investing in our natural capital.

The potential scope of human progress and, indeed, the very existence of our species, depends on Nature’s resources. This includes the world’s geology, soil, air and water, not to mention all living things and the ecosystem services—such as pollination—that they provide1.

This is our Natural Capital. And it’s more important than ever for our economy and society.

The potential scope of human progress and, indeed, the very existence of our species, depends on Nature’s resources

Intertwined: Natural Capital and our economy

Our economy is critically dependent on Earth’s Natural Capital. And we can quantify that dependence.

For instance, natural products and their derivatives account for over one-third of new molecular entities (NMEs) approved by the United States Food and Drug Administration (FDA), including more than two-thirds of all antibacterial NMEs2. The World Wildlife Fund (WWF) valued Earth’s oceans at at least $24 trillion, over two-thirds of which is dependent on healthy conditions to maintain its current output3.

Overall, the World Economic Forum found that $44 trillion of economic value generation—over half of the world’s GDP—is moderately or highly dependent on our Natural Capital4.
 

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Under threat: our WILD economy and Natural Capital

Today, our Natural Capital is facing unprecedented challenges.

Our society now extracts around 100 billion tons of natural resources from Earth every year5. At the same time, we produce approximately 70 billion tons of waste annually, over half of which is in the form of emissions and untraced forms of waste and pollution6. And much of that extraction and waste goes to creating products that add short term value and sit idle for most of their lifespan.

Our society now extracts around 100 billion tons of natural resources from Earth every year

In other words, our current economic model is WILD: Wasteful, Idle, Lopsided and Dirty. And it is placing our Natural Capital at risk.

To take just one example, according to the UN Food and Agriculture Organization (FAO), because of erosion, salinisation, compaction, acidification and chemical pollution, over a third of the world’s soil resources are now moderately to highly degraded7. More generally, of the nine planetary boundaries that define the natural limits within which we can operate safely, we have now crossed four: climate change, biosphere integrity, biogeochemical flows and land-system change8.

The irony is that the threat to Natural Capital comes from the economy that it underpins. Although many sectors are heavily reliant upon Natural Capital, those same industries are destroying the very resources upon which they depend through their unsustainable business practices. In effect, our economy is cannibalising itself.

Although many sectors are heavily reliant upon Natural Capital, those same industries are destroying the very resources upon which they depend through their unsustainable business practices

The use and preservation of Natural Capital are not mutually exclusive

We see evidence that the expansion of human knowledge is set to unlock vast, new opportunities to make efficient use of our Natural Capital in ways that will also serve to preserve and regenerate these precious resources. And many of those opportunities are already here, whilst others are just beyond the horizon.
 

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For example, naturally-derived materials, such as bio-based polymers and composites, are already being used in consumer products and are set to revolutionise sectors from construction and chemicals to textiles and transportation. And the waste generated in producing such materials need not be wasted, since it can be used to generate bioenergy that further protects our Natural Capital.

… certain kinds of investment in our Natural Capital would make a valuable contribution to achieving net-zero emissions

Meanwhile, certain kinds of investment in our Natural Capital would make a valuable contribution to achieving net-zero emissions. Reforestation, land and soil management, biodiversity restoration and the right bioenergy systems would all help to reduce CO2 emissions and sequester CO2 from the atmosphere. Indeed, our Natural Capital has the potential to capture around 16 billion tons of CO2 every year—roughly equivalent to the current emissions of the continent of Asia.

We believe that this potential is no mere hypothetical. For one of our Natural Capital’s most valuable characteristics is that, if we use it carefully and invest in its preservation, it will regenerate itself. And it is supporting such regeneration that will promote the greatest economic, social and environmental returns.

…one of our Natural Capital’s most valuable characteristics is that, if we use it carefully and invest in its preservation, it will regenerate itself

Investing in our Natural Capital is clearly the right thing to do for our economy. But if our WILD economy is also what is threatening our Natural Capital, then the only way we can realise those benefits is by transitioning to an entirely new economic model.

 

To invest in the CLIC™ economy is to invest in our Natural Capital

At Lombard Odier, there is evidence that a transition is already underway to an economic model that is Circular, Lean, Inclusive and Clean: the CLIC™ economy. Such an economy generates valuable economic growth without depleting our precious natural resources.

But we cannot achieve such a transition by carrying on as we always have. That’s why we seek out and favour businesses that deliver the products and services we need in new ways that protect and promote our Natural Capital, such as by removing CO2 from the atmosphere or regenerating our forests and oceans.
 

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Such a transition will take more than a process tweak here and a wind turbine there. The move from a WILD to a CLIC™ economy is a fundamental paradigm shift that will transform businesses across every sector. However, we are convinced that the scale of the challenge also indicates the scale of the opportunity: investing in the transition to a CLIC™ economy will create superior financial returns with risks that are lower relative to investments in solutions at odds with this unstoppable shift. That is why the CLIC™ economy is the touchstone of our core-conviction investment strategy, in which we favour companies that are embracing the transition to a more sustainable tomorrow.

In order to maximise the opportunities related to Natural Capital, we believe that investors should be aware of four key economic revolutions.

The first revolution: The circular bio-economy

The second revolution: Resource efficiency

The third revolution: From private ownership to outcomes and experiences

The fourth revolution: The-zero waste economy

 

Helping investors protect and profit from our Natural Capital

At Lombard Odier we aim to help our clients invest in our Natural Capital because, as we transition to a CLIC™ economy underpinned by our Natural Capital, the evidence base points to these investments representing some of the greatest opportunities of our time.

1World Forum on Natural Capital (n.d.) ‘What is natural capital?’. Available here.here.
1Patridge, E., Gareiss, P., Kinch, M. S., Hoyer, D. (2016) ‘An analysis of FDA-approved drugs: natural products and their derivatives’, Drug Discov Today, vol. 21, no. 2, pp. 204-207. Available here.
2World Wildlife Fund (2015) ‘Reviving the Ocean Economy: The Case for Action’. Available here.
3World Economic Forum (2020) ‘Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy’. Available here.

4Circle Economy (2020) ‘The Circularity Gap Report 2020’. Available here.
5Idem
6Food and Agriculture Organization of the United Nations (2015) ‘Status of the World’s Soil Resources’. Available here.
7Steffen, W., Richardson, K., Rockström, J., Cornell, S. E., Fetzer, I., Bennett, E. M., Biggs, R., Carpenter, S. R., de Vries, W., de Wit, C. A., Folke, C., Gerten, D., Heinke, J., Mace, G. M., Persson, L. M., Ramanathan, V., Reyers, B. and Sörlin, S. (2015) ‘Planetary boundaries: Guiding human development on a changing planet’, Science, vol. 347, no. 6223. Available here.

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