investment viewpoints
Planetary boundaries: Johan Rockström, Mark Carney on Earth’s tipping points
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Investing to restore planetary boundaries
The move towards a net-zero and nature-positive economy requires the large-scale transformation of our economy. Capital must be deployed in a way that mitigates or enables adaptation to climate change, while ensuring businesses operate safely within our planetary boundaries.
The fifth and final event of the Zero-Hour Sessions focused on deploying capital in a way that supports restoring the stability of our biosphere. Several of the nine planetary boundaries which define a safe operating space for humanity and our economy have been crossed or are in close range.
Failing to bring our way of life back within these limits may lead the world past a disastrous tipping point.
Hubert Keller, Senior Managing Partner at Lombard Odier, explained how our investment strategies and operations focus on keeping global warming within 1.5°C and on important biophysical limits, including: the absolute need to stop deforestation and biodiversity loss, and to restore the health of our soil and waterways. This is because integrating such environmental issues into investment processes is essential in driving returns for clients.
“What we are trying to do is help our clients align their portfolios to what could be a substantial disruption to the current economic model,” Keller said.
After anchoring research into economic activity within the planetary-boundaries framework, determining transition pathways for industries is essential.
“Once we have better visibility of these, we can start to work on assessing how our portfolio companies are aligned or misaligned with these transition trajectories.”
Rockström: boundaries crossed in the Anthropocene era
Professor Johan Rockström, architect of the renowned planetary boundaries framework and a Joint Director of the Potsdam Institute for Climate Impact Research, outlined the scale of the problem, identified the main drivers and explained what is required to ensure a resilient, equitable and prosperous future for humanity.
“We have entered a whole new geological epoch. We are leaving the Holocene and entering the Anthropocene. This means that the modern industrialised economy is actually the largest driver of change on planet earth,” Rockström said.
“The earth’s system is a complex, adaptative, self-regulating biophysical system. It has tipping points and interactions which means if you push the system too far, you risk crossing tipping points – which leads to self-amplifying drift in the wrong direction.”
Rockström noted that several planetary boundaries have been transgressed, including climate, biodiversity, land use and biogeochemical flows.
Carney: financing the return to our climate boundary
With climate being among the planetary boundaries that humanity must restore, Mark Carney, the UK Prime Minister’s Finance Advisor for COP26 and UN Special Envoy for Climate Action and Finance, expanded on the notion that the amount of finance committed to achieving 1.5°C is sufficient.
Over USD 130 trillion of private capital is committed to transforming the economy to a net-zero system through the Glasgow Financial Alliance for Net Zero (GFANZ).
“That number is bigger, by about 25%, than most estimates of what it will cost the world to get and remain on 1.5°C path,” he said.
Carney explained that a range of measures are now required in order to achieve a successful transition, including mandatory transition plans for larger companies, better disclosure requirements, and forward-looking metrics.
“Lombard Odier was very much at the forefront of developing portfolio alignment techniques, including the implied temperature rise implications of a portfolio, to tell us whether that portfolio is meeting planetary boundaries. We need to mainstream this approach rapidly and we are going to use GFANZ as a mechanism for mainstreaming and applying these techniques,” Carney said.
Carney also stressed the importance of developing voluntary carbon-offset markets.
“The vast majority of those offsets will be nature-based solutions that will have biodiversity solutions that can help arrest the alarming developments in terms of carbon sinks becoming net emitters, such as in the case of the Brazilian rainforest. We need to get money in to arrest these developments and rebuild nature in those jurisdictions in the right way,” he said.
Blood: hard-to-abate industries and developing economies need climate capital
David Blood, Co-Founder and Managing Director of Generation Investment Management, stressed that the world is on the brink of the most significant economic transition in history, and that climate-led investment considerations are now a key part of fiduciary duty.
“Every financial transaction must consider climate impact and it needs to be considered within the context of capital allocation. Climate-led investing is now part of fiduciary responsibility. We must think about climate impact as well as risk and return,” he said.
Blood also emphasised the importance of ensuring capital allocation is directed towards both hard-to-abate sectors and the developing world.
“When we think about capital allocation, we need to focus on the hard-to-abate sectors, like cement. They are not receiving capital they need to and neither is the developing world. We are going to need to allocate probably around 70% of capital to hard-to-abate sectors and emerging markets.”
Systemiq: change food systems to preserve boundaries
Jeremy Oppenheim, Founder and Senior Partner of Systemiq, a systems-change business focused on economic sustainability which independently assesses Lombard Odier’s sustainability research, highlighted the importance of focusing on reforms in the food and agriculture sector in the context of planetary boundaries.
“The food and agriculture sector illustrates how we need to approach this problem. If you want to maintain planetary boundaries, there is no more important sector than agriculture. Whether it is from an emissions point of view, deforestation, water use, or when it comes to thinking about nitrogen and methane. This is the sector that covers every single one of the planetary boundaries at a local and global level,” Oppenheim said.
“Food and agriculture is the biggest driver of both loss of natural capital and violation of planetary boundaries. Yet, we are miles away from the sector roadmap we need. We know the components of what it will take. It starts with shifts in consumer demand. It proceeds from there to profound shifts in the way we use the natural capital of the planet. Then it goes to way we manage the interaction between agriculture and forests and oceans. We also have to drive innovations such as alternative proteins, and we need dramatic improvements in terms of food loss and waste. All the evidence suggests we can make a dramatic improvement in the next 10 years.”
Faith Ward, Chief Responsible Investment Officer for the Brunel Pension Partnership and Chair of the Institutional Investor Group on Climate Change, stressed the importance of forward-looking portfolio alignment metrics.
“Portfolio alignment and understanding where these companies are going is the single most important metric. A lot of the metrics we have are quite backward-looking, which is what makes these forward-looking metrics so critical.”
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