rethink sustainability

What is the role of investors in financing the transition towards sustainable food systems?

What is the role of investors in financing the transition towards sustainable food systems?
Michael Urban - Deputy Head of Sustainability Research

Michael Urban

Deputy Head of Sustainability Research

Our economy is based on a flawed and unsustainable system – one that is Wasteful, Idle, Lopsided and Dirty (WILD). Low manufacturing costs, which fail to factor in the price of negative externalities, have created a linear take-make-waste model, where raw materials are transformed into products that are often used briefly and only once, before being discarded.

As consumption has grown so too has the harm to our environment. We have already breached several of the nine planetary boundaries which define the limits within which we need to stay to live in a stable environment. Climate change, perhaps the best-known of these boundaries, is coming under increasing pressure, with our atmospheric CO2 levels higher now than they have been for millions of years. Without serious mitigation efforts we could be on course to reach close to 3 degrees of warming. This is twice the temperature increase we can afford if humanity is to thrive. 

Adaptation to environmental change is an urgent challenge for organisations and populations, one that will require technological innovation to find new ways of living and working as extreme weather events become more frequent

Adaptation to this environmental change is an urgent challenge for organisations and populations, one that will require technological innovation to find new ways of living and working as extreme weather events (heat waves, droughts, floods, wildfires etc.) become more frequent. This is where we need climate adaptation. Crucially, if we are to minimise ongoing and future harm, and reduce the risk of cascading climate crises, we must transition to a net-zero carbon economy.

It’s a transition that is already underway, as we move away from a WILD economy to a CLIC® economy, one that’s Circular, Lean, Inclusive and Clean. In the CLIC® economy we will increasingly share, recycle and reuse instead of discarding; waste at the point of both production and consumption will be minimised; equality and inclusivity will create a unified approach to the challenges we face; and we will work with rather than against nature by harnessing its power to sequester carbon and to self-heal.

Read also: Tactics to reduce food waste: meet 5 game-changing start-ups

 

Interactions and complexity matter

To date, climate change has been in the driving seat of the transition to a CLIC® economy. However, we are seeing increasing attention being paid to a wider set of environmental issues, and a greater understanding of their interdependence. Take our food production systems, for instance. We have now cleared 50% of all habitable land to make way for agriculture. The resulting deforestation has diminished the carbon sequestration capacity of our natural environment. It has also encroached on the natural habitat of a vast number of species, many of which are now threatened with extinction. Fields are ploughed and tilled, thereby releasing the carbon sequestered in soils. Fossil fuel based fertilisers are overused to grow feed-crops for livestock which then release methane into the atmosphere.

While these complex interactions extend well beyond our wildly unsustainable food production, they are critically important for investors. Recognising them, understanding them and adapting to them will be one of the most important drivers of risks and returns in financial markets in the years to come, as a set of powerful forces – including governments, businesses, and consumers – drive a sustainability-led transformation of our economic model. As we transition from a WILD to a CLIC® economy swathes of economic activities will contract, while others will rise. 

Shifting consumer sentiment is driving change, as purchasers of products and services become more aware of the environmental impact of their spending. Platforms that foster circularity by enabling short-term rental of expensive items, or by linking buyers with sellers of used items, are seeing strong growth. Take fashion, for instance. The resale industry is expected to grow eleven times faster than the broader clothing industry between now and 20251. In the near-term, rises in the cost of goods and energy are acting as a catalyst to this already established trend.

For businesses less exposed to this shift, an increasingly interventional regulatory environment is seeking to force change, as governments and policymakers make efforts to meet the temperature target agreed in Paris. For some firms this will mean opportunity – in the EU, for instance, the Commission’s RePowerEU Plan will frontload the rollout of solar and wind-power, heat pumps and investment in hydrogen. For others it brings risk, with regulations threatening higher taxes or fines for polluting products and services.

As with all economic revolutions, from the agricultural to the industrial to the digital, The Sustainability Revolution will be underpinned by innovations – and it’s here that investors have a central role to play

 

Read also: Is sustainable policy working?

 

Innovation and the role of sustainable finance

As with all economic revolutions, from the agricultural to the industrial to the digital, The Sustainability Revolution will be underpinned by innovations – and it’s here that investors have a central role to play. Across all sectors, the transition to a CLIC® economy is offering unrivalled opportunity, as early stage innovation flourishes and established businesses look to build-out sustainability-related infrastructure.

The size of this opportunity – estimated at USD 5 trillion every year between now and 2050 – has led to a paradigm shift across the finance industry.

From bio-fuels to plastic alternatives, and from carbon capture to recycling infrastructure, sustainable finance will unlock the potential of new solutions, as well as support transition leaders amongst incumbents.

 

Our approach – sustainable investment is an investment conviction

Managing sustainably invested portfolios is not, however, a straightforward task. We believe the industry’s current focus on low-carbon companies and ESG (Environmental, Social and Governance) metrics is flawed, after all it is precisely where emissions are highest that the most investment will be needed. If we are to allocate capital for the greatest impact we must go beyond mere assessments of a company’s current carbon impact.

Working in partnership with the University of Oxford and SystemIQ we have developed a unique, three-pillared approach to sustainable finance. The first of our three pillars is our Portfolio Alignment Framework, through which we provide investors an easy-to-use metric that assesses a company’s transition trajectory and climate-related exposure. This aims at reducing portfolio risk. The second pillar is our Thematic Strategy, where we create high-conviction portfolios that both fund and take advantage of radical transformations in energy production, use of materials, and the way we exploit our Natural Capital. The third is our Impact Strategy, where we seek out those firms that we believe will harness nature’s untapped potential and preserve its value through a leaner form of industry; those that will be the transition leaders within their sectors; and those that will provide the sustainability innovations needed across industries.

It is our conviction that as we transition from a value-destroying economy...to a value-creating economy...sustainable investing will be the key to generating long-term returns and growing our clients’ prosperity...

 

Read also: Going beyond ESG – sustainable investing explained

Recently, we announced a partnership with the Alliance To End Plastic Waste, a USD 500 million circular plastic strategy through which we will target scalable solutions for removing plastic from the environment and drive the transition towards a circular economy for the plastic value chain. We believe that targeting funds in problem areas, and using scientific frameworks to dig deeper, is the way to maximise both returns and our social and environmental impact. Our Food Systems strategy is positioned to capture the upside of a sustainability-led transformation of the way we produce, distribute and consume foods – we forecast this theme will represent USD 1.5 trillion in annual business opportunities by 2030.

Read also: The CLIC® Chronicles: 10 ways to build a circular economy and the companies leading the way

As the move to a CLIC® economy re-shapes risk and return across all sectors, investors are seeing that performance is increasingly aligning with a profound transformation of our economic model. It is our conviction that as we transition from a value-destroying economy – one which degrades our land, forests and oceans – to a value-creating economy – one which harnesses nature’s power to regenerate and restore – sustainable investing will be the key to generating long-term returns and growing our clients’ prosperity in perpetuity.

 

The Resale Market Is Booming: Here’s How Small Businesses Can Benefit (forbes.com)

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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