Ecology is the study of the relationships between living organisms, including humans, and their physical environment, evaluating and understanding their connections. This broad and complex topic is often overlooked as investors and companies look for returns and growth that are measured solely by profitability.
Until a few hundred years ago, many of the Earth’s ecosystems were quite unique and self-contained at the local level. However, the success of humankind and the cross-border nature of our activities have had significant and mostly negative effects worldwide.
This is particularly true for many emerging economies, where economic growth, the need for food and housing, and population growth are putting a strain on many local ecosystems.
There may well be a cycle of use and repair that these ecologies can tolerate, but many are forever degraded, such as the rainforests of Latin America and Asia. Therefore, investors must fully evaluate their ESG principles when looking for good investment returns in an ever-globalizing investment universe.
International efforts and campaigns to curb the loss of biodiversity have not prevented the loss dynamic, which has nonetheless accelerated over the past few decades. The UN has anchored this in its Sustainable Development Goal 15 – “Life on Land” and “Life underwater” – but a report from the UN Environment Program in 2020 concluded that these measures are failing.
The loss of this natural biodiversity destabilizes the delicate ecological balances in every habitat and has been exacerbated by human interference through the introduction of alien species such as Asian carp into US river systems, as well as cane toads and camels to Australia.
Indeed, most worrying of all is the collapse and failure of many bee populations, without which flowers and trees cannot reproduce, threatening crop failures and starvation.
Population growth and resource pressures for seven billion people are at the heart of this challenge. With “demographics is destiny,” our society should now recognize that we need to change our behavior to reduce the damage that is done by using these resources.
However, this can be oversimplified into the carelessness that many emerging economies show when their populations struggle to survive.
Developed countries also have to adapt, as raging consumerism simply transfers this pressure to the rest of the world. Investors and their companies have an important role to play in changing production methods, supply chains, recycling and packaging.
With much of economic growth likely to re-orientate itself towards Asia in the next few decades, investors can anticipate not only the issue of EM consumers, but also the consequences of its emergence. Because the use of plastics correlates positively with economic growth, so the more EM grows, the more plastic is produced and used and the more is thrown away.
According to estimates by SAS and Ocean Crusaders, eight million pieces of plastic go into the oceans every year, adding to the approximately 300,000 tons already floating there.
In fact, a new continent known as the Great Pacific Garbage Patch is being created and is already the size of Texas. Investors, businesses and consumers must now demand the removal of non-recyclable, non-biodegradable and single-use plastics and tolerate the regulations to enforce them.
For far too long, the developed world has been blasé about its tolerance of waste dumped in landfills or in the seas. While many today are used to sorting their rubbish into different bins, it seems that many disposal companies then do not comply with their eco-certification when disposing of them. For emerging economies, waste collection has a low priority over infrastructure and basic survival.
In the meantime, however, there are many new companies that are trying to make better use of this waste, to convert it into electricity or to cope with it through organic consumption. Investors have gotten better at engaging with companies through waste treatment and even the UK’s largest retailer, Tesco, is no longer dumping waste. So it seems we can find a way where there is corporate will.
Climate change has become a key issue for investors and society in general, according to many UNGC reports and conferences. However, many of its standards are voluntary and require significant reporting.
Our climate is extremely complex and difficult to predict even locally. It is influenced by many factors, all of which do not receive the same level of analysis or scrutiny as many more emotional factors like global warming.
As we have seen with the Covid models, there can be significant deviations in the results if the parameters change only slightly. However, it seems clear to me that humanity should not want to harm the climate if behavior change can avoid it and cannot stop climate change if it so wishes.
It is clear that warming climates, changing weather patterns and rising sea levels are becoming more common and extreme. Over 10% of the world’s population lives within 10 meters above sea level, which includes 17 major cities in the world, including London, New York and Miami.
A sobering thought if the melting of all the ice at the North and South Pole and in Greenland would raise sea levels by almost 100 meters. CO2 emissions and capture, decarbonisation of power generation and industrial processes like cement and steel and biodegradable plastics all seem absolutely essential for our survival.
The decarbonization of our fossil fuels has become a strong trend for industry and politics. Whether through CO2 capture and storage or new energy sources such as hydrogen, we are looking for a replacement for our petroleum-based lifestyle. Just as wood has been replaced by coal and coal by oil, we need to find new sources of energy for the future.
This challenge is made more difficult because many of the new sustainable sources such as wind and sun are more variable and less efficient. I believe we all need to be pragmatic in this transition to carbon, realizing that base load electricity is still best provided by nuclear power, which can therefore lead to a sharp change in uranium demand where there is little mining supply.
It seems to me that every investor and his family should now try to change their own behavior in order to do as little damage as possible to the ecology of the world through their lifestyle. For richer economies, this is a choice that can be implemented through consumer preference and awareness, as well as regulation and taxation.
It seems much more difficult in poorer economies because many people are simply struggling to survive. Multinational corporations are well placed to lead these global efforts to improve the environmental sustainability of their products and services, and investors should better hold them accountable. They might even consider lowering their profit margins to do more good.
There are many opportunities for investors to not only solve some of these environmental challenges, but also to show that new projects are good for the environment. Using our energy more efficiently and building better with insulation and recycled products will help.
The EU’s recent proposal to create an emission allowance directive will reflect the burden of unsustainable production on manufacturers in Asia, potentially leading to higher product costs.
The cost of this carbon credit will enable new solutions and new investment opportunities as companies that offer natural carbon capture, such as forest products and pulp manufacturers, may find their forests increasing in value.
The new solutions of hydrogen, batteries and even nuclear fusion also need investors and governments willing to follow new scientific knowledge and promote real basic research and development.
Neil Dwane is the former equity CIO and global strategist of Allianz Global Investors. He writes exclusively for Citywire and draws on his many years of experience to analyze the rise of thematic investing and the underlying fundamental trends. Please click for his previous columns Here.