investment viewpoints

    Investing in solutions to keep Earth within Planetary Boundaries

    Investing in solutions to retain the planet within Planetary Boundaries
    Alina Donets - Portfolio Manager

    Alina Donets

    Portfolio Manager
    Thomas Höhne-Sparborth, PhD - Head of Sustainability Research

    Thomas Höhne-Sparborth, PhD

    Head of Sustainability Research
    Pascal Menges - Head of Equity Investment Process and Research, Client Portfolio Manager

    Pascal Menges

    Head of Equity Investment Process and Research, Client Portfolio Manager

     

    Need to know

    • Of the nine planetary boundaries, or safe operating zones for humanity, at least six have already been breached, and likely more - underscoring risks to the future of our planet’s health. Urgent action is needed to course correct 
    • To help define the various dimensions through which economic activity may impact natural capital, and vice versa, LOIM’s Natural Capital strategy has relied on the Planetary Boundaries framework. The strategy seeks to invest in attractive business models aimed to deliver direct or indirect solutions to key environmental problems jeopardising the planet’s ecological balance
    • We have classified 75% of the strategy as solution providers, which are those with significant exposure to nature-relevant products and solutions. The remaining 25% comprise transition leaders in industries where product design is vital to addressing nature’s degradation

     

    What are Planetary Boundaries?

    Planet Earth has never been in a more treacherous position when it comes to the impact of our take-make-waste economic model on the environment. Five of the nine Planetary Boundaries, the environmental limits within which humanity can operate sustainably, have already been crossed (climate change, biodiversity loss, forest degradation,  agrochemical pollution, chemical and plastic pollution). And the breach of the sixth boundary for freshwater overuse recently has only cemented the inconvenient truth: time to save the planet from a potential ecological catastrophe is fast running out. 

    The concept of Planetary Boundaries was first developed by a group of researchers led by Johan Rockström of the Stockholm Resilience Centre. Together, the nine boundaries define the safe operating space for humanity. Within these boundaries, the research suggests, “humanity can continue to develop and thrive for generations to come," whereas their transgression “increases the risk of generating large-scale, abrupt or irreversible environmental changes.”

    These transgressions are already on the rise. At a crucial tipping point like this, it is imperative to look beyond fixing the consequences of the breach of these boundaries. There is an imminent need to address the root causes, and focus on solutions that preserve nature’s bounty against negative externalities of global economies, and help bring humanity back within these safe boundaries.

     

    Figure 1: Planetary boundaries.

    Sources

    LOIM analysis; based on Rockstrom et al (2015), updated based on Transformation is Feasible Report by Randers, Rockstrom et al (2018).  For illustrative purposes only.
    1) IPCC Global Warming of 1.5C report (2019)
    2) World Wildlife Fund and Boston Consulting Group (2015)
    3) BBC/EPA
    4) FAO (2015)
    5) UNEP (2016)
    6) Living Planet Index
    7) OECD (2016)
    8) Trucost (2013)

     

     

    Natural Capital: a strategy adopting the Planetary Boundary framework

    Our Natural Capital strategy’s investment thesis is based on the recognition of the need to better preserve, and harness nature by investing in companies providing solutions that either help avoid and mitigate the adverse impacts of human activities (through a leaner form of industry), or seek to leverage and utilise nature-based, regenerative solutions (through the rise of circular bioeconomy).

    Planetary Boundaries framework helps to define the various dimensions through which economic model may impact natural capital1. The framework builds on scientific evidence suggesting that, since the industrial revolution, human actions have become the main driver of global environmental change.

    In order to achieve the complex target of improving the overall environmental health, all of the nine key challenges must be addressed in parallel. At the core of the concept of Planetary Boundaries is a realisation that breaching one of these boundaries has larger, systemic effects. Crossing the boundary on climate change not only affects global warming, but has knock-on effects on our oceans, on biodiversity, and other planetary systems.

    For the same reason, solving only the issue of climate change may help reduce some risks, but unless this is coupled with broader action across other environmental dimensions, such action may ultimately prove insufficient in restoring the planet back to balance and safeguarding the safe operating space for humanity and our economy. We therefore cannot delay action across the range of environmental challenges.

    Accordingly, the Natural Capital strategy aims to address a multitude of factors, investing across all key areas of required solutions of relevance to the restoration, or preservation of key planetary boundaries, across four key themes.

    Firstly, a circular bioeconomy, which aims to substitute harmful parts of the economy with bio-based solutions – reducing toxicity and chemical use, but also more generally supporting the self-regeneration of water, land and air-based ecosystems and biodiversity. However, we know that not everything can be replaced by nature-based solutions and we need to complement that with the reduced use of input materials which brings us to leaner industrial processes. These entail an improvement in the resource efficiency of manufacturing processes, helping to secure lower pressures on natural resources such as water, air or biodiversity.

    The transformation to a more eco-friendly economic model is not just happening on the production side but also at the consumption level. This means we also need to focus on the transition to an outcome-oriented economy, which seeks to recognise the role played by consumption patterns, effectively working on avoiding waste as well as pollution levels, while also alleviating the pressure on materials extraction.

