Investing in the New World of Biophysical Limits
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Two years ago, while researching an article for NYSSA’s The Investment Professional, I interviewed one of the most eminent alternative economists of our time, Herman Daly. It was the spring of 2010 and the global markets were reeling from the impacts of the 2008 financial crisis. Policymakers in the developed world were focused on one goal—to stabilize their economies and put them back onto a robust growth track. Meanwhile Daly, a former senior IMF economist, was warning—as he had for many years—that the relentless pursuit of economic growth as measured by GDP, far from being the antidote to the world’s ills, was diminishing human well-being and pushing the earth’s ecosystem to the verge of collapse.
Two years after I spoke with Daly, the developed world finds itself at a critical juncture. Efforts of monetary authorities to stimulate growth have been frustrated at every turn, whether the tools of fiscal austerity and “internal devaluations” are being pressed into service on the continent of Europe, or quantitative easing in the US. Meanwhile a growing minority of thought leaders in the finance and economics community are joining Daly in advancing the notion that stalled growth in the developed world may well have a silver lining, giving us the breathing room to set our economies on a healthier, more considered, trajectory that respects planetary limits and promotes human prosperity in ways that cannot be measured by GDP growth.
A world economy that operates without net material or energy growth can still be a dynamic one says Peter Victor, a Canadian ecological economist. It will, however, require changing the composition of what we produce and consume, and to minimize our waste and dispose of it responsibly. Victor compares this rebalancing of output to a forest where the total stock of trees does not increase but some grow while others die.
Clearly financial institutions and investors have a critical role to play in this transformation. While a handful of sustainable banks, like Triodos and New Resource, have made lending for positive environmental impacts explicit to their operating models for many years, more mainstream financial institutions are now feeling pressure to do so as well. The United Nations Endowment Program Finance Initiative launched its Natural Capital Declaration, in the run-up to the 2012 Rio+20 Earth Summit next week, calling on the CEOs of major financial institutions to demonstrate their “commitment … to work towards integrating Natural Capital considerations into [their] financial products and services for the 21st century.”
At the same time, organizations like The Earth Security Initiative are urging foundations to lead the way in investing their endowments in projects that “create wealth within ecosystem limits and encourage disinvestments in activities that are driving ecological collapse.” The growing popularity of ESG investing and impact investing suggest that more and more investors are aware of the risk-mitigating value of this kind of responsible investing. A survey of academic research just published by DB Climate Change Advisors concludes that companies with high ESG ratings have a lower cost of capital and that in 89 percent of the studies examined companies with high ratings of ESG factor exhibit market-based outperformance.
But what remains to be seen is what “market rates of return” and “outperformance” translate into in a global economy moving toward an ecological footprint of one. Investors may well be required to permanently lower their returns expectations in exchange for securing the long-term viability of the ecosystem.
–Susan Arterian Chang
Susan Arterian Chang is a contributing writer to The Finance Professionals’ Post and is also director of Capital Institute’s The Field Guide To Investing in a Resilient Economy project.