How we produce and use energy in a more sustainable way that is less destructive for the world around us is a pertinent topic today

Markus

Daniel

Sebastian

<h2><strong>Introduction</strong></h2>
<p>How we produce and use energy in a more sustainable way that is less destructive for the world around us is a pertinent topic today. The usual emphasis here is on switching sources of energy production to sources that do not involve CO2 emissions. But, as we argue, this energy transition will also involve changing the ways in which we distribute, store and consume energy. We identify greater electrification as one central theme for the consumption of energy, while emissions-free energy sources will remain center stage for energy production.</p>
<h2><strong>The future of the energy transition</strong></h2>
<p>The energy transition will continue to have multiple policy dimensions. Changing energy sources and consumption will continue to be encouraged by the &ldquo;carrot&rdquo; of policy subsidies as well as technological change reducing costs. But markets can also be used to provide a &ldquo;stick&rdquo; for reform, in conjunction with policy. Carbon pricing, carbon taxes and the development of voluntary carbon markets provide an obvious example of markets in action and where they can fall short.</p>
<p>The energy transition will require some compromises. Greater electrification, for example, will have many benefits but will also create new demands on our natural capital &ndash; for example, through a higher demand for mineral resources build electronic devices.</p>
<p>But it will also create many opportunities for improvement. For example, the decentralised nature of renewable power may add resilience to overall power systems and benefit local economics. Changing energy systems may also provide an opportunity to rebalance the global energy system, giving greater opportunities to the so-called Global South. The energy transition is not just a matter for the developed economies: the needs of emerging economies need urgently to be addressed too.&nbsp;</p>
<h2><strong>Key takeaways</strong></h2>
<ul>
<li>The world needs to meet an expected increase in energy demand in the least destructive way possible. The bulk of greenhouse gas emissions come from energy.</li>
<li>Increased electricity output from renewables, extending electrification into new sectors, and improved electricity distribution and storage systems are top priorities.</li>
<li>Annual global investments in low-carbon power and sustainable transition strategies are expected to rise exponentially over the next decade.</li>
<li>Public and commercial sector priorities will probably increasingly converge, helped by technological change. Change could help boost energy system resilience and give a stronger voice to the Global South</li>
</ul>
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<p><em>This is an adapted extract from a Deutsche Bank <a href="https://www.deutschewealth.com/en/insights/investing-insights/investing-themes/energy-transition-the-quest-for-emissions-free-energy.html" target="_blank" rel="noopener">report</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>
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Energy transition: the quest for emissions-free energy

• ESG investment has moved to a new third phase characterised by a degree of consolidation and reorientation. Information will be key to this phase.
• Managing the ESG transformation will involve achieving consensus on ESG
definitions, and multiple initiatives for improved disclosure will continue.
• There is also likely to be a greater focus on measuring the “real world” impact of ESG investment and better understanding the different types of associated risk.
• We believe that firms with a coherent ESG strategy are more likely, in general, to able to navigate the complex global environmental and social problems ahead. This will be important from a portfolio management perspective. 


ESG and investment performance: challenges ahead?

Biodiversity is all around us, in ways we can see and appreciate, as well as ways we can’t. Even urban citizens will be aware of the importance of trees. But few of us will either see the full glory of coral reefs or be aware of how deeply we depend on them. 

