There is growing concern about the impact of economic activity on the natural world. Investors can make a difference by focusing on those companies seeking to improve their behaviour and those developing products and services that will benefit the environment.
The term “natural capital” refers to the world’s stock of natural assets, including all living things, but also air, water, geology and soil. The destruction of this natural capital has received less attention than climate change but threatens companies in a range of industries.
Unfortunately, nature is easily exploited. Cutting down trees for new farmland or releasing battery-chicken effluent into local rivers is essentially free of charge.
One reason for the lack of progress is that it is much more difficult for policymakers and investors to assess a company’s impact on nature than its carbon emissions, which contribute to climate change. For example, a major chocolate manufacturer might have 500,000 farmers in its supply chain. How can we measure the impact of every one of those farmers? How many insects were killed by their pesticides? How many trees were felled for new plantations? In contrast, the carbon footprint of those farmers is easier to estimate.
Concern among investors about the impact of economic activity on natural capital is growing
However, concern among investors about the impact of economic activity on natural capital is growing. Agriculture is causing the most damage, being responsible for 80 per cent of global deforestation and 29 per cent of the world’s greenhouse-gas emissions.1 Reducing food waste and encouraging more efficient use of fertilisers and irrigation is vital to lessening the adverse impact of agriculture on the environment.
Investors can make a positive difference to nature by: investing in companies that are seeking to change their behaviour and their impact on natural capital for the better; seeking out innovative companies providing products or services that directly protect nature or lessen the harmful impact of human activity; and engaging with policymakers to improve standards on nature protection.
Policymakers could also, for example, impose taxes on meat or fish consumption and on nature-destructive activities like cruise ships. These taxes would help shift consumer behaviour and force positive change among companies.
Companies that do the right thing now should outperform in the long run
It is, however, encouraging that concern about the degradation of natural capital is rising. Our role as investors is to identify companies we believe to be leading on reducing their impact – and their customers’ impact – on nature, while at the same time ensuring investors see a good return. Companies that do the right thing now should outperform in the long run, as measured by financial returns and by their impact on nature.
Three points to remember
- Concern over climate change has overshadowed the impact of economic activity on the natural world, but investor interest is growing and could play a major role in shaping company fortunes in the coming years
- Investors can play a positive role in reducing the adverse impact of companies on the environment without necessarily sacrificing returns
- There are some data challenges in identifying which are the best companies to invest in, but these can be overcome