Fund managers Invesco published a paper last week called ‘Appetite for change: food, ESG and the nexus of nature’ which looks at the impact of the Covid pandemic on ESG considerations.
We have picked out some of the key points from this paper below and added our own commentary in blue.
Before we look at Invesco’s paper and the points they raised, lets recap on what ESG is.
ESG stands for Environmental, Social and Governance. Investopedia definition for ESG is; ‘Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.’
The key points raised by the Invesco paper are as follows:
- The COVID-19 crisis has demonstrated that humanity’s understanding of its own relationship with the natural world remains inadequate – often dangerously so.
- The pandemic has particularly exposed the interconnectedness of numerous existential threats, all of which might be described as components of the “nexus of nature”.
- One of the most perilous yet underappreciated of these threats is the unsustainability of prevailing attitudes towards food production and consumption.
- From the use of resources in developing countries to policies and practices around factory farming in the industrialised world, this issue affects the entire value chain.
- Guided by the idea of materiality and initiatives such as FAIRR (Established by the Jeremy Coller Foundation, the FAIRR Initiative is a collaborative investor network that raises awareness of the environmental, social and governance (ESG) risks and opportunities caused by intensive animal production), investors are increasingly applying environmental, social and governance (ESG) principles in this sector.
- As well as promoting and protecting sustainable investments, these efforts are showing how positive change in one area can benefit the nexus of nature more widely.
- Interconnectedness means that the ripple effects can encompass concerns including deforestation, biodiversity loss, waste pollution, climate change and human health.
The ‘nexus of nature’
The longer-term survival of our planet and its inhabitants is strongly connected to various existential threats that are themselves highly interrelated. They include climate change, overpopulation, deforestation, loss of biodiversity and – perhaps least appreciated – the ways in which food is produced and consumed. In turn, each of these has a major influence on our health and wellbeing.
The World Economic Forum’s latest Global Risks Report underlines this. Eight of the 10 potentially most impactful risks over the next decade can be linked to humanity’s tendency to take the natural world for granted. Only weapons of mass destruction and cyber-attacks can reasonably be thought of as removed from the nexus of nature.
Why is it so important to grasp how food production and consumption might fit into this picture? The short explanation is that many of the practices that have become commonplace in the face of ever-rising demand for animal protein have consequences that are both far-reaching and deleterious. There may be no better illustration than the circumstances behind the advent of COVID-19.
As has been extensively documented, one of the likeliest sources of the outbreak was a “wet market” where livestock was reportedly kept in close proximity to dead animals. Here, originating either in bats or pangolins, the virus is believed to have been transmitted to humans via a process of zoonosis.
Something analogous happened in the late 1990s, when the emergence of the Nipah virus provided a salutary demonstration of how the nexus of nature can function. Native fruit bats were driven from their traditional habitats by deforestation; they started foraging in trees near farms; through their bodily fluids, they infected land used for raising pigs; and the pigs duly passed the disease on to farmers and abattoir employees.
Similarly, the SARS virus of 2002 is now thought to have come from horseshoe bats, eventually reaching humans via consumption of cat-like mammals known as civets. This, too, was an ominous warning of our collective vulnerability to a type of natural hyperconnectivity that is often woefully underestimated or wilfully ignored.
At first glance, given the circumstances surrounding these examples, it may be tempting to infer that the nexus of nature is at its most threatening in relatively rural settings or in developing economies. In fact, this is far from the case. As we explain in the next chapter, the phenomenon is present throughout the value chain of food production and consumption and represents a genuinely worldwide concern.
According to the World Economic Forum (WEF), risks related to the natural world now dominate the existential threats confronting humanity. They have gradually displaced economic, geopolitical and societal concerns in recent years, particularly since 2011.
The top 10 potentially most impactful global risks over the next decade, as collated in the WEF’s latest report, are shown below. Note that even those classified as societal are in some way linked to nature.