<h1>Corals: beauty and benefits</h1>
<p>Biodiversity is all around us, in ways we can see and appreciate, as well as ways we can’t. Even urban citizens will be aware of the importance of trees. But few of us will either see the full glory of coral reefs or be aware of how deeply we depend on them. </p>
<p>Up to a billion people worldwide benefit on a daily basis from the revenue generation, protection and food security granted by coral reefs[1] . Small island states and many developing countries are depending on coral reefs. Nearly 200 million people around the world make a living through fishing, with coral reef fisheries valued at USD6 billion and 6 million coral fishers[2][3]. They contribute approximately USD30 billion to world GDP each year[4]. </p>
<p>Corals are not only beautiful to look at but provide refuge and homes for thousands of other species. In fact, while coral reefs cover less than 1% of the ocean, they sustain 25% of all marine life[5] . They provide, for example, nursery grounds for species that are of great commercial fishing importance[6].</p>
<p>Coral reefs also protect coastlines, providing self-repairing breakwaters. Healthy coral reefs can dramatically reduce incoming wave energy. Problems here have major implications. Even a one meter loss of coral reef height can double the damage done to the shoreline and triple the costs from an extreme weather event[7]. Without reefs, the cost of damages done by 100-year storm events could almost double[8]. </p>
<p>Reefs may help us in other ways, and not just through their touristic appeal. They can for example provide medicinal compounds with potential uses in treatments for cancers, Alzheimer’s and numerous other diseases like arthritis and bacterial infections.</p>
<h1>What makes a coral reef?</h1>
<p>Corals are living, ocean-dwelling animals. Each individual coral exists as a colony consisting of multiple small, identical coral polyps. Wherever corals make up the foundation of an underwater habitat, a coral reef occurs. Coral reefs are complex marine ecosystems that include diverse collections of colourful fish and other sea creatures. But what is it that allows corals to grow and support so much wildlife?</p>
<h3>One coral is composed of many polyps</h3>
<p>All coral colonies are made up of polyps, which are their basic building blocks. Corals need them to grow, feed, and breed, resulting in a varied and colourful ecosystem.</p>
<img src="https://illuminem.b-cdn.net/articlebody/095902a8466f6b2f1d2a624daea88c8a098d5712.png" alt="undefined">
<h3>Corals build coral reefs</h3>
<p>Corals need calcium and carbonate from saltwater to create their skeleton. Both corals’ structures as well as the overall architecture of the coral reef is provided by this skeleton.</p>
<img src="https://illuminem.b-cdn.net/articlebody/f5f53db7f29eaaefc0d97e4d70649102b931eee6.png" alt="undefined">
<h3>Coral reefs supply both food and protection.</h3>
<p>Corals are the foundation of a complex food chain that permits marine life to thrive on coral reefs.[9]</p>
<img src="https://illuminem.b-cdn.net/articlebody/180873feea34694c20757fa8b69627b938bbdc3e.png" alt="undefined">
<h1>Why corals are at risk</h1>
<p>Corals are animals not plants. The soft polyps within the hard sections of corals are inherently transparent, and the algae that lives inside them gives them their brilliantly vivid hues. </p>
<p>When corals are disturbed – due to high temperatures or pollution – they often expel this algae and turn white. Such “bleached” corals are still alive but vulnerable, being in effect immunocompromised. Many starve and die, then turning a dark brown colour. </p>
<p>Sadly, we are currently experiencing the longest global coral bleaching event ever observed[10]. Warmer ocean temperatures as a result of unusual ocean currents are the main culprit. </p>
<p>Repeated or extended bleaching events can kill off reefs that have taken centuries to form. The Intergovernmental Panel on Climate Change (IPCC) has warned that if global warming hits the 1.5°C target, 75-90% of the world&#x27;s coral reefs could die off[11]. A 2°C warming could make all tropical corals extinct.</p>
<h3>Corals and algae are mutually dependent on one another to thrive.</h3>
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<h3>What causes coral bleaching</h3>
<h4>Overexposure to sunlight</h4>
<p>When temperatures are high, high solar irradiance contributes to bleaching in shallow-water corals.</p>
<h4>Change in ocean temperature</h4>
<p>Climate change-induced increases in ocean temperatures are the major cause of coral bleaching</p>
<h4>Runoff and pollution</h4>
<p>Storm generated precipitation can rapidly dilute ocean water and runoff can carry pollutants – these can bleach near-shore corals.</p>
<h4>Extreme low tides</h4>
<p>Exposure to air during extreme low tides can cause bleaching in shallow corals[13].</p>
<h1>What we can do</h1>
<p>There are many practical things we can do to help coral reefs. We can improve the habitat quality for corals and improve corals’ resilience. We can reduce humans’ direct effect on reefs (e.g., via excessive tourism) and can better use planted corals in to help safeguard coastal areas. We know how to do some of this. </p>
