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Climate change means investors need to switch their priorities to natural assets and away from financial

To save the planet, investors need to switch their priorities from financial to natural assets, says Tim Hodgson, senior consultant at Willis Towers Watson. And we need to put a price on them.

Hodgson’s call coincides with the publication of a report by the United Nations’ Intergovernmental Panel on Climate Change which draws on research by scientists to show the world is facing 1.5 degrees of warming over the next ten years.

Long-term investors should be thinking about the risks to corporate franchise value arising from inefficient use of natural ecosystem assets

This average rise masks temperature extremes in different locations, triggering wildfires in California and the Mediterranean and floods in northern Europe and China. The polar caps are melting at a record rate. The Amazon rainforest is stressed. The Atlantic Gulf Stream is close to shutting down. All of which could lead to crop failure, social breakdown and worse. 

Antonio Guterres, UN secretary-general, calls the situation: “Code red for humanity.” 

Aware of the threat hanging over their next generation, family offices are leaders in impact investing. But still greater efforts are needed.

Hodgson says under-investment in natural assets is running short by trillions of dollars a year. Rather than financial products, he urges institutional investors to back decarbonisation and a sustainable economy. 

It was so different 250 years ago when financial capital was scarce and natural capital was abundant. Cheap natural assets, like water and air, went on to be consumed at considerable cost to the environment to feed financial returns.

But economic growth has ground to a halt and financial returns have fallen, with bonds hitting negative yields. A recent survey by Willis Towers Watson shows 61% of respondents expecting a lower return from financial assets over the next 20 years.   Around 67% believe returns from increasingly scarce natural assets will be higher. 

This means windmills would be a safer bet than corporate bonds issued by utilities. Agricultural land and forests will gain ground at the expense of real estate. People will pay for water security rather than bottled water. 

The recycling of assets through a circular economy will disrupt the continual use of new materials. Fiscal reform is on the cards. Plant-based Beyond Meat chief executive Ethan Brown has just called for a tax on meat.

Hodgson says: “Long-term investors should be thinking about the risks to corporate franchise value arising from inefficient use of natural ecosystem assets.”

Putting a price on natural assets would force market participants to ration their consumption, as is currently the case for physical, technological and human capital. Financial markets would punish conspicuous consumers, who would be forced to make economies.

Hodgson warns that progress will be challenging, not least because vested interests go into denial over threats to their way of life.  

In 2020 advisory group ISF identified rainforest funds worth $2.6 billion, largely created over five years.  But progress is slow. The United Nations’ REDD+ rainforest programme has run into a series of challenges from landowners and loggers. 

The idea of telling companies to account for environmental damage, and improvements, has been championed by Alan Schwartz, co-head of Australian family office Trawalla.  The IFRS Foundation which sets global accounting standards has been discussing sustainability standards. But talks have dragged on.

Independent commentator Duncan Austin used to be a partner at Generation Investment Management, a consistent outperformer thanks to its understanding of sustainable initiatives.  He says ESG suffers because it has been grafted onto a long-standing economic system that continues to drive behaviour.

Impact investing, preferred by family offices, can achieve more, particularly in terms of funding climate technology. 

Activism is also stepping up. According to a survey by Mercer, a rival investment consultant, investors are increasingly refusing to invest in companies who are travelling in the wrong direction.

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