Sustainability Drives Impact Investment in Natural Resources
by Marta Maretich
Natural resources have always been precious to mankind. Today, they are more in demand than ever. Population growth, climate change and the rising affluence of developing nations are putting a strain on the planet’s limited resources. Water, arable land, food, fuel and raw materials are seeing a period of unprecedented demand and there is worldwide concern about future shortages and the destruction of ecosystem services, such as photosynthesis, pollination, flood prevention and climate stabilization, that results from over-exploitation.
But while the pressures on our resources are getting bigger; and the consequences of depleting them are getting clearer; there are positive developments, too. A global movement for sustainability is now maturing and this is encouraging an explosion in the kind of responsible resource businesses that belong in our impact portfolios.
Sustainability goes mainstream
Once a thing of the green fringe, sustainability is now mainstream and this is one of the factors that makes natural resources attractive investments now. Governments are the key drivers of today’s sustainability agenda as they increasingly use policy, regulation and subsidy to support the development of new kinds of businesses and convert existing businesses to more sustainable practices. Working in concert with governments, international bodies like the UN, the WEF and the World Bank are launching programs designed encourage sustainability and establish standards in a range of resource sectors. Natural resources are seen as key to development for some of the world’s poorest communities; including rural smallholders and indigenous peoples; and this puts them at the center of international efforts to raise living standards.
Meanwhile, public awareness of sustainability issues increasingly drives consumer choices. Businesses; even those that once ignored the idea; now know that being able to demonstrate sustainability makes economic sense. Jobs in sustainability are multiplying as businesses hire analysts, consultants and other specialists to manage their sustainability and reporting commitments.
Resources take center stage
With sustainability a growth area for world markets; and a priority for many world governments; there is a new focus on natural resource investing. The emphasis now is on finding ways to make more of nature’s gifts while preserving and maintaining them for the future. New businesses; and new ways of doing business; are springing up, encouraged by government policy and shaped by the expertise of development and philanthropic organizations who have blazed trails in the areas of sustainable use of resources.
This is good news for impact investors looking to place their capital in the natural resources sector. Here are some of the trends and developments in four resource areas: Oceans, Minerals, Forestry and Land.
The world’s salty waters have been a focal point for resources-based activity in recent months. Concerns about overfishing and acidification, a consequence of the seas absorbing high CO2 emissions, are leading governments, environmental campaigners and business leaders to place a new emphasis on the oceans and this is changing the investing landscape.
On the governmental side, 2013 saw the US instituting the National Oceans Policy, joining other governments including Australia, South Africa, Namibia and the Philippines in establishing comprehensive, future-focused policies for ocean resource management. The social enterprise sector kept in step, highlighting the issue by including an ocean themed “track” at SOCAP13. For the first time veteran campaigners and ocean champions discussed ocean topics along with journalists, entrepreneurs, and impact investors from other sectors including small scale agriculture, health, and poverty alleviation; all of which are connected to ocean and coastal issues. Meanwhile, in the private sector, The Economist is throwing its weight behind sustainability issues as it plays host to the World Oceans Summit in California in February of this year.
These developments set the stage for a mini-boom in sustainable marine businesses in areas like fishing, aquaculture and energy and mineral extraction. New government regulations will also drive growth in compliance industries, such as environmental remediation and business-to-business services providing sustainability reports and the like.
Mining; and its products, mineral; have a bad reputation in the world of sustainability. Mineral extraction is widely associated with human rights violations, environmental damage and conflict. For those reasons it remains a largely unexplored sector for impact investors. Yet in the mainstream financial markets, mining is big business, with growth driven by demand from the resource-hungry emerging economies like China, India and Brazil; demand that is not going away anytime soon. This fact, plus the alluring possibility of helping to bring change to the mining sector, means that impact and sustainable investors should think again about minerals when looking for places to commit their capital.
The tools for change may already be in our hands. An excellent piece of research conducted by the International Institute for Environment and Development (IIED) charts the significant progress made in mining policy, oversight and governance over the last decade, especially by the International Council on Mining and Metals (ICMM), a coalition of mining companies that has embraced sustainability standards and put issues like indigenous rights, community development and climate change on its agenda.
The IIED report indicates a rising awareness and acceptance of sustainability in the industry itself; a hopeful sign for the future. The challenge for the next 10 years, it concludes, will be implementing those standards we now have more widely. Such a move could transform the mining industry; and impact investors, with an insistence on standards and reporting, could play an important part in this transformation.
Groups like the Alliance for Responsible Mining (ARM), which works on behalf of an estimated 20 million small-scale and artisanal miners worldwide, are already hard at work bringing change. They have developed supply chains for sustainably mined products and created the Fairtrade and Fairmined gold standards for the industry. Deals have already been struck with jewellery manufactures and, like conflict-free diamonds before them, these ethical products should find favor with consumers as they hit the marketplace in the near future.