<p>We know how to directly implant coral fragments on reefs, for example, or “garden” corals via nursery cultivation before replanting on the reef. Larvae propagation, before they are released to connect to a reef, is also possible. We make it easier for coral reefs to coexist with coastal protection measures (e.g., rock armouring, seawalls, and shore constructions). Some of these measures will be local and some will be global. Some will be engineered, and others will be nature-based. We will need a multi-pronged approach which takes a hard look at the efficiency of every dollar spent.</p>
<p>But what we also need to is a greater understanding. The gaps in scientific knowledge around coral are substantial. We would like to help fill in some of these gaps and therefore the first initiative that will be financed by our DB Ocean Resilience Philanthropy Fund is the Future Climate Coral Bank. This is a research project in the Maldives led by The Maldives Coral Institute (MCI). It is designed to identify coral species that are resilient to climate change and conserve them in a living gene bank. Taking advantage of recent technological developments, this project is at the cutting edge of international efforts to find ways of boosting reef resilience to improve the prospects of coral-dependent communities in the future. We are sure that our clients will want to support such essential research.</p>
<p><em>This article is also published by the <a href="https://deutschewealth.com/content/dam/deutschewealth/cio-perspectives/cio-special-assets/corals-the-rainforests-of-the-sea/cio-nature-series-corals-the-rainforest-of-the-sea.pdf">Deutsche Bank CIO Office </a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>
<h3>Footnotes</h3>
<p>1. Hoegh-Guldberg, O., Pendleton, L., Kaup, A. (2019). People and the changing nature of coral reefs. Regional Studies in Marine Science. 30. 100699. https://doi.org/10.1016/j.rsma.2019.100699 Beck, M. W., Losada, I. J., Menéndez, P., Reguero, B. G., Díaz-Simal, P., &amp; Fernández, F. (2018). The global flood protection savings provided by coral reefs. Nature communications, 9(1), 1-9. <a href="https://doi.org/10.1038/s41467-018- 04568-z">https://doi.org/10.1038/s41467-018- 04568-z</a>. </p>
<p>2. People and the changing nature of coral reefs. Retrieved from: <a href="https://www.sciencedirect.com/science/article/pii/S2352485518306637">https://www.sciencedirect.com/science/article/pii/S2352485518306637</a>. July 2019. </p>
<p>3. Global decline in capacity of coral reefs to provide ecosystem services. Retrieved from: <a href="https://www.sciencedirect.com/science/article/pii/S2590332221004747">https://www.sciencedirect.com/science/article/pii/S2590332221004747</a>. September 17, 2021. </p>
<p>4. UNEP, The Coral Reef Economy Report. Retrieved from: <a href="https://www.unep.org/resources/report/coral-reefeconomy#:~:text=The%20analysis%20found%20that%20a,respectively%2C%20between%202017%20and%202030">https://www.unep.org/resources/report/coral-reefeconomy#:~:text=The%20analysis%20found%20that%20a,respectively%2C%20between%202017%20and%202030</a>. November 13, 2018 </p>
<p>5. UNEP, Life Below Water. Retrieved from: <a href="https://www.unep.org/interactive/status-world-coral-reefs/">https://www.unep.org/interactive/status-world-coral-reefs/</a>. 2020.</p>
<p>6. Coral Reefs of the High Seas: Hidden Biodiversity Hotspots in Need of Protection. Retrieved from: <a href="https://www.frontiersin.org/articles/10.3389/fmars.2020.567428/full">https://www.frontiersin.org/articles/10.3389/fmars.2020.567428/full</a>. September 14, 2020.</p>
<p>7. Maldives Coral Institute, 5 Year Strategic Plan, <a href="maldivescoral.org">maldivescoral.org</a>.</p>
<p>8. The global flood protection savings provided by coral reefs. Retrieved from: <a href="https://www.nature.com/articles/s41467-018-04568-z">https://www.nature.com/articles/s41467-018-04568-z</a>. June 12, 2018.</p>
<p>9. National Oceanic and Atmospheric Administration. Retrieved from: <a href="https://coralreef.noaa.gov/gallery/infographic/makes-coral-reef.html">https://coralreef.noaa.gov/gallery/infographic/makes-coral-reef.html</a>.</p>
<p>10. National Oceanic and Atmospheric Administration. Retrieved from: <a href="https://www.noaa.gov/media-release/el-ni-o-prolongs-longest-global-coralbleaching-event#:~:text=The%20first%20global%20bleaching%20event,a%20less%20powerful%20El%20Ni%C3%B1o">https://www.noaa.gov/media-release/el-ni-o-prolongs-longest-global-coralbleaching-event#:~:text=The%20first%20global%20bleaching%20event,a%20less%20powerful%20El%20Ni%C3%B1o</a>. February 23, 2016.</p>
<p>11. Intergovernmental Panel on Climate Change (IPCC): Global warming of 1.5°C. Retrieved from: <a href="https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_Full_Report_Low_Res.pdf">https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_Full_Report_Low_Res.pdf</a>. 2018. </p>
<p>12. National Oceanic and Atmospheric Administration. Retrieved from: <a href="https://oceanservice.noaa.gov/facts/coral_bleach.html">https://oceanservice.noaa.gov/facts/coral_bleach.html</a>.</p>
<p>13. WWF. Retrieved from: <a href="https://www.worldwildlife.org/pages/everything-you-need-to-know-about-coral-bleaching-and-how-we-can-stopit#:~:text=The%20leading%20cause%20of%20coral,pollution%2C%20or%20too%20much%20sunlight">https://www.worldwildlife.org/pages/everything-you-need-to-know-about-coral-bleaching-and-how-we-can-stopit#:~:text=The%20leading%20cause%20of%20coral,pollution%2C%20or%20too%20much%20sunlight</a>​ </p>