Intensive food production through the lens of material ESG risk
The FAIRR initiative is a collaborative investor network that raises awareness of the ESG risks and opportunities caused by the intensive farming of animals. Through its research, it helps investors integrate such factors into their decision-making and active stewardship processes. FAIRR has identified 28 material ESG issues that could affect factory farms’ financial performance and returns. Set out below, they include community health impacts and infectious diseases.
The COVID-19 crisis has underlined the hyperconnectivity of multiple existential threats, all of them constituents of the nexus of nature. It has also highlighted the position within the nexus of food production and consumption, and in doing so it has provided a stark warning that many of the prevailing policies and practices within this arena are likely to prove unsustainable.
Of course, investors have no more entitlement than anyone else to pass judgment on what is right or wrong. They are not self-appointed saviours or heroes. They do not constitute a deus ex machina for this sector or any other.
Relatedly, investors do not have all the answers. In food production and consumption, as in so many corporate spheres, progress and transformation stem in the main from the companies themselves and from the gathering weight of scientific evidence.
What investors do have, though, is capital; and it is capital that enables positive, lasting change to take place. This has already been demonstrated in a variety of settings, and it is now increasingly being demonstrated in reshaping how we meet the challenges of feeding an ever-growing global population – as we will explore in more detail in our next paper.
By applying ESG principles, investors can make a difference – one likely to have far-reaching impacts. This is the essence of responsible investing and shareholder capitalism, as is already well known, but it is also the essence of the nexus of nature. Positive, lasting change in one area should lead to positive, lasting change in many others – just as the bleak effects of taking the natural world for granted in one area have been felt in many others in the past.
Deforestation, biodiversity loss, waste pollution, climate change, human health – responsible investments in food production and consumption can play a part in addressing all these issues and many more. Nature’s boundless imagination, as so admired by Richard Feynman, guarantees as much.
Feynman once also memorably remarked: “Nature cannot be fooled.” This truth has become all too obvious in recent decades and during 2020 in particular. By engaging with companies and policymakers and by supporting initiatives that prize sustainability, transparency and accountability, investors can go a long way towards helping ensure that humanity does not fool itself.
We have been talking about ESG for a while now, and as we have noted before, the pandemic has really put this topic under the spotlight. As you can see from the key points of the Invesco paper that we have picked out, ESG is a wide-ranging topic and is much more than just ‘being a ‘good’ investor.
The principles behind ESG need to be embedded in an investment framework which encourages positive change.
We build ESG into our ongoing due diligence process to ensure we have a wide range of ‘core investments’ for our clients, which not only seek to provide good returns, but also to drive ESG forward and make lasting and positive impacts in the world.
More investment managers and fund houses are launching ESG investments or starting to move in the right direction with their existing investment offerings, engaging with businesses they invest in.
The demand for ESG and socially responsible investments is growing. Even in the past few months, the term ESG is seen much more in the financial press now than it was.
One thing investors and we as an independent financial advice firm need to watch out for is ‘greenwashing’.
Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.
This can be an attempt to capitalise on growing demand for socially responsible investments.
We recently watched a webinar by Royal London on responsible investing and they highlighted that 85% of funds labelled ‘green’ have misleading marketing* (*Source: 2degrees investing initiative, 2020).
We try to avoid ‘greenwashing’ by doing thorough due diligence, such as asking investment providers questions such as ‘what are their responsible investment policies?’ and ‘how is ESG integrated into investment decisions?’
Our due diligence process is also ongoing, we make sure we stay in regular contact with any of the investment providers we recommend ensuring we understand their investments and investment decisions on an ongoing basis.
The Invesco paper looked at here in this post, gives some food for thought. Invesco are a large investment house and we rely on their input and updates to help us get a handle on key investment issues alongside their peers. We quickly understand the consensus view.
Stay tuned for more on ESG and socially responsible investing along with our regular blog content providing updates and insights from a range of fund managers to help you understand what is happening in the markets and the world.