The economy is currently experiencing a change in outlook. Soil is an important factor in production. Therefore, it should be given a place on corporate balance sheets. This is a new investment theme with potential for returns, writes Alina Donets in an essay on finenews.first.

This article is published on finews.first, a forum of authors specializing in economic and financial topics.

“I invest in environmentally friendly businesses.” When customers make this statement, the megatrend of sustainability takes the lead in the financial sector. About twenty years ago, the still narrow but lastingly successful march of “green investments” began. The joint strategy is based on a best-in-class screening process in which investors’ money is funneled to companies that meet the highest environmental standards within their industry.

This focus inevitably leads asset managers to broaden their knowledge in this area and some even go a step further at this stage and additionally invest in companies that also develop products and services that contribute to the achievement of sustainability goals. Investment managers are thus able to specialize in key areas, creating performance advantages through their in-depth knowledge advantage. Thus, thematic investing allows a more consistent and attractive generation of alpha.

“This is exactly what some scientists say needs to change”

The industry has since preferred to sell certain subjects rather than financial products. It is more practical to be able to tell the client: By investing in this fund, you will benefit from technological progress. Or the aging of the population. Or electric mobility, etc. The list of potential themes is long as modern life is so complex. Thematic investing allows you to focus on factors that the investor can relate to, with consistent focus, attracting more capital.

Economics recognizes three factors of production. By combining these factors, goods are created and the cycle of economic activity is maintained: Land, labor, capital. Only two of them, labor and capital, have a price. Nature is seen as a commons and freely available – but that’s exactly what some scientists say needs to change. One of them is Partha Dasgupta.

He calculated that the world’s physical capital doubled between 1992 and 2014 and that human capital, that is to say the accumulated knowledge and skills of humanity, increased by 13%. Only natural capital fell by 40%. As a result, 1.6 Earths would be needed today to sustain humanity and its standard of living. Or to put it more bluntly: nature’s assets won’t last long. Unless the human species consumes less, grows more slowly, protects nature, uses it more efficiently and invests in its preservation. One way to achieve this is – as always – through a price tag.

“The financial industry is invited to give a new objective to its capital flows”

The United Nations Environment Programme, UNEP, shares this view. In the 2021 State of the World Report, governments are urged to include natural capital in their calculations of economic performance. Nature should no longer be freely available as a passive good, but its use or destruction should be put on a balance sheet. For example, through a certain price with regard to the emission of carbon dioxide. In addition, public subsidies should be moved away from fossil fuels and redirected towards nature-friendly technologies. Banks should stop lending for the exploitation of coal, gas and oil, and companies should avoid waste by promoting the circular economy, etc.

Consequently, the financial industry is invited to give a new objective to its flows of capital. More than 50% of the world’s GDP depends on nature and with a natural capital strategy, it is possible to invest in solution providers that help preserve nature by moving to leaner industrial processes, as well as to exploit its infinite potential and its regenerative powers by developing the circular bio-economy. I am convinced that a Natural Capital strategy contains an opportunity for above-market-average returns for investors along the way.

“A fund defines four dimensions of the natural capital theme”

To achieve this, a fund defines four dimensions of the theme of natural capital, first: life cycle economics, resource efficiency, results-based economics and waste prevention. After which, a best-practice approach is used to select small and medium enterprises that achieve efficiencies and closed loops throughout the production, consumption and disposal chain. Plus, we keep an eye out for innovators who are developing solutions that help preserve nature and harness its regenerative powers.

If the topic of natural capital becomes a mainstream issue in science, society and the financial sector, it could indeed be that the companies that today pride themselves on being ranked in one of the many ESG indices and almost naturally present their sustainable development reports, will be able in 2040 just as well to value the development of their natural capital as a factor of success and to report on their balance sheets in pennies and nickels.

Alina Donets is a portfolio manager in the Global Equities division of LOIM. She joined Lombard Odier Investment Managers (LOIM) in November 2020 and has been managing sustainable portfolios for seven years. Previously, she worked at Allianz Global Investors as a portfolio manager from 2017 to 2020. She was also a portfolio manager at Bank Audi. Previously, she worked at Pictet Asset Management as Investment Manager, Pictet Water, from 2013 to 2016 and as Supporting Investment Manager, Pictet Global Environmental Opportunities, from 2014 to 2016. She started her career as a graduate trainee at Pictet in 2012. She holds a Masters in International Business from HEC Lausanne and a Bachelor of Science in Business Studies from Cass Business School in London. In addition to passing the CFA exams, she obtained the ESG CFA certificate, the CFA Institute Investment Foundations TM certificate as well as the IMC certificate (Units I and II).

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