Corals: the rainforest of the sea

As we mark the UN’s World Oceans Day for 2022, we face major challenges in building a sustainable blue economy. This article explains how the global financial sector will play an important role in finding solutions. We need to manage future change with great care. We know from our (above-water) experience the dangers of getting things wrong and, with the ocean, the threats are even larger.

<p><em>As we mark the UN&rsquo;s World Oceans Day for 2022, we face major challenges in building a sustainable blue economy. This CIO Special, produced in collaboration with the <a href="https://www.oceanriskalliance.org/">Ocean Risk and Resilience Action Alliance</a> (ORRAA), explains how the global financial sector will play an important role in finding solutions.</em></p>
<h2>The &ldquo;blue acceleration&rdquo;</h2>
<p>Our relationship with the ocean is on the cusp of major change. We are increasingly aware that ocean environments are under great stress &ndash; from temperature change, pollution, and other environmental degradation. But, at the same time, technology and greater knowledge appears to be opening the door for further potentially risky ocean exploitation. The possible consequences of this are not known yet.</p>
<p>As a result, the world is now embarking on what some call the &ldquo;<strong>the blue acceleration</strong>&rdquo; &ndash; a race to grab resources in terms of food (e.g. fish), materials (e.g. ocean mining, bioprospecting) and geographic space.</p>
<p>The ocean is central to our existence. Our knowledge of how it functions is very incomplete, but it is a vital source of biodiversity, climate management, food, livelihoods and, for many, relaxation and rejuvenation &ndash; all through a great range of ecosystem services.</p>
<p>We therefore need to <strong>manage future change</strong> with great care. We know from our (above-water) experience the dangers of getting things wrong and, with the ocean, the threats are even larger.</p>
<p>Managing ocean change is, however, difficult: two key reasons contribute to this.</p>
<p>Firstly, <strong>the ocean itself is incredibly complex</strong> &ndash; its size, the interconnectedness of its systems, and the incredible variety of marine biodiversity that lives within it add to the difficulties in understanding and mapping its natural processes. It is also virtually impossible for humans to manage natural processes within the ocean.</p>
<h2>Ocean governance</h2>
<p>Second, the <strong>existing regulatory regime</strong> which is underpinned by the United Nations Convention on the Law of the Sea, while groundbreaking at the time that it was negotiated in the early 1980s, may no longer be entirely fit for purpose. It left many issues unaddressed. The current regime gives countries geographically extensive national rights (which can be licensed to third parties) but the UN supervisory framework is fragmented. Most of the ocean is also still defined as international waters, requiring the cooperation of many countries to manage properly. Future developments on ocean mining may put the regime&rsquo;s failings in sharp focus.</p>
<p><strong>Reforming ocean governance</strong> is difficult and takes a long time. It has taken nearly 20 years to try to negotiate an agreement at the World Trade Organisation to do away with harmful fisheries subsidies. We have spent almost the same amount of time discussing how to protect biodiversity in the high seas (those marine areas beyond national jurisdictions) and agreement here has yet to be reached. But the threats to the ocean are immediate and profound. There is also a pressing need to integrate ocean needs into an emerging framework of government-agreed environmental targets that are cut across multiple areas and include biodiversity and climate mitigation, adaptation, and resilience.</p>
<h2>Natural capital</h2>
<p>In this uncertain environment, what rudder can steer us in the right direction? The world&rsquo;s <strong>financial sector</strong> will play a great part in determining appropriate future direction in the <strong>sustainable blue economy</strong> &ndash; which also needs to be equitable. Current financial involvement is diverse in size and scope &ndash; from small, local (often environmentally-aware) projects to much larger funding of transnational firms in big sectors such as energy or fishing, which may have negative consequences.</p>
<p>These financing needs might seem diverse &ndash; but can be seen as part of the same financial <strong>value chain.</strong></p>
<p>At a conceptual level, in addition to recognising the intrinsic value of the ocean as an Earth system, we need to see it also as a source of <strong>natural capital</strong>, from which we draw ecosystem services. Local communities need to be able to use their knowledge to manage these services for both themselves and the global village. Understanding this link between natural capital and <strong>ecosystem services</strong> will have implications for the financial sector and its future approach to the issue.</p>
<p>New ways of managing these services, for example through <strong>Nature-based Solutions (NbS)</strong>, will require new financing methods (including insurance) that may complement or displace existing investment methods or financial products. Such innovation will affect macro processes (e.g. debt for nature swaps), existing asset classes (e.g. blue bonds) and other forms of resource mobilisation by governments and individual companies.</p>
<h2>Finance and value chains</h2>
<p>The role of finance in ensuring a sustainable blue economy will depend on the understanding of these value chains.</p>
<p>Financial innovation may change the way we draw on these ecosystem services, at many stages along the value chain from initial extraction to transportation and processing and eventual consumption. By implication, it will also help stop investment in destructive activities which harm natural capital.</p>
<p>Moving from this conceptual reframing to <strong>practical investment implementation</strong> might seem difficult. How, for example, are we to measure the exact size or nature of this natural capital? But seeing ocean resources as &ldquo;capital&rdquo; helps focus attention on sustainability and related problems (for example the &ldquo;tragedy of the commons&rdquo;). The time dimension &ndash; sustainability &ndash; becomes a vital part of value chains.</p>
