On Earth Overshoot day, insurance asset managers warn of the threat resource wastes poses to the economy and society, while highlighting tremendous investment opportunities in the old game of supply and demand.
Never heard of Earth Overshoot Day? You likely wouldn’t be the only one.
It is the day on which humans have used more ecological resources than the Earth can regenerate in a twelve-month period. A day that has gained attention from insurance asset managers.
The Global Footprint Network, a think tank, calculates the number of days of a given year that Earth’s biocapacity suffices to provide for humanity’s Ecological Footprint, while the remainder of the year corresponds to ‘global overshoot’. As of today, 2nd August, humanity has used up all of these ressources, meaning that by the end of the year it would have used 1.7 Earths-worth of resources to satiate its ecological footprint.
This year, overshoot day has come later than in the past two years, but the overall trend between 1971 to 2005 has been for the day to come earlier each year, broadly levelling out since then.
However, Jonathan Toub, portfolio manager on the Aviva Investors Natural Capital Transition Global Equity strategy, says that the stabilisation of resource use is unlikely to reflect a step-change in behaviour. Even if more people appreciate the need for a circular economy, he says. “It is still far more likely to be the result of the current economic slowdown,” he says.
Earlier this week, Aviva investors and AXA Investment Managers, called for a shift to more circular economic models and highlighted investment opportunities in the areas of waste, packaging, sustainable agriculture and technology.
At Robeco, Jan Anton van Zanten, SDG strategist, says: “Companies are heavily dependent on natural resources. Their depletion, such as the exhaustion of cropland, degradation of forests, and the decline of marine ecosystems, presents financial risks for the companies that are dependent on them, either directly or through their value chains.”
The same goes for the public sector, he continues. Governments, countries, cities, and regions whose natural resources are depleting rapidly will have less natural capital and thus lower productive capacity. “Those are risks that are financially material.”
Van Zanten explains that Robeco’s ESG analysis identifies companies that are more efficient and thus use fewer resources to create their products.
“And we seek the ones that build new business models, such as those with circular economy processes,” he adds. “We do the same for governments, where we for instance see how much natural resources countries are using.”
The framework goes beyond looking for investment opportunities with limited impacts on natural ressources, but also aims to identifies companies and government that “contribute to solving global sustainability challenges”.
Ecological budget vs carbon budget
At M&G Investments, head of impact investing Ben Constable-Maxwell sees Earth Overshoot Day as a powerful way to shine a light on the broader ‘ecological budget’, in contract to the more familiar concept of a 'carbon budget' (the amount of carbon we can emit while staying within a safe global temperature range).
“[An ‘ecological budget’] covers the sum of the natural resources that we use up every year. This includes reserves of fossil fuels such as oil and gas, minerals like copper and iron ore, and productive land on which we can grow crops to feed the global population. The Earth has a planetary budget and we've thrown it into deficit.”
He adds that that deficit is a signal that society needs to shift towards more efficient and sustainable consumption and production practices. “For example, the vast majority of the world's electronic waste, which contains scarce and valuable minerals, is not being safely managed. Extracting value from this strange treasure trove supports both sustainable outcomes and economic value.”
Similarly, we waste nearly a third of the food produced globally, either during harvesting and distribution or once it reaches the consumer, Constable-Maxwell continues. “Tackling food waste and supporting more efficient agricultural practices can preserve valuable resources and cut GHG emissions. Roughly 10 million hectares of forest are destroyed every year mainly for agriculture and timber. Moving to a more sustainable, efficient agricultural system can dramatically reduce the use of land, water and harmful chemicals.”
And so in a nutshell, “while the annual occurrence of Earth Overshoot Day acts warns us of the urgent need for change”, it is also the recognition of “an enormous commercial opportunity”.
