Considering climate and nature impacts in investing is not just a matter of values but a way to mitigate systemic risks. Financing the transition unlocks interesting new opportunities for responsible investors.
“Responsible investing is not that easy at the moment,” said Kim Pessala, Managing Director at Evli Fund Management Company, in his opening words at Evli’s traditional ESG Days in September 2024. The two-day event brought together a large group of investors and Evli’s asset managers and specialists to discuss the most pressing topics in responsible investing.
“You need to know what the right things are, what affects the environment and climate, and integrate these into investments, while facts and values are constantly changing.”
Pessala says responsible investing has become significantly more complex over the past couple of years. Topics like biodiversity loss and planetary boundaries, which are more complex and harder to measure than carbon dioxide emissions, have quickly gained attention alongside climate change. Meanwhile, global capital has flowed away from responsible funds, and anti-ESG has received a lot of media attention, especially in the U.S.
Despite the challenges, Pessala emphasized that responsibility is not something to be overlooked in asset management.
“We know things are moving in the wrong direction at a quick pace, and the speed of change is only accelerating. At Evli, we believe this is a damn important issue, and it’s part of all our strategies. We are thinking about how to move forward, not just for the next couple of years but over the long term as well.”
Making science-based investment decisions within planetary boundaries
The investment community is increasingly discussing the Earth’s carrying capacity. The planetary boundaries, developed by the Stockholm Resiliency Institute in the University of Stockholm, are science-based limits for consumption, production, waste and other human activities in nine categories. Six of these limits – freshwater use, land system change, biosphere integrity, climate change, biochemical flows of nitrogen and phosphorus and so-called novel entities – have already been crossed.
For investors, planetary boundaries offer a way to assess companies’ environmental impact and risks more comprehensively, based on science.
“This is not a value-based choice but a systemic risk. It’s in the investor’s interest to minimize this risk,” pointed out Outi Helenius, Director, Impact, Investments and ESG at Security Trading, a family investment company focused on creating a more sustainable and resilient future.
At Security Trading, the goal is to base all investment decisions and impact assessments on science. Helenius urges more companies and asset managers to ground their decisions in scientific research and account for planetary boundaries and the interconnected systems.
Companies should adopt science-based climate and nature targets. Investors, in turn, can demand concrete actions from companies to achieve these goals and finance the transition to environmentally sustainable business.
Planetary boundaries can also help identify exciting investment opportunities. Solutions can be found in areas such as clean energy, a circular economy, sustainable food systems, restoration and renewable resources.
“There are solutions, but also a lot of work to be done,” Helenius summarized.
Investors must consider nature and climate impacts together
Exceeding Earth’s carrying capacity will lead to many irreversible changes, pointed out Georgi Agiashvili, Analyst at Security Trading.
Researchers have identified sixteen global tipping points triggered by climate change and biodiversity loss. After the tipping point, the impacts cannot be reversed.
“When nature is stressed a lot for a long time, it no longer recovers but seeks a new balance. The surprise in this is that the change doesn’t happen in a linear way but can occur very quickly.”
Nature’s systems are interconnected, and changes do not happen in isolation, meaning companies’ impact on nature and climate cannot be viewed separately. Relationships between systems must be considered when assessing risks.
The changes can also accelerate each other. For example, deforestation in the Amazon region affects both biodiversity loss and the amount of carbon dioxide forests can capture. We are alarmingly close the point where the rainforest will turn into savannah. As the carbon sinks get smaller, the climate warms even faster, which in turn accelerates biodiversity loss. Even if global warming was curbed within the Paris Climate agreement, the Amazon rainforest could reach its tipping point if deforestation continues unchecked.
Thus, investors must better understand the relationships between nature’s various systems when weighing investment risks and opportunities, Agiashvili emphasized.
“We need to focus on more than just reducing emissions.”
Even if the future looks grim from the scientific perspective, Agiashvili wanted to encourage action and optimism. Humankind has taken successful collective action before.
“Curbing ozone depletion is a good example of how people can tackle planet-sized challenges collectively.”
Accelerating the transition unlocks investment opportunities
The scope of responsible investing is expanding and becoming more complex. Globally, investors are now talking about geopolitics, the human rights aspects of climate change and biodiversity loss, and just transition.
The focus of responsible investing is also shifting. While it used to revolve around divesting questionable companies, now the focus is on financing the transition.
For investors, financing the transition is a challenge and an opportunity. On one hand, the transition needs a lot of raw materials and metals, while their production still has many unresolved sustainability issues. On the other, future climate technologies and solutions that enhance climate resilience in fields such as health care and clean water production can offer interesting investment opportunities.
According to Outi Helenius, there is a need for both capital and international legislation to speed up the transition. Investors, however, shouldn’t rest on their laurels while waiting for legislative changes. Addressing environmental challenges and impacting the predictability of the future operating environment is still many times cheaper and easier in this decade than later. However, current actions and commitments are not enough to halt irreversible global changes.
“We shouldn’t be thinking about whose responsibility it should be; we should be taking action already.”