<p>These value chains cover an infinitely broad spectrum of ecosystem activities delivering services to nature. But here we consider a narrower spectrum of projects with direct human involvement.</p>
<p>At one end of the spectrum, as noted above, we have <strong>environmentally focused, geographically localised projects</strong> &ndash; often involving multilateral agencies and public/private partnerships. The value chain here may short and focused on environmental preservation and sustaining of local communities. Financial support can be seen as a &ldquo;positive&rdquo; but is usually small-scale as financial providers develop new &ldquo;blue&rdquo; approaches and investors assess likely future rates of return.</p>
<p>At the other end of the spectrum, we can have <strong>investment in</strong> <strong>major transnational firms</strong> focused on harvesting of widespread existing resources (from natural capital) and redistributing them to global populations. Financial value chains are longer and more complex. Some of these operations may be sustainable (wind power), others may not be (fossil fuels). Financial involvement in some activities, particularly those which appear destructive, may be seen as a &ldquo;negative&rdquo;.</p>
<p>These two extremes &ndash; and the wide range of investment projects on the spectrum between them &ndash; might be seen as very different. But in reality, similar factors underly investment in all these different sorts of value chains. We would focus on three: <strong>information, measurement, </strong>and<strong> principles</strong>.</p>
<p><strong>Information</strong> is key to understanding all stages of these ocean value chains. At a fundamental level, information from scientific research is helping us build our understanding of how the ocean functions. But to make better investment decisions also requires better and more information from individual firms too &ndash; through improved reporting, disclosure and analysis across value chains.</p>
<p>Use of information requires agreed standards of <strong>measurement</strong> (in the broadest sense, e.g. by improving and unifying taxonomies). This will allow us to integrate information across financial sector decision-making. Progress here continues: for example, the work of the Taskforce on Nature-related Financial Disclosures (TNFD) will help us understand and build financial screening for nature-related risks. Measurement is key to both implementing ESG considerations effectively &ndash; across large and small industries.</p>
<p>Application of information also requires agreed <strong>financing principles</strong>. These are needed not only to build new financial products and develop public-private partnerships but also to improve the functioning and credibility of ocean finance generally. Again, we can see progress here, with Sustainable Blue Economy Financing Principles under the auspices of the United Nations Environment Programme Finance Initiative (UNEP-FI) and guidance on their practical application.</p>
<h2>Future priorities</h2>
<p>Using these three factors, within a natural capital framework, will help us not only to reassess value chains in the wide range of existing and future ocean industries, but also to redefine what we want from them &ndash; and help the ocean to both survive and prosper.</p>
<p>Then we need to act. Capital markets must play a part of any response, as they allow a pooling of shared resources (and risks); this may be coordinated with individual initiatives, for example by venture philanthropy. But financing of new activities is likely to be accompanied by reconsideration of finance to others. Where information points to clear evidence of harm, investments should be encouraged to transition into climate and nature-positive areas. Where there is too little information available, caution needs to be applied and there will be strong arguments for pre-empting investment in potentially destructive activities (like deep-seabed mining).</p>
<p>As part of this, we see three key elements as forming a part of the ocean finance response, which will evolve as our understanding of the ocean grows.</p>
<p>First, we need to <strong>recognise, disclose,</strong> and <strong>acknowledge future risk</strong>. One approach would be to adopt different or smarter laws similar to what we have seen in France, making sure that institutional investors (pension/insurance, asset managers, banks) factor in nature/biodiversity in lending and investment decisions according to the UN biodiversity convention.</p>
<p>Second, there is a strong case for a <strong>targeted multilateral development bank and developed government support</strong> in the form of positive subsidies to support investment which regenerates the ocean. Guaranteed investment capacity pockets are likely to be part of this. Investment will benefit from &ldquo;blue labelling&rdquo; (as per the International Capital Market Association (ICMA) approach that can identify not only the impact expected on the blue economy, in terms of biodiversity, conservation and potential social benefits (e.g. clean water).</p>
<p>Third, <strong>the amount of capital activated must meet the scale of the challenges we face</strong>. Appreciating the scale of challenges will require an additional way of looking at returns, as we noted above. Reframing and invigorating investment into nature will require looking beyond immediate financial returns and consideration of &ldquo;nature returns&rdquo; and measurement of success through benefits to environmental and ecological health as well as social and economic wellbeing. Our thinking needs to coalesce with indigenous and local communities, as we learn how to confront some of humanity&rsquo;s biggest challenges.</p>
<p><em>This article is also published by the <a href="https://deutschewealth.com/content/dam/deutschewealth/cio-perspectives/cio-special-assets/ocean-finance-redefining-the-value-chain/ocean-finance-redefining-the-value-chain-cio-special-2022-en.pdf" target="_self">Deutsche Bank CIO Office</a>. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>