Investment opportunities
Such opportunities can be found in the technology sector, where M&G’s sustainable and impact funds invest. For example, it invested in Tomra, which uses sensor-based technologies to tackle waste from food, mining and recycling and aims to change consumer behaviour. It also invested in simulation software producer Ansys, which cuts material use and waste in design and engineering processes for a range of diverse industries. Another investment was made in plastic recycling business UBQ Materials, which is transforming household waste into valuable consumer and industrial materials.
All these companies “are designing solutions to tackle individual aspects of the 'overshoot’ challenge. In doing so, they are helping to create a more circular and sustainable world – and pushing back the date of Earth Overshoot Day”, Constable-Maxwell says.
Jack Dempsey, fund manager at Schroders, predicts that by 2050, with the UN estimating the global population to be close to 10 billion, we would need the equivalent of three planet Earths.
“The simple answer to this issue is to decouple economic growth from resource consumption,” he says. “This is easier said than done given that GDP and our ecological footprint have a 96% correlation.”
Data suggests the only times Earth Overshoot Day has moved backwards was in times of recession, he says. “Negative economic growth [is] the wrong answer. Similarly, the countries or regions that are living within their natural capital budgets tend not to have high standards of living as per the UN’s Human Development Index. If the answer to sustainability is lower living standards, then, again, it is the wrong answer.”
Like his peers, he says, the only solution is transitioning to a circular economy. And like his peers, he sees this transition as an investment opportunity.
“We see the circular economy theme as one of the strongest secular growth trends over the coming decades,” Dempsey says. “There is an opportunity to invest in the companies, both in the listed and private markets, that can enable it.”
Schroders’ confidence in this trend is simply based on the fact that there are no alterantives: there is only one planet earth. Combined with the simple economics of demand and supply, in Dempsey’s words: ”We believe the opportunity for investors to see outsized returns in this space is high as, when demand exceeds supply, the opportunity for economic profits is created.”
Water, water, every where, Nor any drop to drink
At AllianceBernstein, David Wheeler, CFA, portfolio manager – sustainable climate solutions; senior research analyst – sustainable thematic equities and Daniel C. Roarty, CFA, chief investment officer – sustainable thematic equities, have highlighted the importance of water management, saying equity investors will find water solutions offer attractive growth opportunities in an area that may be overshadowed by higher-profile climate-focused companies. “But just like home plumbing is essential for modern life, companies that help keep the world’s taps flowing are integral for a more sustainable future. Investors who can find innovative providers of water solutions will be able to capture long-term growth potential that should withstand economic weakness, while addressing a fundamental problem facing humanity in developed and emerging countries alike.”
They explain that the world has dramatically underinvested in water infrastructure and technologies for decades, saying that, in the US as one example, annual spending on water infrastructure runs at around $50bn, but the actual investment needed is more than $100bn, according to studies by McKinsey and others.
They add that wastewater is another key component of water sustainability. “It may sound repulsive to some, but treating and reusing wastewater—for agriculture, industry and non-potable applications like street cleaning—is actually a massive opportunity. The UN estimates that 80% of the world’s wastewater isn’t reused, and in many emerging markets, it is released directly into the environment with devastating consequences.”
Treating wastewater is a growing business, as revealed by reports from Grand View Research who estimated the global wastewater treatment–equipment market was worth $63.5bn in 2022 and is projected to grow at a 4.5% CAGR rate through 2030.
Some countries are ahead of the curve, including Singapore, where recycled wastewater now supplies 40% of the country’s demand, Wheeler and Roarty say. “Israel reuses 90% of its wastewater, meeting a quarter of the country’s water needs in a region that has no rainfall several months each year. Danaher, based in Washington, D.C., manufactures precision instrumentation and advanced purification technology to help analyze, treat and manage drinking water and wastewater treatment facilities.”
Desalination technologies are an effective way to boost supply, they add. “Massive desalination plants are already common across the Middle East, and new, huge initiatives in countries like India offer hope for a thirsty populace. The desalination market, estimated to be worth $15.5 billion in 2022, is projected to grow by 9.4% annually through 2030.”