Earth Day is a moment to reflect on a world in trouble. On one day, over a billion people around the world are coming together to address the problems of climate change, biodiversity loss and pollution with clean-up campaigns, tree planting, education and scientific solutions.
But economic and investment solutions are needed too. There is no question that the historic ‘laissez-faire’ capitalism that has dominated in recent decades has contributed to the environmental problems the world faces today. The way that financial capital interacts with natural capital needs to change.
A critical first step in putting a higher value on nature is to measure it better – the costs of using up or damaging the environment are not reflected in GDP and other measures of national accounts. And they are not reflected in the financial accounts of most companies.
At Sarasin, for each investment we make, we consider five major categories of environmental harm
- contribution to climate change
- use of fresh water and ocean resources
- use of land resources and the resulting impact on biodiversity
- contribution to air pollution
- pollution from product end-of-life and the ability to decouple growth from the consumption of finite resources
New regulations like the SFDR (Sustainable Financial Disclosure Regulations) in Europe are encouraging wider-spread adoption of such analysis. By better measuring these inputs and outputs, behaviour will change – what gets measured gets managed. But better measurement and financial disclosure is only the first step.
Challenges like climate change require very rapid shifts in behaviour. A growing number of responsible stewards of capital are encouraging the companies they own to report on climate change with additional data disclosures like TCFD (the Taskforce on Climate related Financial Disclosure), and to set limits on carbon emissions by adopting net zero targets.
For investors there are many financial risks that stem from environmental perils. For example, as climates change, economic costs and financial losses could result from higher temperatures, worse weather and physical climate impacts. Furthermore, as economies seek to reduce carbon dioxide emissions, new government policies, technological developments and consumer sentiment could undermine many business plans. The World Economic Forum estimates that more than half of global GDP (>$44 trillion) is at risk from nature loss unless there are more ambitious conservation efforts at local, national and international levels.
But investors don’t just focus on short-term financial risk and reward. Longer-term measures of value creation must take account of sustainability. This means that the impacts of their investments on the planet, and on other people need to be considered too. Earth Day is a moment to reflect on a world in trouble and for us all to consider a more sustainable future.