Ocean finance: redefining the value chain

The complexity of the environmental, social, and governance (ESG) transformation doesn’t allow for a simple solution. But a new depth of awareness and cultural understanding is now helping shape this process, with philosophers and sociologists illuminating many underlying issues.

<p><strong>The complexity of the environmental, social, and governance (ESG) transformation doesn’t allow for a simple solution. But a new depth of awareness and cultural understanding is now helping shape this process, with philosophers and sociologists illuminating many underlying issues.</strong></p>
<p>We have an urgent need for action on the environment. The good news is that this consensus is starting to be mirrored in financial sector activity. ESG-managed investments have grown by 36% in the last two years. One estimate is that the volume of ESG-managed investments will grow to over <a href="https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/">USD53trn</a> globally by 2025, 25, equivalent to a third of all assets managed by the financial sector – just to mention this number as a gauge for the development while knowing the current shortcomings of measurement and disclosure. The bottom-line is, the development seems to be clear.</p>
<p>Why is ESG investment growth accelerating? This is not just a matter of economic factors, or simple trend following. You also need to look at underlying social factors.</p>
<p>21st century society has been described as being in state of “late modernity”. The sociologist <a href="https://www.sowi.hu-berlin.de/en/lehrbereiche-en/general-sociology/andreas-reckwitz/index">Andreas Reckwitz</a> (Reckwitz, 2019) has argued that multiple factors in today’s economies and society lead individuals to pursue their own “singularity”. We have a set of beliefs about what we, as individuals, can achieve and we want to have some &quot;impact&quot; on the world: ESG investing may be part of how we do this.</p>
<p>Pursuing Reckwitz’s “singularity” implies that we have the economic ability, the freedom and the time to act this way. Many people do not enjoy this. But even in emerging economies, increasing prosperity is also allowing greater freedom around decision-making.</p>
<p>We do not, however, all start from the same place. In one sense, the options of emerging economy citizens are already narrower. There is an implicit concern that industrialized nations may have imposed a limit on the future growth of the emerging economies through their own past growth and the associated consumption of resources. This situation may be seen as unfair, particularly as developed economies are unlikely to make amends for past actions.</p>
<p>The 20th century philosopher <a href="https://hansjonasinstitut.de/hans-jonas/?lang=en">Hans Jonas</a>, an early exponent of the need for environmental action, did indeed argue that a sense of responsibility (for the environment) should not be based on reciprocity. As he put it: “act so the effects of your action are compatible with the permanence of genuine human life” (Jonas 1984).</p>
<p>But, even if we accept that responsibility comes without reciprocity, environmental actions need to be seen as effective and fair. There are several intrinsic problems here.</p>
<p>First, environmental choices are not being made on the basis of perfect information. Digitalization and much greater data collection is of course steadily making clearer the costs of failure to act. The work of climate scientist <a href="https://www.eci.ox.ac.uk/people/fotto.html">Friederike Otto</a>, for example, shows that it is possible to attribute specific weather events to climate change. But we are still some way from fully identifying and resolving the great tensions between the costs and the opportunities of the necessary socio-economic-ecological transformation.</p>
<p>Second, we are not in a static or wholly predictable situation. We need to anticipate more asymmetric shocks not directly driven by the economy. The beginning of the 21st century was characterized by economic and market shocks (e.g. the Global Financial Crisis) and we developed policy tool-kits to deal with them. Now we have to learn how to deal with exogenous shocks from environmental sources – collaborating to find effective solutions to new problems. In Reference to the Philosopher <a href="https://www.ox.ac.uk/news-and-events/find-an-expert/professor-nick-bostrom">Nick Bostrom</a>, <a href="https://lmu-munich.academia.edu/NikilMukerji">Nikil Mukerji</a> and <a href="https://www.frankfurt-university.de/de/hochschule/zentren-und-institute/caes/veranstaltungen/symposien/caes-symposium-corona/adriano-mannino/">Adriano Mannino</a> speak of this as a &quot;philosophy with a deadline&quot;, because avoiding certain tipping points is critical. One danger here is that we are bounced into tactical shifts in policy – and lose sight of the overall strategic direction.</p>
<p>Third, we face a need for rapid change on environmental policy– while realizing that social structures and attitudes can be very slow to change. Our international social infrastructure for dealing with global collaborative action (e.g. the United Nations and the Bretton Woods economic institutions) is also now over 75 years old.</p>
<p>Faced with these three problems, but aware of the high social costs of inaction, we have fallen back on regulation to ensure change. In Europe, such regulation includes the so-called EU Action Plan with the EU Taxonomy and the Sustainable Investment and Finance Disclosure Regulation (SFDR), The basic idea of this may be followed by many Asian economies. In the U.S., on the other hand, the focus is first on increased climate reporting by companies, in line with the Paris Agreement. Both represent different ways to find a way forward to a similar endpoint in challenging circumstances.</p>
<p>Regulation is therefore necessary in the current situation but can only be one part of the solution.</p>
<p>Consider for example the situation in the financial industry. This sector is a regulatory agent of this transformation - whether it likes it or not. In the past, financial institutions’ investment assessments were primarily done via financial ratios, such as the price/earnings ratio or the price/book ratio. Today, they also look at metrics including non-financial factors (and if such assessments aren’t available, they need to make them visible and understandable as data attributes). From the global financial crises, the sector knows the importance of governance. And it also knows how significant the social dimension is, for both corporates and governments.</p>
<p>Regulation provides a way through this complex process, but one danger is that it imposes a single point of view and implies a certainty that does not exist. We do instead need diversity – in terms of discussion, views and approaches. Diversity and diversification are terms often associated with the financial sector (e.g. a hedge against risk in portfolios) but, more fundamentally, diversity is nature&#x27;s way of positioning itself to be sustainable, innovative and protected against risk. As noted above, we are not operating with perfect information and the current situation is not predictable: sustainability, innovation and risk management are essential to any policy response.</p>
<p>In this situation, reconciling the desire for “singularity” and an appropriate response can be difficult. We therefore also need to ensure that regulation does not stop participation in collaborative activities to establish shared goals and intentions – the “shared intentionality” identified by psychologist <a href="https://scholars.duke.edu/person/michael.tomasello">Michael Tomasello</a> and others. We know that effective collaboration requires cultural learning and subtle intention reading, but also some motivation to share our beliefs with others. ESG debates must encourage, not threaten, such behaviour.</p>
<p></p>
<p><em>This article is first published by <a href="https://www.globalpolicyjournal.com/blog/09/05/2022/esg-reconciling-singularity-and-collective-debate">Global Policy</a>. Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>
<p><em></em></p>
<h3><strong>References</strong></h3>
<p>Jonas, H. (1984). The Imperative of Responsibility: In Search of Ethics for the Technological Age. Chicago Press, 1984.</p>
<p>Reckwitz, A. (2019). The Society of Singularities. On the Transformation of Modernity. Cambridge: polity, 2019.</p>


