Tapping Planetary Boundary Funds to Discover Future Opportunities

Managers are using a science-based framework to identify environmental technology investments.

Global standards for measuring companies’ impact on nature are still evolving, but some existing methods already support investors in identifying technologies that are able to deliver sustainable growth.

Frameworks and scientific targets can guide investors to resolve today’s disconnect between finance and nature. The Science Based Targets Network has, for example, started to define targets in areas like deforestation, resource exploitation of water and ecosystems for agricultural land.

Given the devastating impact of human activity on nature, global standards are needed to assess and fully integrate nature-related considerations into the decision-making of financial institutions, as noted in the Dasgupta Review, a global review on the economics of biodiversity commissioned in 2019 by the UK government.

They are also needed to help investors allocate capital towards a sustainable economy. A recent thought leadership series by the EU’s main climate innovation initiative EIT Climate-KIC and UNEP Finance Initiative wrote that “whatever the outcome of the COP26 global climate summit in November 2021, the global economy is headed toward a radical transformation to low-carbon, net zero carbon and carbon-negative technologies, business models and market mechanisms”.

Working within limits

Sarah Cornell, Associate Professor at the Stockholm Resilience Centre, points to the potential of integrating planetary boundaries into asset management to drive worldwide change fast.

The planetary boundary framework was developed in 2009 to identify processes that regulate the stability and resilience of the earth system.

Johan Rockström, the former director of the Stockholm Resilience Centre, led a group of 28 internationally renowned scientists and defined nine quantitative thresholds – or boundaries – which, if kept in check, allow humanity to continue to develop and thrive.

Cornell explains the difficulty around setting meaningful nature-related targets: “Dialogues between science and business are not as well established, and fundamental information exchanges are often still too weak to allow robust target-setting and assessment of business action for global issues other than the very well-studied, well-understood climate system.”

The planetary boundary framework, as defined today, is not very operational, explains Anders Bjoern, Postdoctoral Fellow at Concordia University.

When he compares the framework with the targets of the Science Based Targets initiative (SBTi), he finds that the former has been set at a more precautionary level and lacks practical guidelines.

But its advantage is the framework’s holistic view and ability to identify trade-offs, he notes.

“If you only focus on climate change and you don’t consider other environmental problems, […] you could end up increasing other environmental types of stress like land use or water use,” Bjoern says.

Solutions to planetary deterioration

A small number of managers, including Pictet Asset Management, are applying the planetary boundaries in their investment process.

“[At Pictet], the focus was on deploying leverage for change to reduce the pressures on the nine planetary boundaries,” Cornell explains, who was involved in the work to operationalise the boundaries for the Swiss asset management firm.

The Pictet Global Environmental Opportunities (GEO) fund uses the planetary boundary framework to screen companies on environmental criteria, creating a ‘safe operating space’ within which the selected firms operate.

Jennifer Boscardin-Ching, Senior Product Specialist for Thematic Equities at Pictet, explains: “First, these global limits are translated into boundaries per unit of economic value creation. Second, the environmental footprint at sub-industry and company level is estimated relying on a life cycle assessment framework.”

The strategy then selects companies that derive at least 20% of their enterprise value (or sales, EBIT or EBITDA) from products or services actively solving environmental challenges, narrowing down the initial investment universe of 40,000 to 400 companies.

This thematic purity is measured by the positive environmental impact from a certain activity or value chain on at least one of the planetary boundaries.

Boscardin-Ching comments that Pictet believes that “over the long term, companies with the strongest environmental credentials – those which also provide solutions to help reverse ecological damage and increase resource efficiency – will be most in demand”.

The GEO fund, with €7.3 billion of assets under management as at end of February, outperformed its benchmark, the MSCI AC World Euro, in the last three years. It returned 15.71% versus 10.47%.

“Our core belief is that the true value of natural capital is not properly reflected in market prices, leading to overconsumption of natural resources and excessive pollution,” Boscardin-Ching adds.

Regionally, the fund invests predominantly in the US, with 55.44%, followed by France 6.48% and Germany 5.63%. The top three industry sectors of the fund are energy efficiency, with 36.34%, dematerialised economy, with 19.98%, and pollution control, with 13.69%.

US firm Tetra Tech, a leading provider of environmental consulting and engineering services, is among the top 10 holdings of the fund. It is specialised on innovative solutions for water, environment, sustainable infrastructure, resource management and energy.

Long-term risk framework

John Fleetwood, Director Responsible and Sustainable Investing at Square Mile, believes that applying the planetary boundaries helps to assess the “true sustainability of a portfolio”, along with an impact report.

But he also notes that “the framework appears to be more of a reference tool than a requirement to hit certain sustainable limits”.

While all investments in the GEO fund perform with a better environmental footprint on the boundaries than the fund’s benchmark, in some other funds they do not always, he says.

Pictet’s 2019 impact report for its Pictet Nutrition fund explains that its environmental footprint is higher than that of the MSCI World index along most of the planetary boundaries, due to the high environmental burden food production puts on the planet’s natural resources.

In Fleetwood’s view, the planetary boundaries represent more of a long-term risk framework which can be used as a reference tool but is less suited to define investment themes.

Meanwhile, Pictet is not the only asset manager who looks at the causes for the deteriorating state of the planet to identify solutions.

UK private equity company Earth Capital also selects technologies and investment themes based on solutions that can limit or reverse environmental damage on the planetary boundaries.

“The planetary boundaries are addressed [at our firm] through analysis of natural resources, ecosystem services and pollution control including those of energy, water, materials, biodiversity and climate systems,” says Richard Burrett, Chief Sustainability Officer at Earth Capital.

All investments must achieve a net positive score on the firm’s Earth Dividend scorecard, which enables a holistic understanding of the risks and impacts of sustainable development and where investments make a positive or negative impact.

Challenges and responsibilities

Cornell acknowledges that integrating planetary boundaries in investments brings huge challenges and new responsibilities.

“This is not so much a disadvantage as a wake-up to today’s reality, which asset managers have to factor into their thinking, planning and responding.

“Boundaries and thresholds are not just an extra line to add into a spreadsheet. If they are taken seriously rather than just as a splashing of greenwash, they are a radical rethinking of the place of the economy in worldwide society, and in the biosphere,” she says.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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