Testing the boundaries of
environmental, social, and
governance (ESG)
A system-led approach to investing, helping investors address broader environmental and social issues beyond climate alone.
Investment ideas that won't cost the Earth
Whilst climate change has been high on the agenda of many investors for some time, the recognition of the strong links and interdependencies between climate change and wider environmental and social issues is increasingly leading to more of a ‘systems-led’ approach. Regulations and frameworks such as the Taskforce for Climate-related Financial Disclosures (TCFD), its nature and social counterparts (TNFD and TISFD), the UN Sustainable Development Goals (SDGs) and the planetary boundaries, to name several, all recognise that to be effective, sustainability issues cannot be considered in silo. In turn, this has promoted thinking much wider than a traditional ‘carbon accounting’ exercise approach (one that solely aims to reduce emissions and may not appropriately consider the unintended consequences).
Here we consider how shifting to a system-led approach, by looking beyond climate and considering wider environmental and social issues using the planetary boundaries and SDG frameworks, allows investors to better understand risks, focus stewardship, and capture the investment ideas that won’t cost the earth.
The planetary boundaries - time to think systems-wide
What on earth are the issues?
Despite increased productivity, higher demand (driven by the growth in global population) means that we are running into constraints determined by the limits of the Earth. This includes natural limits - such as the known deposits of rare minerals or water availability within a region - and limits that must be met to maintain environmental and biological systems in a sustainable condition. Of these factors, climate change and the use of carbon emissions budgets are the most widely publicised, but issues such as biodiversity loss and pollutants remain just as important.
Stockholm University note nine planetary boundaries that we must remain within, or return to, for the global economy to remain sustainable. At the moment, only three of the nine metrics sit within the green 'safe operating space'.
The source of the graphic on the right is Stockholm Resilience Centre
In the last two centuries, the global population has exploded from less than one billion to more than eight billion, and is still growing. By 2060, the UN estimates the global population will have risen to around ten billion people.
The average output per person in England is more than 27 times higher than four hundred years ago due to technological change in agriculture, industry and trade. That said, technological change also brings huge disruption to existing industries as it develops.
Given the constraints imposed by the limits on our planet, the fact that humanity is using resource 1.7 times faster than our planet can regenerate and that there is no 'Planet-B', we view the planetary boundaries as one of the structural pillars that contributes to setting the future backdrop for the global economy. We, therefore, believe that this issue will materially contribute to the trajectory of the global economy over the next few decades. In turn, we see vast opportunities and the ability to create positive impact by investors in applying thinking and capital to resolve the issues presented by the planetary boundaries.
A lot of ground to cover
Planetary boundaries, by definition, are far reaching and cover many complex and interlinked scientific, environmental, social and economic issues. The below graphic (which can also be downloaded here in an easy-to-read format) helps investors explore each of the nine planetary boundaries in a more digestible way.
As seen in the central core of the graphic, it is estimated that six of the nine boundaries have breached their safe zone (demonstrated by the orange bars), with the magnitude of the breach denoting an increasing level of expected risk.
We explore three of the nine boundaries in greater detail below. We intentionally explore some of the boundaries that are wider than climate change and biodiversity, allowing for a more holistic view on the risks, opportunities and impacts in areas that likely resonate with investors, but have not yet been explored in great detail.
Novel entities - the problem with plastic
The ‘novel entities’ slice of the wheel is arguably the most interesting, not least of all due to its overshoot of its ‘safe zone’. Novel entities essentially consider how plastics and chemicals affect the Earth's stability.
Expectation is that, by weight, there will be more plastics than fish in our waters by 2050. Furthermore, plastics and chemicals in the environment also pose a negative impact on health including lung inflammation, carcinogenicity and fertility issues. Introduction of policy and changing consumer behaviors, as a result, are likely to pose significant transition risk to material and industrial firms.
Impacts are far reaching, and are directly linked to the targets of four of the 17 SDGs. They cover environmental impacts (on marine life), social impacts (health and access to water) and economic impacts (the move towards a more circular economy).
Opportunities will come from innovation within the material / packaging industry, efficiencies through agricultural technology, protecting and regenerating impacted natural habitats and preventing and treating associated health issues.