ESG: Reconciling “Singularity” and Collective Debate

Hence, any ESG investment assessment needs to look at the entire (product) life cycle and across the whole supply chain of a company. Successful ESG analysis here would help to improve qualitative investment recommendations and decisions. This report focuses on how to do this by also considering nature-related risks. However, oftentimes ESG-related discussions still seem to be about fundamental questions about ESG as an investment concept. Even though perceptions around ESG have changed significantly recently, discussions among investors about broadening the spectrum of ESG discussion are still too rare.

<h1>Introduction</h1>
<p>ESG is a term that has become increasingly established in the past few years. But what exactly is ESG investing? ESG investing is a conscious decision to take environmental, social and governance criteria into consideration in regards of investment decision-making. One can now say that ESG investing has become mainstream, accounting for more than 36% of total funds under management globally. However, while the concept of ESG spotlights three specific pillars to today’s business, the transition to fully sustainable business practices will require a yet-broader approach to ensure we can support the planet&#x27;s health for generations to come as depicted in Figure 1.</p>
<img src="https://illuminem.b-cdn.net/articlebody/cba468c0ea3a8388f9c283b62e69263088aaf10d.png" alt="Figure 1: ESG vs. sustainability">
<p>Consideration of ESG criteria, however, creates challenges as well as potential rewards. Traditional investment theory assumes that prices in financial markets fully reveal all available information. However, growing information flows (especially when they create a situation of “asymmetric information”, i.e. one party knowing more than another) can prove unsettling, often leading to higher volatility and speculation. Behavioural finance and related models also suggest limits to traditional investment theory.</p>
<p>Current considerations of ESG principles in the investment decision-making process have also helped break an old assumption that ESG was associated with lower earnings expectations and higher risk (i.e. volatility). This may be because a previous focus on excluding “sin stocks” in the past has been replaced by more diverse and sophisticated approaches. We now know that ESG strategies can be resilient in times of crisis, from both a short-term and long-term perspective. Nevertheless, valid questions remain about how ESG should be used in investment analysis. A pure ESG assessment on the basis of scores, ratings or exclusion criteria is unlikely to be sufficient on its own as a basis for decision-making. This is because it may not be fully up-to-date, may neglect certain risks, and may not fit easily within existing norms and processes. In addition, the economic dimension needs to be taken into account as ESG might stimulate economic growth by accounting for and promoting the use of natural resources (“natural capital”) as well as implementing social and economic policies.</p>
<p>In the context of taking the usage of natural resources into account, one has to consider the effects of our economic endeavours on our environment and especially the many species inhabiting it. Simply stated: we have to talk about biodiversity. Assessment of biodiversity loss, an increasingly important ESG area, may put a greater focus on current ESG shortcomings and also prompt some solutions. The degradation of biodiversity (biodiversity loss) creates risks (physical, transition, and liability risks) for all companies and industries in different ways and over a period. Hence, any ESG investment assessment needs to look at the entire (product) life cycle and across the whole supply chain of a company. Successful ESG analysis here would help to improve qualitative investment recommendations and decisions. <a href="https://illuminem.com/post/007911cd-e5f9-4876-a9e2-0b9b6a3106f5">This report</a> focuses on how to do this by also considering nature-related risks. However, oftentimes ESG-related discussions still seem to be about fundamental questions about ESG as an investment concept. Even though perceptions around ESG have changed significantly recently, discussions among investors about broadening the spectrum of ESG discussion are still too rare.</p>
<h1>Current ESG perceptions</h1>