Conflict minerals have been a contentious issue for some time and a measure of progress has been made in addressing the human and environmental costs of mineral extraction in places like the Congo. Electronics industry giant Intel has now moved to make all its microprocessors free of conflict minerals. The industry pressure group, the Electronics Industry Citizen Coalition (EICC), has compiled a useful list of conflict-free smelters and refiners, while the NGO the Enough Project has ranked companies for their use of conflict-free minerals.
Yet the path ahead is not yet clear for sustainable mining; and this is another reason for impact and social investors to enter this market. A powerful coalition of business leaders recently petitioned a panel of federal judges to overturn a provision of the 2010 Dodd-Frank law that requires companies to disclose their use of minerals from Africa. This would be a major setback for the movement for sustainable mining. However, the presence of more social investors and conscientious corporations in this resource sector could make all the difference to the way mining develops in the future.
Unlike mining, forestry is already a popular focus for impact investors. Many sustainable forestry enterprises have cropped up in recent years, working to conserve; and sustainably exploit; wooded environments across the globe and these remain attractive investments.
It hasn’t all been plain sailing, though. Carbon offset schemes were central to many forestry enterprises and the collapse of the world carbon markets in 2012 was a blow to the sector. Some forestry sustainability accreditation programs have come under fire, too, and there has been a shakeout in certification schemes that many hope will lead to a more reliable system.
Despite this, impact investors, like the Packard Foundation, have largely stuck with forestry because of its many wider benefits. Sustainable forest management supports biodiversity and habitat conservation, creates local jobs, protects indigenous communities, fosters eco-tourism and recreation, contributes to food stability, and aids climate stabilization; as well as having the potential to generate diverse revenue streams and attract tax breaks.
Meanwhile new technologies are expanding the horizons of sustainable forestry. Innovations, such as the use of drones and sophisticated geo-mapping techniques, are advancing the science of forest management, making it possible to do more with woodlands while we protect them. Eco-tourism and boutique woodland businesses are taking off in many parts of the world. The link between agriculture and forest habitats is contributing to the search for ways to bring prosperity to some of the world’s poorest communities. At the same time, big multinationals such as paper manufacturers are bowing to regulatory pressure and seeking ways to develop more sustainable supply chains, a shift which will have implications for sustainable forestry businesses.
Land is a resource that offers a host of opportunities for impact investing both in emerging and developed economies. Essential to human life and prosperity, land produces food, water, wood, fibre, fuel and minerals and, when managed responsibly, it also provides vital ecosystem services such as photosynthesis, pollination, nutrient cycling, water purification, soil formation, climate stabilisation and flood prevention.
Increasingly, land use and ownership is seen as the key to solving many of the world’s most pressing environmental and social problems. Large international organizations like the United Nations Convention to Combat Desertification (UNCCD) are now promoting responsible land investments as a way to halt land degradation and preserve the integrity of our natural capital. Land and property rights are also central to poverty alleviation, and securing land for use by rural populations is a priority for many development organizations.
Yet, as is true across the natural resources sector, there is a right way and a wrong way to invest in land. Oxfam has raised concerns about a global land grab where big investors, often foreign governments and pension funds, buy up large tracts of farmland, especially in parts Africa, Latin America and Asia, squeezing local people out. Their report drew attention to the negative impact on local communities of the wrong kind of investing and led to a call to the World Bank to end its participation in these deals.
To make sure they are part of the solution, not part of the problem, impact investors need to be aware of the issues. The right kind of investing respects the rights of locals to “Free and Prior Informed Consent”, promotes land rights and good land governance and fosters food security both locally and internationally. To avoid possible pitfalls, investors would do well to tune into the conversation about land use here and here, and subscribe to sets of principles like these and these.
In the developed world, land investment is often part of a move to a more green and sustainable lifestyle. Iroquois Valley Farms, chosen as one of the Impact Assets 50, leases farmland to organic farmers, while Beartooth Capital acquires western ranches for conservation and use as eco-tourism destinations. In cities, land acquisition plays a part in neighborhood regeneration and community home ownership schemes. With these models turning profits, and the movements behind them gaining popularity, we can expect to see more opportunities for land investment in developed economies in the future.
Natural resources have long been a promising sector for impact investors, especially those with an emphasis on the environment. What’s new is the increasing involvement of governments in supporting sustainability. For some natural resource industries, this is putting sustainability on the map for the first time. For others, government support and improved standards are advancing the development of sustainable practices and sparking innovation. All of this is good news for impact investors who want to put their capital behind businesses that contribute to the future health and prosperity of the planet and its inhabitants.
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