Unlocking the global economy whilst meeting green commitments is entirely doable
The pause in economic activity brought about by Covid-19 has accelerated social and economic trends that were already underway, such as remote working, but it has also seen massive support to reconfiguring the world in a greener and leaner model when productivity levels accelerate again.
If anything, this pandemic is largely a consequence of a web of lifestyle and societal factors, alongside a disregard for nature that has passed diseases from animals to human beings because we continue to encroach onto natural habitats and destroy biodiversity.
As such, we urgently need to re-evaluate our relationship with nature. It has not only given us Covid-19. Our food and the majority of our medicines also come from the natural world. Yet, our relationship with it is one of exploitation rather than stewardship. Since 1970, we have destroyed 60% of the biodiversity on earth. Now, a million species are at risk. But the consequences are not only environmental. Declines in biodiversity threaten over 80% of Sustainable Development Goal targets related to poverty, hunger, health, water, cities, climate, oceans, and land, leading to widespread systemic financial implications.
The Dasgupta Review, commissioned by HM Treasury and published earlier this month, says the world is being put at “extreme risk” by the failure of economics to take account of the rapid depletion of the natural world and needs to find new measures of success to avoid a catastrophic breakdown. Prof Sir Partha Dasgupta, author of the report, says: “Nature is our home. Good economics demands we manage it better … Truly sustainable economic growth and development means recognising that our long-term prosperity relies on rebalancing our demand of nature’s goods and services with its capacity to supply them. It also means accounting fully for the impact of our interactions with nature. Covid-19 has shown us what can happen when we don’t do this.”
A recent report by portfolio.earth also found that banks have lent $2.6trn to companies and projects that promote biodiversity loss, with little or no policies in place to address how the financing environment destruction can be mitigtated. This is while $8 trln of gross value added (GVA) are generated from the three largest sectors that are highly dependent on nature: construction ($4 trillion), agriculture ($2.5 trillion), and food and beverages ($1.4 trillion).
With $44 trillion of economic value generation – over half of the world’s total GDP – moderately or highly dependent on nature, this relationship cannot continue. So what can be done and how can we rebuild differently?
For a start, investors are beginning to take note as the relationship between business, the environment and society is being questioned.
Biodiversity loss is now acknowledged by international governments and industry bodies such as the UN Principles for Responsible investing as a systemic risk.
Initiatives like the Taskforce for Climate Related Financial Disclosures have also gained traction, and have encouraged the establishment of a nascent Taskforce for Nature Related Disclosures. The policy shift in support of sustainable finance has not only seen unprecedented capital commitments towards more responsible investments, particularly those that incorporate environmental, social and governance (ESG) factors in their investment thesis.
This trend is now also being made mandatory by law. Investment and corporate disclosures will be compelled to include information about ESG risk and investment decisions.
The UK Treasury announced recently it will make climate disclosures mandatory for companies operating in the UK. The EU regulation on Sustainability-Related Disclosures comes into force in March 2021 and will have particular impact on investment funds. The regulations require clarity on how sustainability risks are incorporated into investment decisions and will apply to fund managers, financial advisers and many other regulated firms in the EU, as well as to non-EU managers marketing into the EU.
These developments are in part due to a realisation that alongside climate-risks, financial Institutions are exposed to different forms of nature-related risks, for example, the risk of default by clients, lower returns from investees, and increasing insurance liabilities due to environmental catastrophes. Systematically not measuring impacts/risks related to mispricing nature has resulted in misallocation of capital, especially in landbased sectors, and has exposed the financial sector to nature-related risks.
Putting natural capital at the centre of economic stability will require company and country balance sheets to incorporate nature into markets. Determining the impact on and from nature will enable companies and investors to evaluate biodiversity risk exposure systematically and at the same time, highlight opportunities to produce returns for both nature protection and the bottom line. And technology will enable us to connect our activities with their impact with more power than ever before.
Green bonds & ESG funds have been major successes – in London alone, 139 green bonds from 18 countries have been listed on the LSE. Nature Performance Bonds, funds & indices could be an even bigger asset class. This also offers potential for connection with other outcomes such as climate change adaptation and mitigation, job creation and other social goals, enabling investors to demonstrate the broader social benefit of their activities.
Nature could provide an opportunity for leadership in the development of a powerful new asset class.
Business leaders could dare to think differently about productivity and the role their firm activities have on the world around them. Those that honour their commitment to the environment, alongside society, should be rewarded with capital flows.
Meanwhile, politicians could think about supporting policy and legislation that promotes disclosure of environmental, social and governance exposures and responsible investment. The UK government has recognised this with its recent Green Industrial Revolution l putting nature and climate at the centre of economic activity and renewal.
The Green Industrial Revolution is a good start, but its targets of zero emissions by 2050 and its commitment to preserving biodiversity is too conservative given the extent of environmental damage, and the announcement at the G7 that we are far behind the Paris target. Hopefully the new impetus provided by the Biden administration in the US, will push the nature agenda further along swiftly.
These have been tough times, and many have died and suffered because of this pandemic, but with optimism and collaboration, an inclusive, sustainable, digital global economy which recognises our connection to the planet on which we depend, is already within touching distance. Investors and policymakers should renew their commitment to ESG and divert capital to such investments as a matter of urgency to make it a reality.