<p>Investors consider ESG in their decision-making for different reasons. Societal expectations (e.g. tangible impact on risks), regulatory requirements, and personal beliefs are amongst the top reasons for considering ESG. From an investor&#x27;s point of view, one can say that ESG is perceived as an answer to the fundamental changes in society, regulation, and personal beliefs that we have seen in the last years. However, ESG is still fundamentally an investment concept. This means that “traditional” measurements (e.g. return and risk) are still important.</p>
<img src="https://illuminem.b-cdn.net/articlebody/7660dac5b28c364cdccf3ad1ac79c1b2c3ee3002.png" alt="Figure 2: Investor perceptions of ESG and financial performance is changing">
<h1>ESG assessment issues</h1>
<p>One of the key enablers for ESG investing is data. There are a number of specialized agencies who aggregate and analyse thousands of data points related to ESG factors, often producing ESG ratings, or scores to compare companies’ ESG performance relative to peers in their sectors. They do this by analysing disclosed data or providing expectations of present and future projections.</p>
<h1>Biodiversity adds new opportunities</h1>
<p>There is increasing awareness of biodiversity loss as an issue but the subject still needs much more attention. Companies today continue to rely on natural resources while simultaneously impacting ecosystems. For the production of goods and services, ecosystem services are crucial, yet mostly unrecognized. As research suggests, many industries and sectors are threatened by biodiversity related risks. For example, roughly 38% of large publicly traded companies seem to be at least partially affected by habitat loss (sample size: 5,300 corporations). But investors may still be struggling to factor biodiversity into their ESG strategy. For example, in our 2021 survey, only 23% of SMEs and large corporates strongly agreed that they factored biodiversity into their strategy.</p>
<h1>The green paradox</h1>
<p>The green paradox describes the possible occurrence of undesirable effects from climate or other environmental measures. The fear is that the measures we take to reduce CO2 emissions might cause the exact opposite. One way this could happen is through fossil resource suppliers expanding their extraction as they anticipate lower prices in the future due to announced regulatory measures, thus increasing CO2 emissions. The existence of the green paradox comes with implications, for example: the interests and possible responses of fossil resource suppliers must be taken into account as governments frame environmental measures. </p>
<img src="https://illuminem.b-cdn.net/articlebody/f2682e8a2cb264d1ea0f24fc72d4f7592157a716.png" alt="Figure 3: The leap to a sustainable economy">
<h1>Conclusion</h1>
<p>The integration of biodiversity into ESG assessments requires a significant enlargement to the concept of ESG and is therefore driving a serious change towards a sustainable economy. This cannot stop at the “E” (environmental) pillar – biodiversity has great relevance for both the “G” (governance) and “S” (social) pillars.</p>
<p>There are many elements to this integration process. For example, the Sustainability Accounting Standards Board (SASB) materiality map can be used to identify sectors for which biodiversity may be financially material. Using biodiversity as a filter in negative screening could exclude companies exposed to biodiversity-related controversies.</p>
<p>Getting the transition to a sustainable economy right is highly important and adds urgency to biodiversity’s integration into ESG. Better understanding of the data around biodiversity should also help policymakers navigate through a series of tipping points to find the best path through to a nature-positive economy that recognises the value of natural assets.</p>
<p>ESG already enables financial analysis on a much more granular level. But as ongoing developments on biodiversity shows, there is even more we could take into consideration when making investment decisions. As political, societal and, economical efforts push further to fundamentally transform our economy, the way we invest will inherently change. Biodiversity could and should lead the way here.</p>
<p></p>
<p><em>This article is part of the report &quot;Biodiversity: the new playing field for ESG assessment</em>​&quot;, <em>Deutsche Bank Wealth Management</em>.<em> To download the full report, please click <a href="https://illuminem.com/post/007911cd-e5f9-4876-a9e2-0b9b6a3106f5">here</a>. </em></p>
<p><em>Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem nor of their employers. </em></p>


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Markus Müller

Markus Müller

Energy transition: the quest for emissions-free energy

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