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It is evident that powerful socio-political and environmental forces are upending established business models. Corporates and their performances are dependent on their stakeholders. There exist deep synergistic relationships among companies, its stakeholders and environment. Ignoring even one will prove to be perilous. An analysis of Environment Social and Governance (ESG) factors that are relevant to a firm, provides investors with a window to the intersection of big macro trends and company’s ability to navigate them.
History is made of turning points and we may be at the cusp of such a moment today as we face the onslaught of climate change and environmental degradation, in our daily lives. It is worthwhile to take note of a few recent instances of environmental degradation and how pollution and climate change have started impacting our daily lives, and thus corporate ecosystems.
Plastic Menace:
a. If all plastic bottles humans use in a year were to be stacked on top of each other, you could build at least 190 towers to the moon. Add to it bags, plates, and everything plastic consumed globally. All that is buried in landfills, dumped in rivers, and carried into oceans.
b. About 6.3 billion tonnes of plastic waste has been generated in the world so far, according to a 2015 study by Britain’s Ellen McArthur Foundation. That’s equivalent to the average weight of more than 1 billion African bush elephants
c. It is estimated that there will be more plastics in the ocean than fish – by weight - by 2050. A joint study by the Ellen McArthur Foundation and the World Economic Forum had found that at least 8 million tonnes of plastic is dumped into the oceans every year. That's equivalent to one garbage truck a minute. It’s set to grow to two per minute by 2030 and four by 2050.
Around 90 percent of this plastic will not decompose for at least 500 years—polluting food, water and air. Plastic in the ocean has a tendency to break down into other smaller pieces. And these tiny pieces then get taken up even lower down in the food chain. Recently a dead whale was found to have its stomach full of plastics. Fish will ingest these plastics and will possibly become carcinogenic. When it ends up on our dinner plates, human health will directly be at peril.
Now imagine the impact this will have on fishery industry, fish imports and exports and all other relevant stakeholders. So consequently, menace of plastics will adversely impact the ship building industry, steel, trawlers, and rob millions of their livelihood all over the world. As an investor your stocks in this sector may be worth a re-look. Would you agree?
Delhi’s winter air blues:
a. Breathing the air was, at its worst, like smoking 50 cigarettes in a day. Last year, Delhi earned the unenviable distinction of becoming one of the most polluted cities on Earth. Pollution surged so high that the airborne particles and toxic chemicals that make up the smog choked the 19 odd million residents of the metropolitan area.
b. Hospitals reported a 20 per cent surge in patients with pollution related illnesses, and doctors declared a public health emergency. Delhi’s chief minister went as far as to call his city a “gas chamber”.
c. According to the US Embassy’s measurements, air in New Delhi reached PM2.5 concentrations (particles with diameters of 2.5 microns or less) of more than 1,200 micrograms per cubic meter, 48 times more than the guideline value established by the World Health Organization, just a bit short of 1,400 micrograms per cubic meter, a negative record set in Shenyang, China.
The increasingly polluted air means people spend more time indoors, which increases energy demand from lighting. That creates a feedback loop that exacerbates the whole situation. People virtually stop going out, adversely impacting sales of most goods during the winter months in Delhi. Working hours are reduced or lost, productivity takes a tumble, and every company’s bottom line is hit. Will it be a matter of time before diesel or petrol vehicles are either banned or minimized in the city? How will this affect the auto industry and stocks? Think about it.
Hothouse Earth Effect:
a. The 2 degrees Celsius mark plays a big role in the Paris Agreement, the landmark 2016 agreement signed by 179 countries to combat climate change by reducing carbon emissions (the same one that the U.S. announced its withdrawal from last year). In that accord, countries agreed to work to keep global temperature rise well below 2 degrees C, and ideally below 1.5 degrees C, above pre industrial levels this century
b. Today, we emit 40 billion tonnes of carbon dioxide a year from burning fossil fuels. But roughly half of those emissions are taken up and stored by the oceans, trees and soil. However, we are now seeing signs that we are pushing the system too far — cutting down too many trees, degrading too much soil, taking out too much fresh water and pumping too much carbon dioxide into the atmosphere.
c. Scientists fear that if we reach a certain temperature threshold, some of these natural processes will reverse and the planet "will become a self-heater". That means, forests, soil and water will release the carbon they're storing. The moment the planet becomes a source of greenhouse gas emissions together with us humans, things will accelerate very fast in the wrong direction.
The only solution possible is to reduce the carbon footprints as much and as drastically as possible. If not curbed almost on a war footing, the outcome of hothouse effect can be too devastating to imagine. Extreme weather events such as building-flattening hurricanes, years-long droughts and wildfires will become so common that they might no longer make headlines.
What do you think will happen to companies that rely exclusively on fossil fuels (the worst CO2 emiitters)? And Have no strategy of moving into non fossil fuels/alternates like renewables and solar. And what if they are in your portfolio?
Companies, consumerism, economy, society will plunge into chaos and mayhem.
The corporate sector must take the lead on mitigating some of these existential risks. Longer term those corporates that choose not to uphold high levels of ESG standards may not survive. If corporates do not embrace responsible environmental practices, natural attrition, shareholder pressure and limited regulatory forbearance will determine their fate – with negative consequences – as the world turns more and more responsible.