Pictet has warned that the Earth risks suffering irreversible changes from human activity according to its latest modelling.
The warning comes as researchers at the Global Footprint Network (GFN) calculate that the 29th July is Earth Overshoot day, the day on which we will have used up a year’s worth of the planet’s natural resources such as timber, fish and minerals.
GFN suggests that for the rest of the year, we will be drawing down on what should have been available for future generations.
Pictet says that what is worrying is that Overshoot Day, calculated by GFN,has fallen earlier and earlier since the start of 1970s when humanity’s resource demand increased beyond what nature could support for the first time in history.
Mathis Wackernagel, co-inventor of Ecological Footprint accounting and founder of Global Footprint Network releases a book next months, Ecological Footprint: Managing Our Biocapacity Budget which demonstrates that the overshoot can only be temporary. He argues that humanity will eventually have to operate within the means of Earth’s ecological resources, whether that balance is restored by disaster or by design.
In the book, he writes: “Companies and countries that understand and manage the reality of operating in a one-planet context are in a far better position to navigate the challenges of the 21st century.”
Pictet warns that further research paints a similarly alarming picture, showing that human activity, and the waste it generates, is leading to potentially irreversible changes to the planet’s ecosystem.
The analysis, based on a bio-capacity measurement tool called the Planetary Boundaries (PB) framework, quantifies resource consumption and waste emissions across each of the 100-plus industries that make up the global economy.
Developed by the Stockholm Resilience Centre, the model assesses the state of the ecosystem along nine environmental dimensions – which include water use, land use and ozone depletion among others – to set the ecological “safe operating space” within which human activities should take place. Already, Pictet says, five of those thresholds have been breached.
The asset manager points out that nitrogen and phosphorus used extensively in fertilisers trigger the excessive growth of algae. Intensive farming, industrial activity and population growth have increased the volume of macronutrients in rivers and oceans to dangerous levels. This is problem because algae deplete oxygen in water, killing aquatic plants and fish in a process called eutrophication.
Scientists estimate that sea areas with zero oxygen, or “dead zones”, have quadrupled since 1950s, threatening marine ecosystems around the world.
Pictet’s industry level analysis shows biochemical waste is being released at a rate that is 40 per cent more than the environment can handle.
However, it says that it is not all doom and gloom.
There are signs that efforts to stop environmental damage – be it policy measures or new innovative technologies to address ecological degradation – are starting to pay off.
According to GFN, throughout the 1970s to 2014, Overshoot Day fell earlier each year by an average of three days. Since then, however, the pace has slowed to less than a day per year. It therefore says its model also gives reason for optimism.
It shows that some of the industries serving forestry and other environmental sectors are managing to reduce the amount of biochemical waste they produce, aided by innovative, pollution-control technologies.
The asset manager says that these companies play an important role in helping us pay our environmental “debt” and to live within our means.
Pictet uses the PB-LCA framework in the construction of the Pictet-Global Environmental Opportunities portfolio.
Stocks in GEO have a significantly lower biochemical footprint than those represented in the MSCI All-Country World equity index.
Mismanagement of water resources is difficult to reverse
Maria Elena Drew, director of research for responsible investing at T. Rowe Price says that water, energy and food are the vital components for sustainable development where the interaction is commonly referred to as the Water-Energy-Food (WEF) Nexus.
Changes in population, urbanisation, diets and economic growth drive demand within each segment – creating complex challenges around the globe. If one component is mismanaged, the other two will ultimately feel the impact.
She says: “Understanding how the three components interact provides a platform for identifying and analysing potential effects on companies and industries, most notably through the nature and pace of resulting regulatory reform. From an investment standpoint, the emergence of water issues is often a catalyst for swift regulatory intervention.
“Water markets are relatively underdeveloped and are far less penetrated by private industry. Consequently, price signals may not emerge until resources are significantly constrained, rendering them unreliable.
“The mismanagement of water resources is difficult to reverse. Since prices are a lagging indicator of scarcity, regulatory responses can be drastic once the crisis becomes apparent.
“As the pull on this finite resource pushes more and more regions into water scarcity, we anticipate greater intervention from governments as they struggle to manage water, energy and food resources. In turn, this is likely to have a knock-on effect for the energy, utility and transportation sectors, as well as other sectors indirectly exposed to the WEF-Nexus.”
David Osfield, manager of the EdenTree Amity International Fund, says: “Whether it is reducing global carbon emissions, tackling obesity or reducing our enormous waste footprint, there are often multi-faceted opportunities to address the issue. It is critical to assess both the materiality and intentionality of the company’s approach, as well as the effectiveness of the company’s broader strategy and execution.”