16/01/2013 04:43 GMT | Updated 17/03/2013 05:12 GMT

Which Raw Materials Pose the Biggest Business Risks?

Chatham House produced an excellent report on resource futures last month, which provides a detailed and comprehensive look at how underlying environmental stress contributes to material insecurity. Its diagnosis, that declaring that "the spectre of resource insecurity has come back with a vengeance" is stark. It's based on highly credible, detailed analysis and should serve as a warning to businesses that the raw materials they depend on have major embedded risks.

However, the report's solutions, as I've argued elsewhere, focus too narrowly on multilateralism and international cooperation.

My contention is that addressing material insecurity means tackling the underlying environmental stresses causing it, through the development of a circular economy. Unfortunately, the circular economy is still more of a good idea than a plan for action. To develop a plan, we need to understand where circular systems make the most sense.

This means identifying how and where to avoid material insecurity by measuring the embedded environmental impacts (such as water or land use), which are a major cause of that insecurity.

When the Circular Economy Task Force met in November 2012 to discuss how to measure these embedded impacts, the discussion was about which to focus on. Our thesis is that measuring four impacts - water, carbon/energy, land use, and ecotoxicity - embedded in each tonne of raw material provides a good basis to measure, and then manage, material security risk.

These were chosen from a much longer list and reflect two categories of risk which relate to globally significant environmental boundaries, and which have affected material security:

- Risks that can be priced: embedded energy/CO2 and water. The increasing relative scarcity of these means rising price floors, which translate into higher raw material prices and potential for volatility. The increasing carbon, energy, and water impact of mineral extraction also increases the likelihood of regulatory restrictions.

- Measurable risks that are hard to price: land use and ecotoxicity. These capture the human acceptability angle, and serve as a proxy for reputational risks such as the impact of palm oil on orang-utans, coltan mining on chimpanzees, and the health impacts of material extraction and processing which have and could affect access to, and the price of, resources.

By applying these risks to materials on a per tonne basis, we can see which matter most for different materials. Take aluminium, for example. Its biggest impact lies in the amount of energy (and CO2) used in production: creating a tonne of primary aluminium releases around 13 tonnes of CO2. The energy used in refining and melting iron, steel and aluminium are responsible for ten per cent of world CO2 emissions.

True costs

These insights can be translated into future price risks for aluminium: if CO2 were priced according to PUMA's pioneering environmental profit and loss accounts, adding the cost of carbon to the market price of a tonne of primary aluminium would cause its combined price to rise by nearly 70%. By contrast, more circular use of aluminium leads to lower risks: recycled aluminium would only rise in price by seven per cent, and reused aluminium would rise by less than 1%. This huge difference in future price risk reveals embedded CO2 as a strong indicator of material insecurity for aluminium and enables companies to see the benefit of circular business models. Similar calculations could be made for the impact of rising coal, oil and gas prices for aluminium and steel; or for water demand for a bio-based plastic, for example.

Avoiding risk

The last month has seen a crescendo of reports on the direconsequences of ever increasinghuman impact on the environment. The underlying science on climate change and increasing resource availability risks aren't new, even if the message bears repeating. What is new is the frame: financial and business risk.

But seeing resource and climate problems as business risks is only the first step. Companies and countries need to connect the underlying environmental causes of risks to the specific materials they're bound up in. By doing so, they can begin to understand why risks arise, and how to mitigate these by designing closed loops. Getting to this level of detail, as the aluminium example above shows, is essential to understanding how and where a circular economy can create resilience to increasing insecurity.