where an openly accessible resource is depleted to the detriment of all.

Consequences of failure

Failing to protect marine ecosystems will have negative consequences for the global economy, posing a systemic risk to long-term investments. There are business model risks for industries such as tourism, while changing sea levels and stronger, more frequent hurricanes pose a physical risk to businesses located in coastal areas. And if a company is linked to ocean pollution it can result in reputational damage, impacting its value as an enterprise. A prominent example is the Deepwater Horizon blowout that sent oil major BP’s share price tumbling by 55% and resulted in the company having to pay more than $65bn in clean-up and litigation costs.

In addition to the risk of litigation, companies that do not adequately manage their impact on ocean sustainability may be underprepared for regulatory changes. International agreements that safeguard the oceans, such as the 1986 ban on commercial whaling, can fundamentally disrupt industries.

Today, the global community is starting to see the importance of managing its impact on the oceans. The UK government is one of 30 countries in the Global Ocean Alliance calling for 30% of seas to be protected by 2030. The United Nations Sustainable Development Goals (SDGs) highlight ambitions for action in SDG 14 ‘life below water’, which includes targets on reducing marine pollution, protecting and restoring ecosystems, reducing ocean acidification and sustainable fishing, among others. Finally, consumer awareness of environmental impacts, fuelled by popular documentaries such as the BBC’s Blue Planet series, has resulted in significant shifts in market demand for products linked to ocean pollution, such as single-use plastic items.

Investors should be aware of these risks and how the companies in which they are invested impact the oceans. This will involve scrutinising the impact of different companies and sectors on ocean sustainability. Effective stewardship should be in place to encourage companies to understand and monitor how their activities impact and depend on the oceans. They should develop mitigation measures or fundamentally shift their business models where they negatively impact marine ecosystems. Ultimately, companies should work towards solutions that have a net-positive effect on the oceans through innovation and circular economy practices. Engagement with policymakers will also be required to ensure that the right frameworks and incentives are established to protect ocean health and account for the externalities that damage oceans.

Our society is dependent on the oceans in a myriad of ways and it is therefore important to reverse this tragedy of the commons and nurture the long-term sustainability of ocean ecosystems. We will continue to explore new areas of company and public policy engagement to protect the oceans and ensure the continuity of the vast benefits that they yield. With the COP 27 for climate change and the COP 15 for biodiversity due to take place later this year, there is an excellent opportunity to place ocean sustainability higher on global policy agendas.

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