Is the “Greta effect” going to last?

27/02/2020

Time magazine awarded its accolade of ‘Person of the Year’ in 2019 to climate activist Greta Thunberg, for “creating a global attitudinal shift, transforming millions of vague, middle-of-the-night anxieties into a worldwide movement calling for urgent change”.

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Whether or not the young Swedish environmentalist will continue to capture public imagination, the facts about global society’s effect on the climate will remain. More and more, I believe these will shape the economic framework we operate in.

The last 150 years have brought great improvements to our wellbeing and life expectancy, with millions of people lifted out of poverty. The world’s population has multiplied to 7.8 billion people, and the value of global economic activity has grown in that period from an estimated US$1 trillion to US$85 trillion.

Industrialisation, together with globalisation and technological innovation, have contributed to shape a period we can call the “Great Acceleration”.

Those socio-economic trends have of course been accompanied by earth-system trends, like the intensification of biosphere degradation, the increase in stratospheric ozone and rising carbon dioxide levels in the atmosphere. Manmade changes to the planet have been so significant in the last 150 years that scientists are referring to our times as a new geological epoch, the “Anthropocene”.

These changes are extremely significant to our economic system. In a 2018 report, the World Wild Fund for Nature (WWF) estimated the value of ecosystem services – the benefits of natural resources like clean air and soil nutrients – to be around US$125 trillion. Yet these precious and indispensable resources are under threat by the way we use the planet.

Traditional economic models have tended to ignore the environmental costs of economic activity. However, by attributing a financial value to natural resources, we can permanently move from a linear, take-make-dispose model towards a more sustainable, circular economy.

Such a transformation requires substantial product innovation – most products are often very difficult to recycle, for example – a change in the way we consume – with more focus on shared use – and wholesale reform in certain sectors. Despite the initial investment that will be needed, a more circular economy can bring numerous efficiencies – by reducing energy costs, limiting waste and strengthening supply chains, among others.

Today, companies with long-term thinking can grasp the opportunity to become more environmentally and socially sustainable, thereby gaining a competitive advantage over peers and creating value for all their stakeholders.

Of course, government support is often needed to catalyse this revolution, whether through adjusting regulation, tax incentives and state spending, but investors have an important role to play. This is not only because finance can provide the “fuel” for such transformation, but because investors’ collective influence can enable us to drive different aspects of the sustainability agenda, across sectors and borders.

I believe conditions are ripe for change and that we are starting to see the shoots of a significant transformation. For companies, today’s interest rates mean the costs of borrowing to invest in innovation and sustainability are near historic lows.

The growth of the market for green bonds – where money is borrowed explicitly for ‘green’ projects, like renewable energy – is evidence of investor appetite to lend for these kinds of investment. Further proof is seen in the rising demand for sustainable investment strategies, with more funds that target environmental and societal goals alongside financial returns being launched.

People might be cynical about the sustainability trend but, in so far as it shapes consumer tastes, it can play an important role in harnessing capitalism to provide positive outcomes for the planet.

While the “Greta effect” might indeed fade over time, I believe it looks likely that a sustainable economy might well become reality. As investors, we can not only look to contribute to this theme, but also aim to profit from it over the long-term.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

The views expressed in this document should not be taken as a recommendation, advice or forecast.