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Investing in Nature: no tragedy of the horizon
November 28, 2019
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Investing in Nature: no tragedy of the horizon
November 28, 2019
A new report released this week
at the Environmental Finance Natural Capital Investing conference in
London, opens up a new horizon for investors - the world of buying-in to
nature. It is a live topic in both London and Paris this week, with a
slew of events on either side of the channel examining how capital can
be deployed to both keep our Earth cool and to help finance the
restoration of nature.
It
sounds like a simple fix but in reality the vast majority of private
money is doing just the reverse, often encouraged by global subsidies
that create false price signals and massive market failures. I sense two
big potential upside winners in the future. The first is natural
climate solutions and second is reform of the food sector.
So
let's look at the first. Several billion years ago, our atmosphere was
95% CO2. Today it is around 0.041% CO2, but rising fast, by geological
standards. Earth created its own climate solution, long before we
dreamed up industrial carbon capture and storage. It deployed plankton
and trees. The former downloaded carbon as limestone and sediments, the
latter wall papered the land with leafy solar panels, creating coal,
peatlands and oil.
It
should be no surprise therefore that natural climate solutions, such as
reforming agriculture and planting trees to suck carbon up and also
investments to prevent burning down the store, (see Mirova Natural Capital
and others) as in preserving ancient forests, will become a growing
focus for investors. Today this solution offers between 30 and 40% of
what the world can do to stay below "2 degrees" between now and 2030.
Yet, at the last count, it gets just 3% of climate finance. What an
opportunity!
Why
do I sense a change? Forest carbon credits that had no buyers for a
decade have recently found a home. Large oil majors seeking
strategically to transition to a less carbon intensive model, bought up
millions of tonnes of these credits in the last quarter of 2018. Today
forest carbon credits are undervalued. They sense that others, like
aviation and shipping, will want them too, and will end up paying more.
In 2019 Shell offered carbon neutral fuel at petrol pumps for the first
time by buying forest carbon "transets" (I hate the word offsets), as
they transition to a new kind of energy future and help to save
rainforests at the same time.
Secondly,
the Loi PACT coming into force in 2020, in France, will mandate all
pension funds there to apply a % of their funds into green assets. In
China, the new 'green weighting' of the banking system requires less
collateral capital if lending into green businesses, than lending into
brown. A new Taskforce on Nature related Financial Disclosure (TNFD) is
in the works, as a follow on to the TCFD on climate, and in the coming
decade, this will help drive smart capital towards restorative nature
based asset allocation, rather than into destructive investments.
The firework on the cake this month came from none other than Pope Paul. He backed the concept of an International Law of Ecocide.
This was first promulgated by the late Polly Higgins, a visionary
London lawyer, who advocated that persons complicit in the wholesale
destruction of nature, that compromised the security of future
generations, should end up in court. So could we see Pension fund
Trustees or Bank CEOs subpoenaed for investing in callous plastics
companies polluting oceans or lending to reckless palm oil growers
destroying rainforests? You decide.
Toast Plc - Toast says 40% of bread is never eaten. Now you can drink it.
So what about food? Today, according to Faunalytics,
humans kill about 80 billion animals each year to feed 7 billion
people. I suspect we are reaching peak meat. The share prices of
alternative meat companies have been pretty frisky this year. Veganism
is up. Consumer realisation that the world's industrialised food system
is the biggest global destroyer of biodiversity and drives some 25% of
climate change emissions, makes us sick, and forces many traditional
farmers into suicide, is causing millions to think more carefully about
what they eat. Cheap food it seems, comes at a price.
The
mammals around the dinosaur's feet are insect protein units, vertical
farms, brewers using surplus bread for beer, and environmentally minded
impact investors. Few family office forums have cottoned on to this, but
they will. Cocoa and coffee producers are facing a double whammy of
drought and deforestation, which is forcing them to rethink
production, as increasing temperatures mean lowland mountain slopes will
become untenable, and cooler uplands are in short supply. As much as
40% of production may need repurposing. What an opportunity!
In June 2019, Ocado snapped up Scunthorpe based
Jones Food Company in a £17m investment into
vertical farming.
In
the next decade a "Bloomberg of Natural Capital" will emerge; possibly
many of them. They will offer data to guide a new demanding class of
green investors. The evidence is, that service providers such as
S&P, MSCI, and FTSE Russell are already flirting with new
acquisitions such as Trucost, Carbon Delta and Beyond Ratings.
A
combined approach of transparency, disclosure and regulation, with
standardised comparable dependency and impact data and tools, may one
day mean that the world of nature will indeed become an investment
oyster.
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