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May 2021

Equity Investing and Natural Capital

A large share of the world economy relies on natural capital. Since 1970, our ecological footprint has exceeded the Earth’s rate of regeneration. We look at the related risks and opportunities for equity investors.
A few years ago, I met one of the largest global food product companies for a presentation on their ESG initiatives. Towards the end of the meeting, I realised that they had only spoken about climate change and carbon, and so, I naturally asked them about their packaging policy. Their answer was clear: we have to stay focused and cannot tackle all issues at the same time. Today, many consumer product firms are desperate to source more plastics from recycled sources, as more consumers embrace environmentally friendly behaviours and regulators are increasingly stepping in. However, there is not enough recycled plastics available for everyone and those who have acted early now have a competitive edge. This anecdote illustrates the risks associated with a poor management of natural capital, but also the opportunities.

Analysing biodiversity loss

The World Economic Forum has warned us that the risks related to biodiversity loss and natural capital have significantly increased over the last few years. However, doing a thorough analysis of those risks is all but simple. In our investment process, we put an emphasis on certain key metrics related to natural capital, such as recycling rates, water management or pollution. However, comparable data are still lacking, in particular in the domain of biodiversity. The Task Force on Nature-related Financial Disclosures aims to clarify the metrics required by financial institutions around those risks, and plan to test-run a reporting in 2022. Last year, Bank J. Safra Sarasin became a founding signatory of the Finance for Biodiversity pledge to increase and share knowledge in the area of biodiversity, establish a dialogue with invested companies, and publish transparent reports.

Harnessing opportunities in biodiversity

We have developed a framework that groups nature-related challenges into water ecosystems, soil, and air. In our view, opportunities across these categories will be driven by three main factors. Firstly, we have already touched upon the importance of growing awareness with the example of recycled plastics. This would also apply to other environmentally friendly products, such as electric vehicles, water efficiency or renewable energies. Secondly, the falling costs of green solutions will also be a key growth driver. Over the past decade, the cost of renewable energies, hydrogen and water treatment have gone down significantly and are in many cases at par with conventional technologies.
Source: Bank J. Safra Sarasin Ltd
Finally, new regulations based on net-zero carbon targets or stimulus plans have never been more favourable for environmental solutions. The EU Green Deal, for example, is expected to bring EUR 470 billion of extra investments, spread over energy efficiency, the circular economy, and environmental protection.
In our view, this environment is particularly positive for early stage businesses, as they now have enough visibility to develop and market new technologies. For example, our JSS Sustainable Equity – Green Planet strategy owns companies that have developed enzymes to depolymerize and recycle PET plastics. Although we need to be aware of equity valuations, we believe that these companies have many years of growth ahead and represent tremendous investment opportunities.

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