In recent years we have become very familiar with climate change and how it affects our lives and investments. Given the existential threat it poses, we tend to focus on the risks and costs: the risk of rising temperatures, the cost of avoiding disaster.
These risks and costs are an important part of assessing which companies make promising long-term investments. Firms with strong emissions-reduction policies stay ahead of regulators, for instance; those with close supply-chain relationships are better equipped to manage the impact of more volatile weather.
The other global emergency
However, this approach could result in investors missing a wealth of opportunities. Climate change is one of two closely connected global emergencies. The other is the loss of biodiversity and natural habitats. Biodiversity (the variety and abundance of species) is only just beginning to be discussed by asset managers. The focus is on the risks that loss of biodiversity brings: three quarters of our food is animal-pollinated and over 70% of cancer drugs are sourced from chemicals and compounds found in nature. The destruction of biodiversity affects almost every sector and over half of global GDP.
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Investors have begun to reward the companies selling products that can solve the climate crisis. So what are the opportunities in relation to biodiversity? What is the biodiversity equivalent of renewable energy? Food. The way we grow, sell and consume food is linked to over two-thirds of biodiversity loss, and so food is crucial to addressing it. Reducing pesticide use, water consumption and packaging is a key driver of change.
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AGCO (NYSE: AGCO) is changing the way we consume and produce food. This long-established US business makes farm machinery, but has a particular focus on hardware and software that allow users to take a “precision” approach to agriculture. Such “smart farming” (using sensor and satellite technology to fine-tune irrigation or fertilisation to the specific needs of small areas, for instance) greatly reduces the amount of chemicals applied to the land and saves money.
Fresh water is under constant stress from agriculture. Over 70% of it is used in the food-production chain and most of the rest in industrial processes. Evoqua Water Technologies (NYSE: AQUA) is a world leader in water treatment, with technologies to filter, disinfect, recover nutrients and more. Its products increase safety and efficiency for those consuming and using water in industrial processes, but also allow for clean disposal in the environment.
One way to help nature is to avoid damaging it in the first place. The fast-evolving circular-economy sector (which involves reusing, repairing and recycling existing materials for as long as possible to tackle waste and climate change) is an excellent source of ideas for companies using innovation to help us move away from the extractive economy (a resource-based economy dependent on extracting natural resources for money). Australia’s SIMS (Sydney: SGM) is a leading metal-recycling company, but it also deals with household items, data-centre equipment and electronic components. The volume of waste in the electrics category is increasing rapidly and it represents the company’s fastest-growing segment.
