Opinion: Our investment choices are costing the earth – radical transparency can change this
We need to halt economic growth to save the planet, but sustain growth to meet society's needs. Impact investing, particularly in energy, waste recycling and agrifood, can help overcome this paradox, says the co-founder of agrifood investor Astanor Ventures. But it needs to focus on three key principles.
Time is running out in the race to slash carbon emissions and repair biodiversity, with the goal of reaching net zero carbon emissions by 2050 as elusive as ever.
But, rather than making media-friendly pledges and grasping low-hanging fruit (such as taxing private aviation, which accounts for less than 1% of global emissions), world leaders must radically overhaul finance instead.
Only by aligning investment decisions with the UN’s 17 Sustainable Development Goals, and ensuring that industrial and services companies measure and incorporate in their P&L statements the full environmental and social costs of their operations – costs that are currently passed on to taxpayers or absorbed by Nature’s balance sheet – will we stand a chance of achieving the breakthroughs we need.
We must resolutely direct financing towards the reduction of all extractive and polluting activities while favouring the growth of all regenerative activities
Our civilization is facing a crisis that stems largely from a dilemma we, collectively, have not yet been able to face. Paradoxically, we need to halt economic growth to save the planet, but need to sustain growth to save a society that depends on growth to function. Impact investing, primarily in the sectors that most affect the health of our planet, such as energy, waste recycling and agri-food, is perhaps the most easily and directly applicable solution to overcome this paradox. We must resolutely direct financing and public and private action towards the reduction of all extractive and polluting activities while favouring the growth of all regenerative activities, from agriculture to energy production.
Time is running out for inaction. I have three suggestions.
1. Require radical transparency in every industry
Life cycle analysis (LCA) has been defined as ‘a method used to evaluate the environmental impact of a product through its life cycle, encompassing extraction and processing of the raw materials, manufacturing, distribution, use, recycling and final disposal’. Using this as a template, we need LCAs to be available online for all agri-food ingredients so end products can have a clear, informative electronic label, assembled from all the LCAs of its ingredients. In turn, consumers will be able to make an informed choice.
Of course, LCAs shouldn’t just become standard practice for the agri-food industry, but for every other sector, too, including consumer products and all industrial and construction projects (concrete, plastics, petrochemicals and so on). Recent deep tech (technologies based on engineering innovation or scientific advances, such as advanced computing or robotics) and AI-based developments have made this technologically feasible today, but governments and large corporations still need a firm nudge from regulators – what’s banned in the US and EU should be outlawed in South America, too – as well as increased pressure from consumers. (While consumers are increasingly holding businesses to account for their impact on issues around social justice and the environment, cost competition still affects consumer demand).
This means looking at how a business operates, and how it is valued, in a new, clear-eyed way (with rules and standards that in substance have yet to be written).
As the Financial Times’s Alan Livsey wrote of another industry, steel: “If a company was likely to face a bill in the future to buy permits to emit carbon, that is an impact that could be accounted for. Likewise, if an ageing steel plant had to be written down in value because its longevity is curtailed by tougher environmental standards, then an impairment is required.
“But how and which costs should be accounted are still being defined. I asked one steel sector analyst recently what they did to assess the financial impact of climate change on forecasts for the companies he covered. The response? Nothing. It was seen as too hard and there is too little clarity on what the standards of reporting should be.”
2. Ensure a multidimensional approach to investment and impact measurement
Second, I’m also advocating for a proactive, multidimensional approach from investors (including fund managers), which means measuring the full financial, economic, environmental and social cost of a product over time. Measurement is fundamental to the impact revolution and is why we should be incentivising impact investor-backed startups that can be designed and built to measure the effect they have on people and the planet from day one. The fact that most of these companies are still privately held and backed by venture capital and private equity investors – driven by impact missions – makes them capable of resisting the assault of the die-hard Friedman doctrine investors that are so active on the public markets.
My own impact investing firm, Astanor, for example, applies the venture capital philosophy to the creation of impact, with the aim of maximising not only return, but also impact. To do this we have defined six impact KPIs (key performance indicators) that enable us to capture a holistic image of our companies’ positive impacts on both people and the planet, across the entire agri-food value chain. These include three planet KPIs related to climate change (greenhouse gas emissions, water use and biodiversity) and two people KPIs, related to social and health crises. We also have a third category of ‘enabler’ KPIs, necessary to assure our collective advancement towards global climate goals. Today, we have one enabler KPI, impact intelligence, which measures the impact of technologies that provide intelligence to facilitate informed decisions and support impact creation for both people and the planet.
We establish metrics for each portfolio company based on an industry baseline. For example, greenhouse gas emissions are measured in “avoided emissions” in CO2 equivalent; biodiversity is approached through a range of metrics such as reduced land use and reduced use of pesticides and fertilizers; social KPIs can quantify how the company contributes to the financial stability of producers, such as increase in farmer remuneration.
3. Understand Nature’s ‘balance sheet’ and the cost of repair
This multidimensional approach to investing exposes the deep flaws inherent in an accounting model that is no longer fit for purpose. We must replace it with a new standard – the double or triple bottom line – which factors in the full financial, economic, environmental and social impact a company and its products or services have on the world. However, even that model would only make sense on its own if we were more or less replenishing the resources we extract or deplete. Instead, our impact on the world continues to be net negative. So, while having all the available data at our fingertips to inform better decision-making is critical, it’s certainly not enough. That’s why we must also factor in the cost of repair.
Zeroing in on nature’s balance sheet forces us to confront the complete picture and either replenish and remediate – or cease activities altogether
If we look at the issue in legacy accounting terms, it’s as if we are still fixated with nature’s P&L account when we should also be considering its balance sheet, including all ‘assets and liabilities’ and encompassing everything from the quality of the air we breathe, to that of the land, oceans and freshwater bodies, and the biodiversity teeming within it all.
Zeroing in on nature’s balance sheet forces us to confront the complete picture and either replenish and remediate where we can – if it is feasible from a technological and financial standpoint to do so – or cease altogether activities that cannot be reversed. To succeed, clearly this would entail monitoring and holding to account those who fail to act within recognised guidelines, with the cost of replenishment being borne by the government department, company or organisation responsible. Monitoring and enforcement would be no small task. Yet there are promising signs that things are already beginning to move in the right direction, at least in the crucial world of finance and investing.
- Adapted from Costing the Earth: How to Fix Finance to Save the Planet by Eric Archambeau. The author is an engineer, venture capitalist and the co-founder and partner at Astanor Ventures.
Top photo by Chris LeBoutillier on Unsplash
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