Home Wealth Creation Transitioning from a Free Market Economy to Conscious Capitalism
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Transitioning from a Free Market Economy to Conscious Capitalism

by gbaf mag
Transitioning from a Free Market Economy to Conscious Capitalism

By Thomas Buchar, Managing Partner at OXGAV

Sustainable investing used to be a niche – reserved for the  Whole Foods frequenting optimists that didn’t care about making a profit; they just wanted to save the planet. But as climate awareness had grown and constituencies begin to turn elections, institutional investors have increasingly realised that incorporating environmental, social and governance (ESG) factors into decision-making and investment strategies is not only good for the planet, but good for their profit margins too; alas sustainable investing has gone mainstream.

As enterprise and their investors begin to realise these financial benefits, ESG investing has proliferated. In recent years, sustainable investing techniques and strategies grown increasingly sophisticated, with increased emphasis on maximising risk-adjusted returns. In addition, the growing awareness and extremity of ESG-related risks as our exploitation of planetary boundaries reaches its limits means that it is less profitable and more risky to invest in non-sustainable assets, such as fossil fuels and deforestation-linked products.

We believe that all this means that ethical investing will, before long, be mandated by legislative bodies globally. This regulation is going to become necessary as we close in on commoditising “clean ir” and selling it as a premium luxury service; many have come to accept these truths. But despite these undeniably seismic shifts to our way of life, challenges remain for investors who want to drive the shift to a sustainable economy.

This brings us to the critical question: how can the financial community overcome these denier challenges to ensure that capital flows are directed in a way that protects the planet’s natural resources that sustain us?

A distinct choice

Thomas Buchar

Thomas Buchar

The deadline for achieving the UN’s Sustainable Development Goals (SDGs) is 2030. So is the deadline for cutting global greenhouse gas emissions by 45% from 2010 levels to meet the Paris Climate Agreement temperature target. That’s less than a decade away. And now, the UK has just announced new climate change commitments to cut carbon emissions by 78% by 2035. With time running out to meet these targets, the world is faced with two options.

The first is to protect and enhance the value of natural resources that not only enable the existence of humanity, but drive financial markets – including the world’s stocks of soil, air, water and living organisms. Doing so will enable industries and countries to build resilience against not only the physical impacts of climate change, but against the disruptive changes in policy and market preferences. For investors, this means protecting the returns for those invested in industries both directly and indirectly reliant upon or vulnerable to natural resources – in other words, almost every single industry.

The second option is a continuation of business-as-usual practices, whereby the value of nature is undermined, increasing our vulnerability to natural disasters, such as floods and wildfires – and intensifying market risks. The financial implications of this scenario shouldn’t be underestimated; last year, Bloomberg forecast that Australia’s 2020 wildfires could decrease the country’s annual GDP growth by 1.6%, driven by negative impacts from a decrease in tourism, a decline in consumer confidence and a destruction of its economic engine because of rising pollution.

The financial community is uniquely positioned to drive this decision. Equipped with the capital that NGOs lack and not constrained by the bureaucracy that often slows down governments, it is simultaneously powerful and agile enough to, quite literally, save the world. Soon, governments will begin to recognise that quantitative easing to benefit the green sectors will be more important than purchasing bonds from airlines or automakers.

From niche to mainstream

Indeed, more than one quarter of assets under management globally are now being invested according to the premise that ESG factors can materially affect a company’s performance and market value, according to McKinsey. This is partly a promising indicator of the fact that investors are waking up to their responsibility as stewards for nature – and partly a reflection of the fact that sustainable investing is easier, more accessible, and more profitable than ever before.

Previously, a lack of transparency and standardisation acted as a signficant deterrent to investors looking to invest sustainably. Because ESG risks do not appear in traditional financial tools, quantifying the non-financial performance of companies within their portfolios, and comparing this performance to these companies’ peers, was, at best, inaccurate, and, at worst, simply impossible. In 2019, despite the majority of global investors acknowledging that incorporating ESG into financial strategies improved financial returns, 40% identified a lack of acceptable policy frameworks as the main challenge to integrating ESG in their investment strategies, and over a third stated a belief that there is a lack of quality data to support decisions.

ESG standardisation has come a long way since then. The ICMA’s Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines, and Sustainability-Linked Bond Principles, have become the leading frameworks globally for the issuance of sustainable bonds. While not legally mandated, these principles are often a requirement of those trying to access the preferential rates offered by this finance, and go some way in mitigating against issues such as greenwashing and ESG-washing. More, the EU’s Sustainable Finance Disclosure Regulation was introduced in March, and its Sustainable Finance Taxonomy, a framework against which investors and businesses will be able to assess whether certain economic activities are “sustainable”, is due to come into practice in 2022.

A big picture view

Despite these developments – and notwithstanding the distance that ESG reporting still has to go to bring it up to part with traditional financial risk measurement – challenges still remain.

The majority of these challenges undeniably arise from the secondary effects of ESG investment decisions. For example, investing in electric vehicles (EVs) appears, on the surface, to be a straightforward decision in terms of the environmental benefits. Replacing five million petrol cars with EVs equates to 36 million fewer tonnes of CO2-related emissions being pumped into the atmosphere. Indeed, there are signs that China is prioritising EV proliferation in the hope of boosting post-COVID economic stimulus. Beijing has already committed to increase the share of EVs in China to 25% by 2026, from 5% in 2019.

But the mining of lithium, a key component in EV batteries, has significant environmental, as well as social, impacts. The release of the toxic chemicals required to process lithium contaminates soils, water and air, harming communities, ecosystems and food production. In 2016, protestors from a town bordering the Ganzizhou Rongda lithium mine in Tibet took to the streets after fish from the nearby Liqi River were found dead on mass following a toxic chemical leak from the mine.

Recycling of lithium also poses an issue. According to the Commonwealth Scientific and Industrial Research Organisation (CSIRO), only 2% of Australia’s annual 3,300 tonnes of lithium-ion battery waste is currently recycled – and the cumulative waste is set to exceed 100,000 tonnes by 2036.

So, what’s the solution?

Rather than looking to solve specific, localised problems, investors must take a holistic, 50,000-foot view and look at the source of the biggest causes of environmental breakdown. Often, this means understanding the links between often siloed environmental, social, and governance problems.

Reducing palm oil production and the resulting deforestation, for example – a distinct environmental problem – requires the education of industries and governments, as well as the communities working on palm plantations to empower them to create green industries and generate income more sustainably – an endeavour usually considered under the social umbrella.

Collaboration is key

Investors must also take a big-picture view of the larger ecosystem of stakeholders driving sustainability, and where and how they should interact with other players to enact change most effectively. Undeniably, advanced research has a key role to play in this change, and global research universities are uniquely positioned to play a foundational role and act as catalysts to advance deep, base straddling fundamental research. Their research & development and innovation is often framed to look first at the broad macro issue boundary, and then patiently scaffold research specifically to address this issue. However, despite its evident value in increasing the potential efficiency of addressing such issues, university research is often not implemented.

Investors, research bodies and corporates each have a vital role to play at various stages of development: universities bring the innovation; investors bring the capital; and corporates bring scaled commercialisation. It is only through true collaboration between these parties that we will begin to be able to address the largest problems facing the planet at their roots, rather than simply relieving the symptoms, and the full potential of ESG investing can be realised.


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