    Lastly, despite all our efforts to promote a circular bio-economy, resource efficiency and an outcome oriented economy, unfortunately we will still generate waste. We therefore need to focus on the full pursuit of zero waste. This requires investment in closed-loop systems to minimise pollutive externalities and also involves improvement in downstream collection and processing technologies, but also a rethink in how we design our products and materials.

     

    Environmental solution providers

    To assess exposure of the portfolio to the different dimensions covered by the framework of the Planetary Boundaries, we assess the portfolio revenues that are associated with solution activities of relevance to each boundary.

    To do this, we firstly assess the exposure of company revenues to over 2,200 economic activities from the production of steel, aluminium and automation equipment to the development of plant-based proteins, or specialised water solutions. For each activity, where applicable, we assess the most direct planetary boundary impacted by the activity, as well as its indirect effects.

    Direct contributions: These are activities which contribute to mitigating adverse environmental impact, with regards to at least one of the Planetary Boundaries. Solutions related to water supply, for instance, are most directly related to the Planetary Boundary concerning freshwater use, whereas activities related to smarter and more organic forms of farming would be more directly related to the Planetary Boundary concerning agrochemical pollution.

     

    Figure 2: Interactions between planetary boundaries

     

    For illustrative purposes only. Source: LOIM adaptation. Interactions between the planetary boundaries Net normalized| Download Scientific Diagram (researchgate.net).

     

    Indirect contribution: We recognise that solution contributions are not necessarily confined to a single issue but are often indirectly linked. Companies that make a direct, positive contribution to one environmental dimension may also have contributed indirectly to various other dimensions. For example, an activity that has a direct contribution to water use can have an indirect contribution towards the biodiversity boundary. We assess these interactions using the analysis by Lade, Steffen, de Vries and Carpenter (2020)2, as shown in figure 2.

    With the portfolio companies’ activities and revenues clearly labelled, we can evaluate the share of portfolio’s revenues associated with the solution activities. Figure 3 below shows the percentage of revenues deemed to contribute directly or indirectly to the amelioration of one of the planetary boundaries, or to reduce material extraction and waste.

    Transitioning activities: In addition, some revenues in the portfolio are not deemed to be directly linked to solutions, but to transition activities. These include activities that may typically have a significant environmental footprint today, but where industry leaders may be pioneering innovative approach to amend the products and services provided in a more nature-positive manner.

    Where solution providers offer the necessary alternative technologies, products and services that can accelerate the transition to a more nature-positive economy, transitioning leaders on the other hand comprise those companies implementing these alternative solutions.  

     
    Figure 3: Portfolio revenues associated with solutions providers and transition leaders
     
     
     
     
     

     

     

     

     

     

     

     

     

     

     

    Source: LOIM. Data as at 31 December 2021. For illustrative purposes only.3 Human impacts on planetary boundaries amplified by Earth system interactions | Nature Sustainability.

     

    Portfolio view: final measures & comment

    We have classified 75% of the strategy as solution providers, which are those with significant exposure to nature-relevant products and solutions. The remaining 25% of the fund holdings comprise transition leaders or leading names in industries with a high relevance to nature-related themes, and where appropriate product and service design changes are vital for transition to a nature-positive economy.

     

    Investing in solutions to avoid Planetary Boundary breaches: a potential catalyst for returns

    With every additional transgression of the nine Planetary Boundaries, ecological risks could escalate unless our economic impact on the environment is not mitigated and reversed. We have reached a tipping point which necessitated bold, urgent action to leave a breathing planet for current and future generations. Failing to do so is no longer only an environmental aspiration, but is becoming a real economic risk. Over half of global GDP is dependent on nature, and its degradation is already causing significant economic damage. In the US, for instance, cleaning up hazardous waste is already expected to cost USD 500 billion, posing potential liability risks for companies3. The Organization for Economic Co-operation and Development also estimates health and productivity costs of air pollution at USD 2.6 trillion per year4.

    If we are to avoid breaching any more of these Planetary Boundaries, we must understand how we can safely use our natural capital and how to adapt our business models to this new reality.

    Identifying companies that champion solutions that directly or indirectly contribute to preventing transgressions of the Planetary Boundaries and integrating this framework in our Natural Capital strategy is an essential step in addressing this challenge.

    LOIM’s Natural Capital strategy, which targets companies with strong business models, whose products and services preserve or harness the regenerative power of nature, seeks ever-greater incorporation of well designed and implemented Planetary Boundaries framework.

    To read more about the sustainability impact of our Natural Capital strategy, download the link above.

    Discover more about our Natural Capital strategy here.

     
     

    Sources

    [1] Outside the Safe Operating Space of the Planetary Boundary for Novel Entities | Environmental Science & Technology (acs.org)
    [2] Human impacts on planetary boundaries amplified by Earth system interactions | Nature Sustainability.
    [3] Source: BBC/EPA
    [4] Source: OECD (2016)

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