Economics is currently experiencing a change in how things are viewed. Soil is an important factor when it comes to production. Therefore, it should receive a place in the balance sheets of companies. It is a new investment theme with yield potential, Alina Donets writes in an essay on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
«I invest in environmentally friendly companies.» When clients make this statement, the sustainability megatrend is taking a lead in the financial industry. Around twenty years ago, the still narrow but in many senses of the word sustainable victorious march of «green investments» began. The common strategy is based on a best-in-class selection process in which investors' money is channeled into companies that meet the highest environmental standards within their industry.
This focus inevitably leads to asset managers broadening their knowledge in this field and some go even one step further at this point and additionally invest in companies that also develop products and services that contribute to the achievement of sustainability goals. Investment managers are thus able to specialize in key fields, creating return advantages through their advantage in insight knowledge. Thus, thematic investing allows for more consistent and attractive alpha generation.
«This is exactly what needs to change according to some scientists»
The industry has since preferred to sell certain topics rather than financial products. It is more practical to be able to say to the client: By investing in this fund, you will benefit from technological progress. Or from the aging of the population. Or from electric mobility, etc. The list of potential themes is as long as modern life is complex. Thematic investing allows you to focus on the factors that the investor can identify with, with a consistent focus, attracting more capital.
Economics recognizes three factors of production. By combining those factors, goods are being created and the cycle of economic activity is being nurtured: Soil, labor, capital. Only two of these, labor and capital, have a price. Nature is considered a common good and is available for free – but this is exactly what needs to change according to some scientists. One of them is Partha Dasgupta.
He has calculated that global physical capital doubled between 1992 and 2014 and human capital, i.e., the accumulated knowledge and skills of humankind, increased by 13 percent. Only natural capital fell by 40 percent. As a result, 1.6 Earths would be needed today to sustain humanity and its standard of living. Or to put it more bluntly: nature's assets will not last much longer. Unless the human species consumes less, grows more slowly, protects nature, uses it more efficiently and invests in its preservation. One way to achieve this is – as always – through a price tag.
«The financial industry is asked to give its capital flows a new goal»
The UN’s Environment Programme UNEP agrees with this point of view. In the State of the World 2021 report, governments are called upon to include natural capital in their calculations of economic performance. Nature should no longer be available free of charge as a passive good, but its use or destruction should be included in a balance sheet. For example, through a certain price with regard to the emission of carbon dioxide. In addition, public subsidies should be withdrawn from fossil fuels and redirected to nature-friendly technologies. Banks should stop lending for the exploitation of coal, gas and oil, and companies should avoid waste by promoting the circular economy, etc.
As a result, the financial industry is asked to give its capital flows a new goal. More than 50 percent of global GDP depends on nature and with a Natural Capital strategy, it is possible to invest in solution providers that help preserve nature by transitioning to leaner industrial processes, as well as harnessing its infinite potential and regenerative powers by developing the circular bio-economy. I am convinced that a Natural Capital strategy contains an opportunity for above-average market returns for investors along the way.
«A fund defines four dimensions of the natural capital theme»
To achieve this, a fund defines four dimensions of the natural capital theme, in a first step: the bio-cycle economy, resource efficiency, results-oriented economy and waste prevention. After which, a best-practice approach is used to select those small and medium-sized enterprises that realize gains in efficiency and close loops along with the entire production, consumption, and disposal chain. In addition, we keep an eye out for innovators who develop solutions that help to preserve nature and use its regenerative powers.
If the topic of natural capital establishes itself within the realm of science, society, and the financial sector, it could indeed be that companies that today pride themselves on having a ranking in one of the many ESG indices and present their sustainability reports almost naturally, will in 2040 just as easily value the development of their natural capital as a success factor and report about it on their balance sheets in pennies and nickels.
Alina Donets is a portfolio manager in LOIM’s Global Equities division. She joined Lombard Odier Investment Managers (LOIM) in November 2020 and has been managing sustainability portfolios for seven years. Previously, she worked at Allianz Global Investors as a portfolio manager from 2017 until 2020. She was also a portfolio manager in Bank Audi. Prior to this, she worked at Pictet Asset Management as an investment manager, Pictet Water, from 2013 to 2016 and as a supporting investment manager, Pictet Global Environmental Opportunities, from 2014 to 2016. She began her career as a graduate trainee at Pictet in 2012. She holds a master’s degree in International Business from HEC in Lausanne and a bachelor’s of science degree in Business Studies from Cass Business School in London. In addition to passing the CFA examinations, she has been awarded the ESG CFA certificate, the CFA Institute Investment Foundations TM certificate as well as the IMC certificate (Units I and II).
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