Colleagues holding on to a plant

14 Jul 2021

On nature and diversification

Harold Hutchinson

Head of UK Research

The natural wonders that grace our shores are not just recreational marvels. They offer an investment opportunity that society simply can't afford to miss. In this week's blog post, Harold considers how balancing an investment portfolio with physical, human and natural assets is a pathway to securing a sustainable future. 

Recent posts have wandered across the UK and Ireland considering the gifts endowed by nature – our forests, peatlands and coastlines. These bounties are not just fountains for recreation, but also offer hugely valuable natural assets to underwrite our futures. 

While it may seem that such musings lie far from finance, nothing could be further from the truth. One of nature’s strengths lies in biodiversity. This helps to sustain it in the face of uncertainty. The value of portfolio diversification may have been reinvented by Harry Markowitz in the 1950s, but that lesson has been visible in the natural world for millions of years. 

Imagine you had allocated your savings to an asset manager promising you a well-spread, resilient portfolio to meet an uncertain future, making due allowance for your individual circumstances. You might admire his or her wisdom. Imagine you suddenly saw your well-constructed portfolio being dismantled in favour of an individual high-risk investment that could ravage your wealth. You may not be endeared to your manager then. 

Yet, in essence, this is what we are doing as stewards of our natural inheritance. Rates of biodiversity loss, driven by human activities, are now 100-1000x higher than for millions of years previously, and they continue to rise. 

A recent study of accounting valuations of global capital assets, quoted in the Dasgupta Review, suggests the following. Between 1992 and 2014, physical capital per person doubled (roads, factories etc.,), and human capital per person (things like health and education) increased by 13%. Over that same period, the stock of natural capital per person fell almost 40%. We ignore the growing risks of this nature-starved portfolio of capital assets at our peril.

A path to long-term sustainability requires institutional reform, nationally and internationally, not least to ensure polluters compensate fairly for environmental damage under strict laws of liability. 

In a future set of posts, I will suggest in specific terms how global society might hope to restore a sustainable capital market equilibrium. For now, a few key principles.

The first is to realise we are on a road to destruction. The good news here is that the evidence is now becoming so clear that even the historical doubters are starting to pipe a different tune. 

The second is to start to look at the world in a different way, and specifically to realise that we are a part of nature, not separate from it. As such, we have to organise our societies in a way that contributes to, benefits from, and properly values our inherited natural capital. The real key here is our education system, from nursery school to university. At the research and development level, we need to tilt our focus in the coming decades towards living within our planetary boundaries, rather than trying to escape from them. 

Thirdly, a path to long-term sustainability requires institutional reform, nationally and internationally, not least to ensure polluters compensate fairly for environmental damage under strict laws of liability. Currently, we subsidise damage to nature to the tune of some US$5trn per annum. That is just insane.

Building on these principles, a sustainable future will need to be based on changes to consumption and investment patterns by all of us to ensure our societal portfolio of physical, human and natural assets is properly diversified and evolves over time to meet the uncertainties that form part of our existence. In the end, we all need to be sound asset managers if we are to ensure the future for our grandchildren. 

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Disclaimer: The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.