Earth Overshoot Day: what investment opportunities does it offer?
3 AUG, 2023
This year's Earth Overshoot Day (EOD, also known as Ecological Debt Day) falls on 2 August. Certainly an early date on the calendar.
Earth Overshoot Day is the date of the year when humanity has consumed all the natural resources that the Earth can regenerate in a year. From that day on, we are operating in an ecological deficit, depleting local resource reserves and increasing the concentration of carbon dioxide in the atmosphere.
Investment Opportunities on Earth Overcapacity Day
Chris Iggo, CIO of AXA IM Core and Chairman of the AXA IM Investment Institute
It is a well-documented fact that humans are using the Earth's natural resources at a faster rate than they can regenerate. In fact, the rate can be accurately calculated, as is the case with Ecological Debt Day, the date when each year our demand on the planet's resources exceeds what can be regenerated in that 12-month period.
This year, Ecological Debt Day will be on 2 August, according to the latest report from the National Ecological Footprint and Biocapacity Accounts. This is encouraging news as it is later than last year (28 July) and 2021 (30 July), which means there has been an improvement in the way we use our planet's resources. The date had been moving up as the situation worsened, with one exception in 2020, when COVID-19 confinements pushed back Ecological Debt Day by almost a month, to 22 August.
Each country has its own Ecological Debt Day: developed markets with higher standards of living tend to be at one end of the spectrum while developing countries are at the other. In the United States, the deadline was reached on 13 March this year, meaning that if the world's population were to consume resources at the same rate as the United States, this would be the date of Ecological Debt Day. Germany, France, Japan, the UK, and others reached that point in May, while Qatar was the first country to reach it, on 10 February. In contrast, Jamaica will not reach the gap until 20 December.
This highlights the fact that the way we use natural resources is unsustainable and that governments, businesses, and investors must take action.
How investors can help push back this date
Global Footprint Network identifies a number of areas that it believes are most pertinent to reducing our use of natural resources, such as protecting biodiversity, decarbonizing the energy sector, and producing food more efficiently, as well as reducing food waste. These are all critical areas for responsible investment and where we believe investors can make a difference, while still aiming for long-term financial returns.
More than half of global GDP depends on well-functioning biodiversity and ecosystems, and degradation costs the global economy more than $5 trillion a year. The collapse of just three of these natural services - wild pollination, timber supply, and fish supply - could cost 2.3% of global GDP by 2030.
A more circular approach
The Circularity Gap Report 2023 by think tank Circle Economy and Deloitte suggests that moving to a circular economy model can meet society's needs using only 70% of the raw materials we currently extract from the Earth and use, meaning we would not exceed the Earth's limits. However, we are a long way from achieving a fully circular economy: the report estimates that the global economy is currently only 7.2% circular.
Nevertheless, this movement is gaining momentum. In 2020, the European Commission adopted a circular economy action plan that included measures to ensure that products are designed to last longer, are easier to recycle, and use recycled materials in their production wherever possible. Then, in March 2023, it proposed a directive on the "right to repair" to make it easier and more cost-effective to repair goods rather than replace them.
Potential benefits for investors as well as for the planet
As asset managers, we can invest at scale and also engage with companies in these areas (biodiversity, energy transition, food, agriculture, circular economy) and beyond, including also governments through their public debt issuance.
We believe that companies at the forefront of the transition could experience strong growth, while laggard companies are likely to experience lower demand for their goods and services and a higher cost of capital, and could be adversely affected by regulatory or policy changes, such as higher taxes and tariffs.
Michael Lewis, Head of ESG Research for DWS
This year, Earth Overcapacity Day (EOD) falls on 2 August. This early date in the calendar, compared to the 1970s when resource requirements were estimated at almost what could be regenerated in a year, marks a significant increase in our demand for ecological resources. In the last fifty years, global resource needs have increased exponentially due to a doubling in world population and a four-fold increase in global gross domestic product.
Decisive action is needed to begin transformation urgently
When it comes to bringing Earth Overshoot Day into balance and possibly into surplus, all is not lost. However, it requires transformation and intervention in multiple sectors. Some of the most impactful ways to make progress in reducing Earth Overshoot Day revolve around halving carbon emissions in industrial operations, implementing energy efficiency measures in, for example, commercial and residential real estate, halving food waste, and replacing meat consumption with plant-based proteins. According to the Global Footprint Network, reducing carbon emissions by 50% would displace Earth Overshoot Day by 93 days. In addition, legislation can help improve the investment environment necessary for the required transformation. For example, this month, the European Commission proposed legally binding targets to reduce food waste by 30% per person by 2030.
Funding opportunities to support small and medium-sized enterprises contributing to the transformation
Initiatives such as carbon pricing, energy efficiency, implementing sustainable technologies in the building, transport, and industry sectors, as well as reducing food waste, could not only help to use resources more sustainably but could also offer attractive investment opportunities. This includes buying EU carbon allowances, which can help reduce actual greenhouse gas emissions; retrofitting buildings, which can increase property valuations and reduce the risk of mortgage defaults.
On food waste, WWF has been working with partners to implement artificial intelligence in the purchasing systems of food retail chains. The result was an average reduction of 14.8% in food waste in each pilot shop of the project. In our view, these measures will contribute to strengthening energy security, reducing greenhouse gas emissions, and fostering job growth across the European continent.
Given that any transformation is an ambitious project requiring significant capital investment, we focus on the role we, as asset managers, can play in financing this transformation. For example, we see direct lending becoming an important pillar, providing the speed and flexibility needed to drive technological change, accelerate growth and improve the competitiveness of small and medium-sized enterprises (SMEs) across the European continent. Given that SMEs are responsible for 60 percent of the continent's greenhouse gas emissions, they will play a critical role in Europe's transformation. Borrowers that are particularly suitable for direct lending will be those SMEs focused on Europe's energy transition, technology, and digitalization, as well as in the health sector and those that contribute to strengthening the resilience of European supply chains.
Such transformative steps and initiatives can also provide the opportunity for a "double dividend". Firstly, to help mitigate the impacts of climate change and roll back Earth Overshoot Day; and secondly, to achieve sustainable economic growth through the creation of new technologies and solutions over time.
