Do investments in sustainable products and services also make sense for your portfolio?
Our daily consumption makes a significant contribution to the use of resources and the associated environmental impact. Investments in innovative areas are needed to promote the spread of sustainable products and services, and to counter the growing use of resources. Sustainable investment strategies make it possible to promote forward-looking projects like these whilst generating returns at the same time.
What were you doing on July 29 this year? The lights stayed on and there was still water in the taps — yet that was the date that the world officially used up its natural resources for the year.
Earth Overshoot Day, as it’s known, is based on a calculation of the world’s total annual consumption versus the resources we can sustainably renew within one year. The date that we go into ecological debt to the planet — a debt that’s only growing — moves up a little each year. In 2018, it happened two days earlier than 2017.
This raises two important questions: What does this mean for our existing resources? And what does it forecast for those resources we must develop ourselves?
As Paul Donovan, Chief Economist with UBS Global Wealth Management, notes: “Over 20 years, real living standards would have to fall by a third to a half in order to be sustainable with the increased global population.” Or, he adds, we can invest in a wealth of new industries that support economic growth and consumption: “That requires innovation and productivity.”
Borrowing against our ecological future
The consequences of our current ecological overspend are stark, from the loss of wildlife and depleted fishing stock to water scarcity and global warming. If, as predicted, the world population hits 9.6 billion by 2050, it would take the equivalent of three planets to provide the natural resources to sustain the current rate of consumption.
Media attention on the issue of how goods are currently (and unsustainably) produced has intensified. Note, for example, the recent controversy over plastic in the marine environment. Some eight to 13 metric tons of plastic are dumped into the oceans each year. The U.K.’s Ellen MacArthur Foundation estimates that, by weight, there will be more plastic than fish in the oceans within three decades.
Other controversies include the strain on the world’s water supplies, food waste and even secondary impacts like the role of the meat industry in antibiotic resistance — a growing health concern. Approximately 80 percent of the antibiotics sold in the United States alone are used in meat and poultry production. This has far-reaching consequences for water and land use, as well as health care.
For companies willing and able to tackle these and other problems around sustainable production, the opportunities are significant. “Capital markets investments directed towards sustainable efforts can be a strong driver of change in production and consumption patterns,” says Michael Nelskyla, Head of Investor Solutions at UBS Investment Bank.
Electric cars, for example, saw sales pass a million units in 2017. While that’s still relatively small, it’s a sign of the growing appetite among consumers to participate in more sustainable markets. Several multinational car manufacturers are committing to increased electric or hybrid vehicle production. “A direct impact on production could be achieved through targeted social development programs such as eco-farming in China, whereas consumption behaviors can be impacted through programs focusing on educating on health, nutrition and environmental awareness.” Nelskyla adds.
Toward a sustainable supply chain
Fortunately, many business leaders are recognizing the tremendous opportunities that this presents for entrepreneurs, as well as for investors who can support whole industries — or niche areas — where sustainable enterprises can thrive while helping the planet to do likewise.
One NGO that has identified a sustainable segment of a traditional market is Canopy, founded by Nicole Rycroft. It is building partnerships to help global brands protect the world’s forests by creating a more sustainable paper and pulp supply chain.
“We find champions within major companies who mobilize their teams to draft environmental policies and set benchmarks and implementation plans for protecting forests and greening their paper, packaging and/or textile supply chains,” Rycroft says. “Our focus and the primary value we provide is the practical support, tools and strategies that help brands reduce their supply-chain risk.”
Canopy helps brands pool resources with their peers to develop next-generation solutions, such as packaging made from straw rather than wood or fabrics made from recycled textiles. “Today’s ecological challenges are complex and can feel overwhelming,” Rycroft says. “We help provide a pathway for business leaders to be part of the solution.”
More brands have partnered with Canopy during the past five years, ensuring that billions of dollars in new mill infrastructure is not built in the heart of endangered rainforests.
Cultivating educated consumers
“One theme we notice in our research is the idea of the ‘green consumer’,” says Julie Hudson, the Head of ESG Research, UBS Investment Bank, pointing to the rise of “natural” ingredients in the food industry. “Companies are responding to demands from their customers for more ‘sustainable’ consumer products. This can mean anything from healthier content in food to water efficiency in supply chains.”
Thanks to growing consumer awareness of both ecological challenges and the urgency in addressing these issues, there have been discernible adjustments to the consumption patterns of the general public. A 2017 Cone Communications CSR study suggests that nearly two-thirds of consumers “are hopeful businesses will take the lead to drive social and environmental change moving forward, in the absence of government regulation.” Not only do these reports indicate a clear market demand for sustainably produced goods, they suggest tangible financial opportunities for companies that practice sustainable production methods.
As Rycroft says: “Since 1999, there’s been a sea change in global awareness of issues like climate change and biodiversity decline and their impacts on our societies and economies. There’s been a parallel realization of the agency that business leaders possess in helping to address these complex global issues — and the value that brings to their companies. With a lack of bold or consistent political leadership on environmental challenges, business executives have increasingly stepped in to take environmental leadership.”
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