Stephan Langen: From Paris to planetary boundaries
This column was originally written in Dutch. This is an English translation.
By Stephan Langen, Head of Portfolio Management at ASN Impact Investors
Planetary boundaries are an important and beautiful concept. But how can we as investors incorporate this principle into our selection and our actions as shareholders?
It sounds like a platitude, but it is a truism: we only have one earth, so we must take care of it. We have known for a long time that there are limits to what the planet can provide us with in terms of resources such as water, fertile land and clean air.
More than global warming and biodiversity
In 2009, Swedish earth scientist Johan Rockström mapped the planetary boundaries. He formulated nine boundaries within which humanity must operate in order to continue to make sustainable use of resources. Six of these have already been amply exceeded.
The charming thing about those boundaries is that they are about more than global warming and the loss of biodiversity. Water scarcity, ocean acidification and chemical pollution also set limits to our (economic) actions.
Business research remains limited
I recently came across research on how the concept of planetary boundaries is embedded in business research. The conclusion: the subject receives little attention, researchers mainly focus on the impact of climate change. The holistic view of planetary boundaries is still lacking in empirical research on companies.
I also see this reflected in financial and economic research and investment practice. Financial return thinking still prevails and can easily be translated into measurable objectives. When it comes to sustainable selection and formulating sustainable policy choices, we still mainly focus on (limiting) climate change and combating biodiversity loss.
Companies pay for acidic oceans
It has dramatically increased the demand for data that helps prove that companies are actually making an impact. As far as climate impact is concerned, a lot of work has been done on a simplified method to measure this effect. For biodiversity, the development is somewhat more recent and it is also much more complex, not to mention human rights.
These are necessary steps on the way to investing within planetary boundaries. Testing and exceeding those limits is not (yet) incorporated as external costs in our economic systems, let alone that we can hold an individual company accountable for ocean acidification or the hole in the ozone layer.
Paris Planetary Agreement
To map these external costs, more research is needed, from a business perspective and from a financial and economic point of view, into the interrelationship between certain economic actions and the planetary boundaries. One step further is making the influence of companies on those boundaries measurable. Perhaps one day there will be a 'Planetary Paris Agreement', in which we make agreements that are much broader than those on emissions.
Should we wait for that? What applies to the climate also applies to those other terrestrial boundaries: as the negative impact increases, the risks also increase rapidly, especially for companies with high external costs that are still being passed on to the planet and thus to the future generations.
Getting started with planetary boundaries
As far as I'm concerned, these are risks that you as an investor can already deal with. Even within a portfolio carefully constructed based on sustainable principles, the principles of planetary boundaries offer starting points for further analysis. It can be quite thorough, because I have said it before: anyone who really invests sustainably knows what he owns. So know what you own!
A company may be Paris-aligned according to the available data, but does the board act with the realization that there are more planetary boundaries than global warming? And does it conduct research into the relationship between its own activities, those of suppliers and customers and the use of scarce resources? The interconnectedness of planetary boundaries requires a different way of thinking, outside the silos of one's own chain.
External costs and risks priced in
The investor who now looks through the holistic lens of a livable planet will in the long term benefit from a robust, future-proof portfolio. Economic principles still dominate in which external costs do not count, but they do not last forever. Sooner or later, planetary costs and risks are priced in.
Don't wait for that moment, but explore the principles behind planetary boundaries! Let's try to respect those earthly boundaries together!
Stephan Langen is Head of Portfolio Management at ASN Impact Investors. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments.