Earth’s natural resources largely determine the global economy’s ebb and flow. As such, the effects of climate change continue to cause concern among economists and environmentalists alike.
In 2018, professors William Nordhaus and Paul Romer won the Nobel Prize in Economics for their work exploring how climate change affects economic stability. Ultimately, the pair’s research found the phenomena to be closely linked. The case for investment in sustainable ventures is clear: Without such commitments, both the planet and the global economic ecosystem will suffer.
Sustainable investments may jump start the slow process of changing consumer habits. Below, we examine the economy-boosting benefits of environmentally friendly business models — and how sustainable investment plays an important role.
Rolling the DICE
As part of Nordhaus’ research, he developed an economic model called Dynamic Integrated Climate-Economy model — DICE. The acronym, he notes, acknowledges that ignoring climate change is a gamble with severe economic and environmental costs.
The DICE model examines expenses related to crop failures, flooding, and other natural disasters. It considers the threat and frequency of environmental damage, as well as the economic harm associated with carbon emissions. The long story short: Climate change has potential to wreak havoc upon the global economy.
Nordhaus’ research helped shape the United Nations Intergovernmental Panel on Climate Change (PICC)’s recent report. The findings have attracted attention from policymakers and economists worldwide. Preventing severe consequences of climate change is a matter of enacting strict environmental regulations — and quickly. The UN’s report says that such regulation on an international scale has “no documented historic precedent.”
As one part of a solution at scale, Nordhaus and Romer have proposed that governments enact a global carbon tax. Earlier in 2018, at the UBS Nobel Perspectives Live! event in Shanghai, economist and 2007 Nobel Laureate Eric S. Maskin supported this notion.
“Climate change is not a problem that is going to take care of itself,” says Maskin. “Some progress has been made toward reducing [carbon] emissions. But not nearly enough … A carbon tax forces people and companies to pay directly for the damage they’re creating.”
Government action is, however, historically a process that moves at a snail’s pace — time the planet doesn’t have to waste. This is why private and institutional investment in environmental ventures is part of a realistic long-term plan to combat climate change.
We must learn to do more with less
Paul Donovan, chief economist at UBS Global Wealth Management, echoes Maskin’s sentiment that urgent action is no longer optional. “We have been borrowing resources from future generations in order to raise our living standards today,” Donovan says. “Environmental constraints on economic growth are becoming increasingly visible — whether that is the destructive power of natural disasters or simply a lack of resource.”
“We must learn to do more with less,” Donovan continues. “That requires innovation and productivity. It also requires a climate where the existing way of doing things is challenged.”
Sustainable models: Saving the environment, boosting the economy
Thankfully, a number of organizations are working to build sustainable business models — both from an environmental and economic perspective. These smaller-scale initiatives can have major impact from the ground up.
Ambri is a revolutionary battery technology founded by Dr. Donald Sadoway, a professor at the Massachusetts Institute of Technology (MIT) and a UBS Global Visionary. Dr. Sadoway created the liquid metal battery based on his research with electrochemical processes. Ambri’s products are intended to reduce society’s reliance upon the traditional power grid.
Ambri hopes to bring a renewable energy source to the masses. “The idea is to have a battery that is robust and long-lived, and ultimately very cheap,” says Dr. Sadoway in a video for UBS. “And so, I conceived of this device… ultimately, we want to have something about the size of a ten-meter shipping container that would have a capacity … to service 100 American homes.”
Velafrica, created by UBS Global Visionary Paolo Richter, is another company that blends economic growth with environmental progress. The organization collects and refurbishes bicycles and delivers them to rural areas of Africa. The bikes provide an efficient, affordable, and sustainable method of transportation that can help lift people out of poverty.
Velafrica’s bicycles provide people in underserved areas with transportation and access to resources like food, water, and education. Today, the company has distributed more than 180,000 bikes in places like Ghana, Gambia, Madagascar, Tanzania, Burkina Faso, and Ivory Coast.
A recent study found that more than 80% of institutional investors are interested in customizable sustainable investments.
Continued investment in organizations like Ambri and Velafrica may help ensure both environmental and economic benefits for future generations to come. Luckily, investors have expressed increasing commitment to sustainable ventures. A recent study found that more than 80% of institutional investors are interested in customizable sustainable investments.
Donovan has seen this very trend firsthand at UBS. “UBS clients tend to have a long-term view and often consider future generations,” notes Donovan. “It is natural that they will have a particular interest in managing the issues of the environmental credit crunch.”
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ESG/Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of ESG or sustainable investments may be lower or higher than a portfolio where such factors are not considered by the portfolio manager. Because sustainability criteria can exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance.
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