Impact investing: reconciling nature and our finances

My dog and I have a rou­tine. She eats all the bis­cuits in her dish and then stares intent­ly at the emp­ty bowl, wait­ing for me to duti­ful­ly fill it up again and again. Her unwa­ver­ing con­fi­dence that the bis­cuits will keep com­ing always reminds me of the blind faith the cor­po­rate and finan­cial world has that nature will con­sis­tent­ly and reli­ably sup­port our activ­i­ties.

We’ve all been part of this lin­ear “take, make, waste” econ­o­my for a long time. We are con­di­tioned to see­ing nature as some­thing sep­a­rate, oth­er – at best some­thing beau­ti­ful to spend time in and at worst a free resource.

The asset man­age­ment indus­try has been par­tic­u­lar­ly nar­row in focus, with a reluc­tance to attribute val­ue to any­thing which isn’t asso­ci­at­ed with a mon­e­tary charge, par­tic­u­lar­ly if it is invis­i­ble, as is often the case with our nat­ur­al resources.

How­ev­er, this is begin­ning to change. There is a real­i­sa­tion that resources aren’t infi­nite and cli­mate change will lead to more volatil­i­ty in ecosys­tems and the ser­vices they pro­vide. As an indus­try, we are begin­ning to cal­cu­late the true con­tri­bu­tion of nat­ur­al cap­i­tal to our econ­o­my. To quote Tony Juniper, Chair of Nat­ur­al Eng­land and a mem­ber of UBP’s Impact Advi­so­ry Board, the econ­o­my is a whol­ly owned sub­sidiary of nature, not the oth­er way around. The num­bers are huge.

The World Eco­nom­ic Forum points out that more than half the world’s GDP is depen­dent on nature and its ser­vices, such as the pro­vi­sion of food, fibre and fuel. Three out of four bites of food we eat today depends on ani­mal pol­li­na­tion, says the Euro­pean Com­mis­sion’s DG Envi­ron­ment com­mu­ni­ca­tion offi­cer Tan­ja Fra­n­otović (May 2021).

If we start to place a val­ue on the ser­vices of nature, it will be tru­ly trans­for­ma­tion­al to the val­u­a­tions and prospects of our invest­ments and the qual­i­ty of our retire­ment. There will be many win­ners. Com­pa­nies that are con­tribut­ing to a nature-pos­i­tive econ­o­my will enjoy sig­nif­i­cant growth tail­winds, such as reg­u­la­tion and con­sumer demand, as well as val­u­a­tion sup­port.

These are busi­ness­es that are solv­ing prob­lems, for instance pre­ci­sion agri­cul­ture that enables far low­er use of chem­i­cals, bio-based solu­tions and com­pa­nies using waste as an input. Such busi­ness­es can help close the loop of our econ­o­my, mak­ing it more cir­cu­lar and less extrac­tive.

Then there are the big multi­na­tion­als in the food, cloth­ing and man­u­fac­tur­ing sec­tors that have vast and com­plex sup­ply chains. If these busi­ness­es work with their sup­ply chains, and if they have long-term think­ing and gen­uine com­mit­ments to local com­mu­ni­ties and habi­tats, they too could be win­ners.

But there will also be losers and this is why how we invest – the com­pa­nies and funds we sup­port – is so impor­tant. In the com­ing years, some sec­tors are going to face unman­age­able risk in many forms. These range from phys­i­cal risks, such as the ongo­ing reduc­tion of soil qual­i­ty that caus­es flood­ing or ero­sion and makes crops less suc­cess­ful, to lia­bil­i­ties, where com­mu­ni­ties that suf­fer loss increas­ing­ly demand com­pen­sa­tion from the cor­po­rate world (think oil spills).

And then there is tran­si­tion risk, where busi­ness­es of yesterday’s econ­o­my strug­gle to cope with the cost of mov­ing to a nature-pos­i­tive approach.

How do we nav­i­gate this as investors? It may sound sim­ple, but what is good for nature is almost always good for us, and increas­ing­ly this applies to our invest­ments too. Fund man­agers have a fidu­cia­ry duty that can­not be seen in sole­ly mon­e­tary terms. In ignor­ing the nat­ur­al world, asset man­agers put an increas­ing lev­el of risk to work in a port­fo­lio and miss oppor­tu­ni­ties to gen­er­ate supe­ri­or returns by view­ing investors as part of nature, not sep­a­rate from it.

My dog’s blind faith will, in all like­li­hood, con­tin­ue to be reward­ed. The same might not be said for our invest­ments.

For more infor­ma­tion on the oppor­tu­ni­ties in impact invest­ing please vis­it www.ubp.com

Pro­mot­ed by Union Ban­caire Privée