Earth Day is celebrated every 22 April, an initiative that has already been joined by almost 200 countries around the world. It is a commemoration that aims to raise environmental awareness among citizens, but also among institutions. To mark the day, several experts from the asset management industry explain the need to protect the environment and the natural resources we have, and how this affects our investments.
Earth Day 2023: Investment Opportunities with a positive environmental impact
Pascal Dudle, Head of Quoted Impact, and Matthias Fawer, Senior ESG Analyst & Impact Assessment, Vontobel
Investing in companies and projects that contribute to the fight against global warming and other environmental challenges can be a profitable and impactful investment strategy. However, it should be borne in mind that it entails higher risks than traditional investments, so it is important to conduct thorough research and seek professional advice before investing.
Some areas with attractive prospects can be found in renewable energy and energy efficiency; for example, Vestas, Prysmian, and Nibe are leading companies in these areas. Also, green infrastructure solutions such as public transport, bike sharing, and green buildings can contribute to reducing carbon emissions. In addition, areas such as sustainable agriculture, including companies that develop sustainable agricultural practices or provide products that reduce environmental impact, offer attractive prospects. Innovative solutions for waste management and recycling can help reduce the amount of waste going to landfills and promote circular economy practices. Ecolab and Smurfit Kappa are a couple of examples of companies in this field.
The race to net zero emissions is accelerating around the world with major government initiatives trying to take their fair share. The European Commission has taken a bold step towards net zero emissions with two recently announced measures, which aim to increase industrial capacity for clean technologies and ensure a sustainable value chain for raw materials. The proposal includes bold targets and measures, probably to leave the US and China behind, a rather difficult challenge.
How the investment world can help create a positive future for nature
Peter Harrison, CEO of Schroders
Droughts, heat waves, hurricanes, and other extreme weather events are warning us that we need to rethink our relationship with nature, and the financial sector must play its part.
The world is becoming aware that the global economy must not only achieve zero net emissions but also have a positive impact on nature. For that, we need to know the value of nature – only what can be measured can be managed. It has taken 15-20 years to get carbon language – and carbon disclosure – into corporate reporting. Even so, getting quality data on nature is still virtually impossible today. But we do not have another 15 or 20 years, as more than half of the global GDP depends on the natural world. Protecting and preserving nature can make a significant contribution to efforts to mitigate climate change, so the response must be robust.
Asset managers, in particular, need to radically change the way they operate, and, to do so, they must act on three fronts: commit to changing the nature-based practices of all the companies they invest in, create new nature-based investment products, and channel capital into funds based on natural climate solutions.
Natural climate solutions combine efforts to conserve, restore or enhance ecosystems to absorb and store carbon from the atmosphere. According to analyses, these solutions have the potential to provide around one-third of the climate action needed to achieve the Paris Agreement goals and avoid the most damaging effects of climate change. Yet they currently receive barely 3% of all climate finance globally. How do we close that gap? In my view, we need to accelerate investment. Assets under management allocated to natural climate solutions have doubled in the last five years and, it is true that the supply of projects remains a challenge, but the growing demand and activity for climate solutions are creating new opportunities to finance projects.
There is no denying that the transition to a world that has a positive impact on nature will be devilishly difficult, but it is exciting to see the growing momentum that the investment sector is providing. This transition is imperative and urgent, and we must make it possible to invest in it. The investment sector must join the chorus of actors who are redoubling their efforts to adopt nature-focused measures – there is no time to lose!
Álvaro Cabeza, Country Head at UBS AM Iberia
For investors, the question is not how to set up a new system of nature conservation and biodiversity, but rather how to improve our current climate knowledge and take into account some of its particularities. More specifically, how can we quantify the risks to biodiversity and, consequently, how can we best cost them?
From an investment point of view, we think of biodiversity and natural capital in three different ways.
First, it is a big risk. The Cambridge University Institute for Sustainability Leadership (CISL) estimates that at least $10 trillion of global GDP will be lost by 2050 due to ecosystem degradation. The World Economic Forum’s estimates are even more devastating: $44 trillion, which means that more than half of the world’s GDP depends “moderately” or “heavily” on nature and its resources.
Moreover, according to the study “Economics of Biodiversity”, led by Partha Dasgupta, natural capital has already declined by 40% per capita since 1992. Secondly, we consider that it is closely linked to everything related to decarbonization. Deforestation in turn reduces the planet’s natural carbon dioxide absorption capacity while putting pressure on natural habitats, which impacts biodiversity. The global increase in heat waves and forest fires caused by climate change has negative consequences for agricultural crop yields and wildlife. Soil erosion and mangrove depletion have similar dual effects of carbon sequestration and biodiversity loss, among many other issues.
Third, at UBS AM we believe we need to be aware of where the elements of natural capital differ. A tonne of carbon emitted is the same everywhere, from Miami to Mozambique. With nature and biodiversity, location matters. Deforesting a hectare of pine trees in Finland is not the same as cutting down a hectare of palm trees in the Amazon rainforest. And nature – the water, the wildlife, the forests – can depend to a large extent on its location.
Engage or sit on the sidelines
But as investors, while we know how huge the concept of natural capital is, we also have to try to make it tangible, so that we can incorporate it into our portfolios and their models. There are several ways to approach this. One is through avoidance: an investor trying to reduce his or her biodiversity footprint might choose not to invest in sectors that are really exposed; oil, gas, or chemical companies, for example.
Another way is to “get closer” to the problem, being willing to invest in exposed sectors, but focusing on those that apply best practices and standards. There is also engagement, of course, where we can work with companies to try to mitigate their impact. In this case, we spend time on those areas where there are already methodologies developed – around water, land use, and deforestation – that companies understand well. We also focus on those situations where we can help bring about change. Some investors incorporate key performance indicators around biodiversity and the circular economy into their analysis of portfolio companies.
In particular, investors need to consider these issues at a time when big decisions are being made around capital spending to avoid unintended consequences. For example, several oil and gas companies are increasing their use of biofuels, for example, based on the idea that they are a viable alternative to fossil fuels. However, several studies have shown that, when poorly designed and managed, biofuels derived from food crops, predominantly soybeans, and corn, can emit 1.8 times more CO2 than traditional fuel sources. Even if they think they are solving the problem, they may be making it worse.
