In his August blog, Simon Zadek lamented that while "responsible investing has been shown to be both practical and often profitable … the sad truth is that financial markets remain disengaged." This echoes the conclusion reached in a report produced by the University of Cambridge's programme for sustainability leadership, as part of its Natural Capital Programme earlier this year.
The report suggested that while certain environmental issues are certainly moving up the investment agenda, most investors remain unfamiliar with the general concept of natural capital. This is defined as the sum total of nature's resources that underpin human survival and economic activity, including agricultural crops, vegetation, wildlife, fossil fuels and mineral deposits.
If considered at all, natural capital is largely seen as a long-term issue within markets that are institutionally focused on short-term returns. Since the metrics and measurement tools required to translate natural capital into quantitative, material assets are inadequate or insufficiently developed, its potential financial cost is largely invisible within financial markets.
While incentives for responsible management of natural capital are also limited, perverse incentives to do the opposite continue to be widespread and entrench damaging practices. At the same time, the current profusion of disclosure-based initiatives tends to be disjointed and ineffective in the delivering a model for valuating natural capital that can be adopted by mainstream investment practice.
It is easy to become pessimistic about this pattern. Drawing from recent economic history (notably the credit crisis), this imbalance of incentives is unlikely to change until natural capital is upgraded to a point that it becomes a financial imperative to consider it more highly when investing. The timescale for this happening is thought to be within the next five to 10 years.
However, the publication of From Red to Green? How the Financial Credit Crunch Could Bankrupt the Environment by Paul Donovan and Julie Hudson offers hope of a different outcome.
Several commentators (including Lord Stern) have drawn parallels between the financial credit crunch and the similar crisis that we are arguably approaching for the environment. The New Economics Foundation has devised the Ecological Debt Day, marking the point in the year when "human demand on ecological services begins to exceed renewable supply". This day fell on 27 September 2011 and from that point onwards the world has been theoretically operating in ecological overdraft – an unsustainable burden for the environment.
However, the Red to Green book is the most detailed examination that I have seen so far on the potential impact of both crises on the global economy. Its authors examine a future where supply and demand dynamics are affected by weaker consumers and government spending caused by the credit crisis on the one hand, and constraints posed by a depletion of natural capital on the other.
They also suggest some of the policy interventions that could play a part in maximising economic growth and environmental sustainability in a changing economic and environmental climate.
A panoply of social and economic areas are covered, with chapters on food, water, energy, infrastructure, housing, consumption, health, as well as education, work and leisure.
The importance of this study, however, lies not only in its depth of analysis, but in the position of its authors. Both hold prominent roles at investment bank UBS. Furthermore, and most encouragingly, their analysis is now being woven into the company and sector reports that are sent out on a regular basis to their corporate and institutional clients.
The sad truth may be that financial markets remain on the whole disengaged. However, this is surely an important signal that natural capital is becoming a more visible part of mainstream financial analysis and economic decision-making.
Emma Howard Boyd is head of socially responsible investment and governance at Jupiter Asset Management
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