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Natural capital: the call of the wild

2024 Outlook

5 December 2023 |
Active ESGImpactSustainable
It’s time for investors to embrace the economic potential of protecting and enhancing the world’s natural resources.
The Federated Hermes 2024 Outlook
Mitch Reznick
Mitch Reznick, CFA
Head of Sustainable Fixed Income, Federated Hermes Limited

On August 2nd, 2023, the planet hit Earth Overshoot Day. This is the day each year that the planet consumes its annual budget of natural capital required to generate economic value to humanity in that year. Beyond Earth Overshoot Day, the planet eats into the following year’s budget of natural capital. As such, from Earth Overshoot Day we are running natural capital budgets. When scientists first calculated Earth Overshoot Day in the 1970s, it occurred in late December; 10 years ago it occurred in late August. The trend is moving in the wrong direction.

Moreover, scientists at the Stockholm Resilience Centre (SRC) have estimated Earth is now operating outside of six of its nine Planetary Boundaries. The SRC believes that planet must remain inside of these nine boundaries to remain stable and provide for the growing population. If there ever were a red flag on the weakening ability of the planet to provide for humanity in perpetuity, this is it. 

With natural capital under threat, so then is the generation of global economic value.

Why does this all matter? According to the World Economic Forum, over half of global GDP “is moderately or highly dependent on nature and its services”.  With natural capital under threat, so then is the generation of global economic value. This is, therefore, a systemic risk.

Fortunately, a myriad of international organisations, countries, regulators, companies, and investors recognise this and are responding. This global pushback on the planetary effects of the Anthropocene Age generates forces that lean into sustainability—changes in regulations; shifting value changes and evolving consume preferences. These forces are triggering systematic changes in the economy and, consequently, finance. 

The companies that have the visibility and the governance to see these structural changes, and adapt to them—managing risks and/or capturing opportunities—are the resilient companies of the future.  They are the winners through this irrevocable change in the economy.  As we look ahead to 2024, valuation permitting, these are the companies that we seek to direct debt investments, because we believe they will be sources of alpha for our clients and positive impact for the environment and, therefore, society.

Gemma Corrigan
Gemma Corrigan
Head of Policy and ESG Integration, Federated Hermes Limited

We expect that natural capital themes will continue to rise on the agenda in 2024. To date, we have largely taken nature and its permanence for granted — but as we reach critical and irreversible tipping points, there will be limits to growth and the potential for huge financial losses if we continue on our current trajectory. The good news is that we still have an opportunity to fix this problem.

COP161 will be key to delivering the commitments needed for this change. Countries will be expected to deliver national biodiversity strategies and we will be pushing governments to deliver on both their 30% by 2030 goals and the more detailed targets outlined by the Global Biodiversity Framework. This means protecting the most important biodiversity hotspots, reorienting subsidies to reward nature friendly activities and tackling the main drivers of biodiversity loss.

Political will needs to be translated into clear, effective and fair policies

Political will needs to be translated into clear, effective and fair policies, with governance systems that protect tropical forests and oceans and other critical ecosystems. Existing companies should consider how they are impacting and dependent on nature, and how they can restore the subsequent damage. We need to move our collective focus from risk mitigation to nature positive by developing new regenerative and circular business models and revenue streams. There are already lots of innovative companies developing solutions, and we need equally innovative financing solutions. Blended finance will be key to delivering the outcomes we want to see in the most precious ecosystems, particularly in the global south where financing must be scaled significantly.

With mandatory climate disclosures increasingly widespread and voluntary adoption of the Taskforce on Nature-related Financial Disclosures recommendations gathering speed, regulators and standard setters – including the International Sustainability Standards Board – will soon turn their attention to nature-related disclosures.

Disclosure is not the end in itself. As data availability improves, regulations are emerging that are pushing corporates and financial institutions towards concrete action. In the EU, for example, 2024 will see the agreement of the Corporate Sustainability Due Diligence Directive to require corporates and potentially also financial institutions to take action to identify and mitigate social and environmental adverse impacts in their value chains.

Broadleaved woodland habitats provide the highest value of pollution removal services in the UK

1 2024 United Nations Biodiversity Conference (COP16) of the Parties to the UN Convention on Biological Diversity (CBD) is planned to be held in 2024

The Federated Hermes 2024 Outlook

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