• Lev Mikulitski

Natural resources as an inexhaustible source of a high return on investment.

For the business world, embracing the SDGs is a smart business and reveals a lot of unleashed opportunities. But this is more than just another approach or direction of thought. It is about building long-term impact-generating foundations, especially from the investment point of view. So where should I start? Let's start with the planet we live in and especially with the biosphere.

The biosphere is the surface and atmosphere of the Earth occupied by living organisms. Here we find deep oceans, fast deserts, massive mountains, mysterious forests, and powerful weather conditions Our planet is incredibly diverse and home to many known and unknown species. The biosphere is the context in which life on Earth lives and develops defined by our planetary boundaries. This is why the very first step to explore businesses' contribution to the SDGs starts here.

The economy and society are embedded in the biosphere. There are four SDGs predominantly linked to the biosphere. It's quite clear what the goals and climate action (SDG 13) and clean water and sanitation (SDG 6) aim to achieve. But what do life on land (SDG 15) and life below water (SDG 14) mean and how can businesses contribute to achieving these particular goals?

I will start with SDG 13 which focuses on taking urgent action to combat climate change and its impact. Without urgent actions to reduce CO2 emissions, global temperatures are going to rise by five to six degrees Celsius by the end of the century. I think no one knows exactly what that would mean for the environment, but the effects will no doubt be devastating. It will severely challenge the viability of our current ways of living, lead to an increasing number of climate refugees, and cause a dramatic extinction of species.

We are already experiencing the negative and unpredictable results of climate change such as the increasing magnitude and frequency of extreme weather events. Just think of the hurricanes that destroy the infrastructure on the shores and how fast the Arctic sea ice is melting. SDG 13 aims to integrate climate change measures into national policies, strategies, and planning. It also strives to make communities more resilient against extreme weather events.

Let's look into the other SDGs related to the biosphere. Climate change has a strong link and interconnection with SDG 14 and SDG 15. The functioning of ecosystems on land and below water is under threat by pollution, over-consumption, and climate change just to name a few examples. Our oceans drive global systems that make it possible for us to live on Earth. They regulate weather and climate and provide us with food, drinking water, and not to forget the oxygen we breathe. SDG 14 focuses on the conservation and sustainable use of the oceans, seas, and marine resources.

As for life on land, we face several threats, think of land degradation, droughts, and desertification, and a loss of biodiversity. This poses a threat to our ecosystems and to people who depend on the land to make a living and to feed their families. SDG 15 aims to solve these challenges, but why are SDG 14 and SDG 15 important to business? Well, companies are dependent on ecosystems for their use of natural resources such as freshwater, fiber, and food. They can negatively affect ecosystems by depleting these resources. However, businesses can directly contribute to these SDGs by measuring, managing, and mitigating their impact. Ultimately, they should change their business model to a sustainable business model that includes social and ecological value creation as much as financial value.

Now let's discover the unrevealed beauty of planet earth, marine life. If you happen to be a fisherman or a scuba instructor, you interact with oceans on a regular basis. But for the rest of us, marine life is usually the last thing on our minds as we go about our workdays. So it's easy to assume that we don't impact the oceans. However, individuals and companies do make an impact on ocean life all over the world through externalities, and externalities could be destructive.

When I talk about externalities, I usually refer to unintended consequences of our actions, sometimes our very basic actions. In economics, the word externality means the consequences of firm behavior, which are not accounted for in market prices. This occurs when behaviors impact external parties in a negative or a positive way. In a perfect world, we would still pay attention to the full cost to society for all our actions and would receive the benefits in exchange for paying that market price. But when externalities exist, the total cost exceeds the price, or the total social benefit exceeds the benefit to the firm. We call these negative and positive externalities. Some examples will help us show why this matters. If a firm causes a negative externality, the social cost exceeds the price paid. This means the behavior causes harm to others in society. For example, when we place wind turbines in the ocean, we capture a lot of zero-carbon energy, which is great for producing low-emissions electricity. At the same time, we might disrupt marine wildlife habitat or migration routes. Every move we make has consequences.

The impact of wind farms on wildlife is considered a negative externality because we don't usually pay the cost of damaging the wildlife. Other common negative externalities that impact the world's oceans include excessive use of disposable plastics by consumers and heavy application of fertilizer in agriculture. These materials often wind up as pollutants in our oceans. And we'd all be better off with less of these externalities, but unfortunately, the ones causing the damage aren't the ones paying the price.

Positive externalities, on the other hand, generate benefits for others. For example, research and development projects to reduce plastic packaging may save a company money on packaging or shipping supplies, but also prevents waste, prevents pollution from wasted plastics, and provides examples for other firms to follow. Other firms will learn from the innovator's research efforts and can adopt the technology at a lower cost.

That's how research create benefits for others outside the firm. Other common positive externalities include education and habitat protection. These activities tend to make others better off, so we want people to do more of them. Unfortunately, the ones investing in research, education, or habitat protection are not the ones who get the full benefits of their action.

So what can we do? In economics, we say that it is just about getting the price right. What I pay for the product at the market should reflect the true cost to society. When I buy plastic, I don't normally pay the cost of the pollution that it creates. But if I did, I'd buy less of it. That's why governments often tax polluting activities. Taxes increase the price so that the price you pay is equal to the cost to society. The reverse is true for positive externalities. For example, when I educate myself, I invest my own tuition money and a lot of time, but will likely share the knowledge I gain with my eventual coworkers and peers. Because those others benefit from my investment, we often subsidize schooling. These subsidies lower the cost of education, encouraging people to pursue more of it. An economist would tell you that the key to correcting externalities which damage our oceans is simply to fix the prices. However, correcting externalities is rarely simple. First, the social cost of pollution is uncertain.

How much does it cost society if a section of reef is damaged by tourists or by pollution? Without a clear answer, it's not clear how much we should tax the activities causing the damage. And remember, the tax only makes everyone better off if we get the price right. Second, externalities often cross-government borders, with polluters in one country impacting communities in other places. This is especially true for our oceans, which span the globe. Addressing externalities requires collaborations. In many cases, this means that a polluter must join forces with those impacted by pollution to identify a way to make everyone better off.

Last but not least is water-related matter. Having clean water is taken for granted a lot of times. But did you know that water scarcity is one of the top urgent global crises? Around more than four billion people, which is half of the world's population, have trouble accessing clean water. This crisis is getting worse by the year, and the expected demand for water will be 40 percent higher than the supply in 2030. SDG 6 focuses on ensuring the availability and sustainable management of water and sanitation for all. Clean water is, in fact, a business challenge. Many industries use water as a key resource. Just to give you an example, the production of one cotton t-shirt can take up to 2700 liters of water. The fashion industry is not even the most water-intensive industry. In fact, almost every industry needs water for its production. Food, energy, construction. The list goes on.

One of the few industries that is not a major water consumer is the financial industry, yet they have a powerful way to influence access to clean water. Banks and other investment companies decide which projects get funded. Fortunately, there's a strong business case for investing in water. Long-term investors are especially interested in projects that will be in high demand in the near future, like water-saving technologies and water purification plants.

The future sometimes seems unclear, but it depends only on us. Our business duty is to embark on a better future and build all the necessary infrastructure to enjoy it in the best possible way. And yes, it is also a wise financial investment.

#vc #SDG #impactinvesting

© 2016 by Mikulitski Critical Consulting. All rights reserved.

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