What is an investor's role in combating climate change and biodiversity loss?

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Climate change and biodiversity loss are a systemic risk, and its management is resource-intensive. Investments can change the world for the better, reminded Mikko Spolander from the Ministry of Finance and Outi Haanperä from Sitra at Evli's ESG training days.

We know that the climate is warming and biodiversity is declining, but what are we going to do about it?

According to Mikko Spolander, Director General of the Economics Department at the Ministry of Finance, climate change and overconsumption of natural resources force us to find more efficient and sustainable ways to produce and live. Continuing the current way of consuming the planet's resources will become impossible before long, but a radical cut in our living standards is not realistic either, according to Spolander.

The global average temperature increase might be stopped by reducing our living standards or by developing and introducing more efficient and cleaner technologies even faster. “We should make such drastic reductions in our living standards over the coming decades that I don't think it's possible or a winning strategy in any elections. Adaptation to such changes is comparable to a situation where our living standards in Finland would fall to the level of early 1950s by 2050,” Spolander comments in light of his calculations.

Therefore, Spolander puts his faith in technology and in the production and consumption based on more sustainable clean energy and recycling of materials, all generated by technology. According to him, it is the most concrete solution and requires “the least effort” in mitigating climate change and adapting to the changes. Technology and industrial restructuring require innovation and fresh solutions which, in turn, open the door to the redistribution of markets and new success stories.

Many new ideas are yet to be born around the world,” Spolander says. “There are eight billion of us humans, and even today someone comes up with something new. There are also existing technologies that can be introduced and commercialized. In this, Finnish companies have been pioneers globally.

Getting involved in the change will require significant investments by the public as well as the private sector, and at least in the beginning we have to compromise on other aspects for their sake. However, according to Spolander, Finland cannot afford to be a bystander in the change process as it would render Finland a “technological open-air museum” and unable to offer solutions to the global markets and it would undermine our competitiveness.

In my opinion, taking part in the transformation of technology and production is the only realistic way to lay a foundation for value added adapted to the planet’s carrying capacity – and on that foundation we can build a good life in the future.

Economic value of nature must be made visible

When we talk about the economy, we must also talk about nature and its diversity, emphasizes Outi Haanperä, project director of Sitra’s Nature and the economy project. The most recent megatrends report of Sitra, published in early 2023, highlights the erosion of nature’s carrying capacity as a key challenge of our time and emphasizes that the slower we change our ways, the worse the impacts of biodiversity loss will become.

Biodiversity loss presents a systemic risk to the financial markets, too,” Haanperä reminds.

More and more individuals, companies and public operators are aware of the risks and impacts of biodiversity loss but carry on living as before. According to Haanperä, change is only achieved by making the economic value of nature visible in decision-making. She gives forests and wood as an example.

We recognize very well the value of wood as a raw material and know the price of logs per cubic meter and the forest industry’s share in exports. But forests provide a huge number of other benefits as well.

Trees sequester carbon, cool down and control local climate, promote biodiversity, contribute to human wellbeing and prevent erosion. These important services are not visible, however, in our current way of valuing nature.

At the moment, we don’t see the big picture so clearly. And if we fail in that, can we make the best decisions for the future?

Haanperä says that the economic value of biodiversity can be better showcased through the following: pricing nature risks in financial markets and putting a price on burdening nature. Mechanisms included in the latter are, for example, sustainable growth tax reform and introduction of ecological compensations.

In addition, Haanperä believes there is room for innovative investment products in the markets.

We also need financial instruments relating to nature’s ecosystem services. What could they be?,” she challenges the financial sector experts.

Change is also an opportunity

There is a huge demand for solutions aiming to reduce greenhouse gas emissions and mitigate biodiversity loss impacts. Boston Consulting Group (BCG) and Global Financial Markets Association (GFMA) estimate that such solutions require globally 3–5 trillion dollars per year in the next three decades.

The sum may appear astronomical, but Spolander fosters optimism by putting it into perspective with the help of gross domestic product (GDP): the needed annual investments account for 3–5% of the global GDP.

According to Spolander, investments will be the key issue of global economic policy: how to create a financial environment where investments are directed to the right decisions?

Investments are an interesting question also locally. Finland’s export potential of climate-aligned solutions is significant: up to 85–100 billion dollars by 2035 according to the BCG’s estimate. In terms of export, climate-aligned construction, bio-based materials as well as green hydrogen and green metals, for example, are interesting industries.

Spolander sees the consulting firm’s estimate as large, but he believes Finland is in a position to become a great exporter – compared to its size – of climate-aligned and green knowledge and technology. In addition, the realization of investment plans relating to green energy and industries in Finland have captured public attention and would be significant for the economy. Government, companies and investors alike will play a key role in the change.

Government actions are essential for enabling the transition. The public sector is responsible for education, knowledge and research which are all preconditions for enabling companies to commit to product development and to create new technologies to be scaled to other countries. That’s where productivity comes from.

Spolander and Haanperä were guest speakers at Evli portfolio management’s internal ESG training days in November 2023.

At Evli, we want to grow our clients’ wealth in a responsible manner. Read more about our responsible investment principles, Evli’s climate work, how to incorporate biodiversity into investment activities and a climate portfolio tailored to the client’s needs.