ESG Issue Brief: Sustainable Resource Use
Investors are increasingly including environmental, social, and governance (ESG) into their existing investment frameworks, causing firms to take notice and make sure their investment policies and practices align with the priorities of their investors or potential investors. We’ve put together a series of ESG issues investors are concerned about to help you speak to these concerns and adjust your practices accordingly.
Our progress as a species over the last few centuries has depended upon our continued extraction of resources from Planet Earth. As our population continues to grow and our economic system remains reliant on increased consumption, so too does our need to use Earth for everything she can provide, resulting in severe environmental degradation.
According to the United Nations, the global material footprint rose from 43 billion metric tons in 1990 to 54 billion in 2000, and 92 billion in 2017, making for a 113% increase since 1990. It is projected to grow to 190 billion metric tons by 2060. It seems our increasing footprint shows no signs of abating.
ACA’s Data & Analytics Solution, Ethos ESG, provides a comprehensive framework for understanding how companies and funds impact the broad cause of sustainable resource use, which includes the sub-causes of conflict-free mineral production, reduced waste and sustainable use of natural resources. This issue aligns with United Nations Sustainable Development Goals 11 and 12.
Discussing sustainable resource use
There are both financial and ethical/moral considerations related to sustainable resource use. We view it as important to address both aspects when talking with an investor, for very few decisions are purely one or the other. We believe that addressing these two aspects allows for a more holistic investment strategy. We believe it is possible to make money while also respecting the planet.
The question that constantly arises with sustainable investing is whether or not the financial side adds up. If the goal is to maximize a client’s (or even your personal) return on investment, does sustainable investing make sense?
In a Bloomberg article discussing renewable returns compared to fossil fuels, a particular global portfolio of renewable power companies posted an average annual return of 18% in the decade leading up to December 2020, compared to 4.7% for fossil-fuel stocks. The total return for renewables over this period was 426%, more than seven times that figure for fossil fuels.
Furthermore, according to BNP Paribas, SRI, ESG, low carbon, and clean energy indices have all outperformed over the last five years. They have also suffered lower drawdowns during the market corrections of 2011, 2016, and 2018.
Also according to BNP Paribas, SRI indices such as the MSCI World SRI have delivered a 14.1% compound annual growth rate since the beginning of 2016, 1.1% more than the MSCI World standard benchmark index.
The financial case for investing sustainably makes sense today, and it shows no signs of abating in the near future. ESG and SRI remain controversial topics. Does it really make a difference? Do they really matter? What about greenwashing, or the lack of standardization in measurement?
It is true that work remains to be done. Last year, Morningstar removed the sustainable label from more than 1,200 European funds. Clearly there are issues. But does that mean that we should not try? If the financial case makes sense, and you and your client are able to resolve the emotional component as well, then arriving at an investment strategy using an ESG/SRI approach should benefit all involved, including the planet.
Throughout the world there are examples of just how devastating our resource consumption has been. The Great Pacific Garbage Patch, the Alberta Tar Sands, and Amazon deforestation are among the most clear examples of what humans are doing to the environment. Other examples can easily be found.
Former California Governor Arnold Schwarzenegger was quoted as asking if it is acceptable that “7 million people die every year from pollution” or that “every day, 19,000 people die from pollution [directly] from fossil fuels?”
These are the types of questions that people have begun to ask themselves when deciding where to invest their money. Up until the last few years it has been easy for those of us who live in “advanced” economies to be effectively shielded from the direct consequences of our human action.
But recently we are being confronted with the results of our over-exploitation of the planet. Increased flooding, fires and drought over the last 10 years have shown us what will continue to happen if we do not change our relationship with our planet.
How we help
ACA's new ESG platform, which combines our Ethos ESG acquisition with our advisory services, integrates in-depth, transparent ESG data into your portfolio construction. It can help firms easily conduct ESG risk and impact diagnostics and benchmarks to understand how investments map to widely accepted sustainability frameworks, including:
- Evaluate investments by their sustainable resource use score, an aggregation of over 300,000 data points related to metrics such as sustainability disclosure shareholder actions and ethical sourcing of minerals.
- Use Impact Stories to show investors how investments in funds or companies make a direct impact on addressing our resource use.
- Use screens such as single-use plastic, or deforestation financing to understand a company or fund’s relationship to sustainable resource use
To learn how we can help your firm, please speak to your ACA consultant or contact us.
Read our other issue briefs
Other sustainable resource use tools
- Homepage - Altiorem
- THE 17 GOALS | Sustainable Development (un.org)
- ESG factors and equity returns – a review of recent industry research | Blog post | PRI (unpri.org)
This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this podcast constitutes a solicitation, recommendation, endorsement, or offer by ethos ESG or any third-party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.