Land system change - the land of opportunity?
Land system change essentially considers forest and other natural habitat loss, and land degradation.
Expectation is that 95% of the Earth’s soil will be degraded by 2050. Furthermore, the global economy is highly dependent on the raw materials that are provided by many of the Earth’s habitats, such as timber and crops. Protective policy and regulations, as well as access to raw materials and restrictions around the use of natural assets are likely causes of future disruption and financial loss.
Impacts are far reaching, and are directly linked to the targets of three of the seventeen SDGs. They cover environmental impacts (such as impacts on biodiversity) and social impacts (such as access to food and water).
Opportunities will come from innovation and efficiencies with regards to the use, preservation and regeneration of natural resources, such as forestry and agriculture.
Stratospheric ozone depletion - a 20th century success story?
Stratospheric ozone depletion is essentially the diminishment of the ozone layer (a region of the Earth's stratosphere that absorbs most of the Sun's ultraviolet radiation). Whilst currently within its safe space, we have intentionally highlighted this boundary as a success story, dating back to the 1980s.
During the 1980s, it was confirmed that there was a hole within the ozone layer, likely caused by human-made ozone depleting substances (ODS). Despite push back from industry, the Montreal Protocol phased down the consumption and production of the different ODS in a stepwise manner (allowing for impacted firms to adapt). Due to this action, the ozone layer is estimated to recover by the middle of this century. Without this agreement, studies have shown that the ozone layer would have collapsed by 2050.
Impacts associated with depletion are directly linked to the targets of two of the seventeen SDGs. They cover environmental impacts (climate action) and economic impacts (such as the move towards a more circular economy).
Opportunities are relatively low, when compared to the other eight planetary boundaries. Although they may arise from continued advancement and efficiencies in areas that pose a risk, such as successfully managing the disposal of previously used ODS.
Capturing the opportunities
Many investors are, by necessity, focused on short-term information. But investors wishing to be long-term need to be aware of the structural pillars (and linked opportunities, that we call ‘megatrends’), as they may allow you to benefit from opportunities, mitigate the risks and create impacts that those with only a short-term focus may miss. Two linked opportunities (or ‘megatrends’) to which we have provided further insights are natural capital and artificial intelligence (AI)/robotics.
The impacts of planetary boundaries are wider reaching than environmental issues and have an impact on society. Societal impacts may pose both financial and reputational risk to an investor. The interlinked nature of these risks and opportunities lends itself to thinking systems wide rather than in silos such as climate, nature, social etc.
The SDGs offer an effective structure for connecting ecological limits to investor aims and investable prospects. This framework fosters comprehensive analysis, widely adopted by investors and asset managers to assess risks, opportunities, and impacts across both environmental and social domains.
An SDG is an overarching goal set by UN members in order to eradicate poverty and realise a sustainable world. Each of the 17 UN SDGs has underlying targets (there are 169 in total) that are aimed to be achieved by 2030. The existence of each target, and activity being undertaken to achieve each poses both risks and opportunities to investors.
Such investible ideas span across different asset classes, styles, sectors and geographies, and each strategy may consider impacts in different ways. Therefore, the way in which the idea is implemented, and with which asset manager, is fundamental.
The investable ideas can be implemented in various ways, allowing for all types of investors to gain exposure to opportunities. This could be through existing, more established, avenues such as open-ended pooled funds, or through more direct investments in specific firms, their debt and/or their physical assets/infrastructure.
An example of the former, could be an investment in UK forestry assets, either through a dedicated forestry strategy, or a wider natural capital strategy, whilst the latter could involve venture capitalist investment in start up firms that are providing the goods and services to enable the opportunities.
How we can help
Our in-depth research across the economic structural pillars, such as the planetary boundaries, and associated investible ideas, enables us to assist investors when formulating and implementing their investment strategy. Each of the investment ideas above can be accessed through investment solutions that our manager research team research and rate. We can assist investors to meet their objectives through mitigating risks, capturing opportunities and deriving impacts associated with the Planetary Boundaries and wider issues.
To find out more, please get in touch with one of our experts.