Here are some thoughts on the environment and sustainability leading to our investment philosophy.
The climate is changing our environment. The planet’s glaciers are melting and sea levels are rising, deforestation is changing our biodiversity and pollution is affecting the quality of land, air and sea. Although some of these changes can be down to cyclical swings in-between ices ages, there is no doubt that humans are speeding up the rate of change. Wasteful and ignorant with regards to our role in the eco-system it’s time we woke up and became aware of our impact on the environment we habit and the planet we call home. Mindfulness in our actions now leads to a sustainable approach where we understand the limits of our planet’s resources are no longer optional. It is a must.
To that end, measuring our impact and actions has become a top priority. Some say we can only manage what we measure, however, I kinda disagree, I would like to think humans are more than just robots and our intuition and moral compass can help us a very long way down the right path. Still, the ESG (Environment, Social and Governance) movement is gaining momentum and rightly so. It is at its core it is a very progressive and noble effort to try and quantify some second derivatives to the actual cost of doing business. The current financial framework is ill-equipped to deal with anything outside the well-established number-crunching matrices dealing with free cash flows and bottom-line returns. The effort is worldwide, and several NGOs are cropping up in its support. However, with a global economy made up of a whole heap of different fiscal jurisdictions and local idiosyncrasies the ESG data is open to interpretation and benchmarking is more of an art form than anything else. In addition, the ESG effort is entirely voluntary without a global regulator to enforce it. Therefore, it is in practice very difficult to validate, verify or even reference the data with much confidence. Without policing and with lax regulation, one has to be aware of its potential misuse leading to “greenwashing” and other marketable schemes taking advantage of an unsupervised playground. Furthermore, one should note that anything data-intense that uses multiple vectors and variables, is likely to be very subjective and hard to interpret. For example, what does having a net-zero carbon footprint mean in today’s world? Carbon emission(s) is a great example because like everything else under the sun it is a tradable commodity. That means as a company you can spew out carbon emissions but if your product makes enough money you can afford to simply purchase the carbon offset and report that you are a net zero producer.
When something gets too complicated it is time to reassess. Firstly, what are we trying to measure? An individual company’s impact on the overall climate change? Or, how does it performs to its peers? These are very complicated questions to answer period. Secondly, transferring the essence of these questions into formulaic equations is not that straightforward either and thirdly, finding the data to work with, as mentioned above, is at best tricky. But by taking a more holistic view on the matter and answering some more fundamental questions such as what is a good way for us to reduce our impact on the climate and is there a process that is more resource-friendly than others? We can use our common sense and moral compass to start down the right road towards something we know is right. As a consumer or an investor, at some point there has to be an awakening and an acceptance that something needs to be done for the environment and the sustainability of the planet. We simply have to square away that the take, make and waste philosophy is no longer viable, and another model is needed. Some awareness that the classical demand-supply model has limitations would also be useful, where the assumption that market forces will always find a solution via the pricing mechanism and resources are limitless. So if we are trying to measure the climate impact we are talking about the environment. But the environment is more of an output than input, I guess this is a chicken or egg question, but for our purposes here we assume it is. Sustainability is a process and therefore can more readily be seen as an input. Thus, sustainability is what we should be looking at to improve if we want to affect the outcome, i.e. the environment in a positive way. In essence, sustainability is resources management and we want our resources to last as long as possible, indefinitely even. The circular economy approach is a framework that aims to do just that, keep resources in play for as long as possible. The coolest part about this approach is that you do not need to be an expert to give a fair assessment of whether something is intended to be wasteful or not. As a consumer, it is possible to quickly make that assessment. The concept of circularity undresses the question of intent very elegantly. The first principle for sustainability production is to keep resources in play for as long as possible. That means the design is the key. If a product, or even a service, is designed to be kept in circulation for a long time, well that clearly shows intent (by the company). If the input in making this service or product comes from renewable resources then that is amazing. And if when you are done the product and service it can easily be recycled, you can kind of make a very fair judgment about the company producing the good or service. Because no matter what the ESG data say or does not say, the circular approach to production, does more to confirm the intent of a company’s approach to deliver on sustainability and hence, therefore, positively affect the environment.
So, when we look at investments, we are in reality looking at the intent of the producer or the manufacturer. Is it designed to be recycled or repaired? Are the materials sourced sustainably? What does the product look like, meaning who makes it and how (this is where ESG data becomes very important and useful)? What does the lifecycle for the product look like? Is it easy for me as a consumer to recycle it? Of course, very few companies are circular in the broader spectrum, it is very hard to do, I mean, the world is not set up for it. For many, they are at a very start of a long transitional journey, some are further down the line and some are almost there. What is important is intent and progress. If management has bought into the transition journey and set realistic goals then that is a big step. If some form of circularity has made its way into the huge production line. E.g. if one pair of shoes are designed and produced according to circular standards mentioned above, well then, the know-how is there, it is just a matter of scalability and costs. Scalability means that if they can circularly make one product then the know-how and competence are there to make all production as circular as well.
Be mindful when consuming or investing. Choose wisely.
Above all be kind and loving to everyone in your ecosystem!