On 1st August, 2018, Earth reached its “Overshoot Day” at an earlier point than any previous year in history. This describes the day by which all of the planet’s natural resources that can be renewed and regenerated in one year have been consumed. Beyond that tipping point, humanity is essentially living off credit from future generations’ resources, which is unsustainable in the long term.
Irrespective of whether you believe in man-made climate change, this presents a far greater quandary. The fact is that the traditional economic model of perpetual growth, with a linear take-make-waste approach, in a planet of finite resources and population expansion, is a fallacy. Pursuing growth with no consideration for the non-monetary externalities of economic activity is progressively costing the broader society at large.
Material sustainability issues pose real and present risks for businesses, to an ever-greater extent. These range from financial, to operational, to reputational, and legal or regulatory aspects. All of these factors can affect a company’s operating cash flows and profits, its license to operate, even potentially impacting the ability to service its debts. How a company opts to manage these considerations attests to the quality of its governance and how its intangible assets should be valued in the long term, as well as reducing costs and improving efficiencies. Moreover, going beyond managing downside risks, shared value and closed-loop innovations with distinct positive impacts integrated into the business model represent long-term opportunities for the forward-thinking.
For too long, the prevailing attitude among the global investment community has been that sustainability and financial returns are mutually exclusive; that sustainability considerations must compromise investment returns, violating fiduciary duties. This despite a plethora of academic and industry literature demonstrating, if anything, the reverse to be the case. In my view, in the current environment, the dismissal of sustainability concerns exposes investors to a significant risk of long-term underperformance and sudden downside shocks.
The consideration of sustainability factors is critical to making well-informed investment decisions and will only become increasingly so. Before too long, such practices will be the global norm rather than the exception.
By 2016, as an individual with a successful 16-year track record in traditional portfolio management, these questions were beginning to trouble me. I had a secure, desirable, well-paid career, with a fantastic team, at a reputable company that had treated me well as far back as my undergraduate years. Yet, I wanted to learn more, and so I enrolled in a two-year part-time Master’s Degree program in Corporate Environmental Governance at HKU.
One year into the programme, the answer became clear. I no longer wanted to chase short-term returns, without being more thoughtful about whether I was facilitating the flow of capital towards recipients who were a) contributing to the problem or b) offering part of the solution. With over US$200 trillion of investable assets globally, I firmly believed that some of it could be redirected to more positive uses.
The sustainable finance infrastructure in Hong Kong at this time was somewhat underdeveloped relative to international financial centre peers, but the conviction was strong enough that it felt disingenuous to wait, and so my employer and I parted ways on amicable terms and I ventured into the unknown. Many considered this a senseless gamble, several simply thought it “brave” (code for “mad”)… but it felt right, there was much still to learn, and no time to waste.
Around this point I stumbled, quite coincidentally, across the Tropical Landscapes Finance Facility. This is a joint venture between ADM Capital, the ADM Capital Foundation, BNP Paribas, UN Environment and the World Agroforestry Centre. The concept is to bring international private finance at scale into projects in Indonesia with a strong environmental and/ or social impact.
Indonesia grapples with many environmental and social challenges, and funding transformative projects in sustainable landscape use and renewable energy can contribute significantly to its long-term sustainable development. The aim is to build an innovative lending platform that can be replicated across other developing markets, to demonstrate that sustainable development does not have to be synonymous with pure philanthropy. The venture launched its first transaction in the sustainable agriculture sector in February 2018, and has many more exciting energy and landscape projects in the works.
A pioneering initiative such as this- one of the first in Hong Kong to attempt impactful finance at scale- is obviously not without challenges. However, every transaction we engage in brings additionality of capital that traditional investment approaches do not.
I know I, personally, would rather be instrumental in efforts to improve the world for future generations than continue to blindly enable a broken and unsustainable economic model.