Earth Overshoot Day: How Investors Can Help Move the Date

Original content: AXA IM

The impact of the coronavirus pandemic meant that Earth Overshoot Day in 2020 was pushed back by three weeks, to 22 August – as lockdowns meant far fewer people were travelling, planes were grounded, and carbon emissions plummeted. But as global economies have reopened, they have begun to rise again. Meanwhile, other areas of natural resource consumption, such as demand for food, has not been reduced by the pandemic. As a result, Earth Overshoot day in 2021 has moved almost as early as in 2019, when it fell on 26 July.

At AXA IM, we believe that investors have a crucial role to play in the transition to a low carbon economy, with the move to renewable energy paramount. However, other areas such as biodiversity, urban planning and development, and how we produce and distribute food are other critical factors in managing the earth’s natural resources more responsibly.

Policymakers, businesses and asset managers like us are already taking decisive steps to combat climate change. Governments around the world have announced net zero targets and new policies to work towards those goals, while as of March 2021, more than a fifth – 21% - of the world’s 2,000 largest public companies had made net zero commitments, representing annual sales of nearly $14trn1.

Asset managers are working together by signing up to ambitious pledges and programmes like the Net Zero Asset Managers Initiative, which has pledged to support the goal of net zero greenhouse gas emissions by 2050 or sooner. As of July 2021, it had 128 signatories - of which AXA IM is a founding member – representing $43trn of assets under management2.

Below, AXA IM experts share their views on how we can all reduce the rate at which we consume the planet’s resources, and outline what they believe the investment implications could be.  

Amanda O’Toole, Portfolio Manager, Clean Economy Strategy, AXA IM

One clear way to reduce carbon emissions - and our reliance on fossil fuels - is to switch from petrol cars to electric vehicles (EVs). Thankfully, the combination of ongoing innovation in the automotive sector and policy support from governments is continuing to support their increased adoption.

Currently, it is anticipated that EVs will make up almost a third, at 31%, of all passenger vehicles on the road globally by 2040, versus just 8% in 2030. 3

But if EVs are to be truly green, the electricity they run on needs to be generated via renewable resources. The industry also needs to address issues around the extraction of raw materials where there are environmental and human rights concerns. Some of the leaders in this sector are already acting more responsibly by developing innovative methods or using other raw materials where possible.

Another potential area of concern is around managing EV batteries’ end-of-life – there is scope to develop batteries that can be more easily repaired, reused or recycled which we think is a growth opportunity and where the most responsible businesses can differentiate themselves.

Read more: Can electric vehicles help drive a green recovery?

Another area to consider is how we produce, distribute and consume food. A United Nations report found that if food loss and waste were a country, it would be the third biggest source of greenhouse gas emissions.4 One way we can support the reduction of food waste is by allocating capital to companies taking the right steps forward. Precision agriculture solutions help to produce more food using less land, water and fewer chemicals, creating less emissions and therefore lessens the impact on biodiversity - and I believe there are potentially many long-term investment opportunities in this sector.

Additionally, we can all make more effort to recycle and as investors, we can look to companies that facilitate recycling and the reusing of materials. One example is aluminium drinks cans. These are easily recycled through an efficient process, and as consumers increasingly turn away from single use plastic bottles back towards aluminium cans, I see a structural growth opportunity in this sector.

I also believe that businesses that are helping mitigate environmental damage by leading the way in waste management and recycling will yield large net gains to the global economy and are more likely to navigate changing regulatory demands in future.

Liudmila Strakodonskaya, ESG Analyst, AXA IM

Resource consumption is directly related to biodiversity preservation and protecting natural ecosystems. Producing 24% of global CO₂ emissions, deforestation is a leading cause of global warming and is a key factor compounding biodiversity loss5. As investors, we can focus on this area by identifying the hotspots and the areas that are most at risk, in terms of where we are consuming resources at the highest rate and which are the most vulnerable in terms of their capacity to be renewed.

This is the approach we are taking at AXA IM with our new ecosystem protection and deforestation policy where we are trying to avoid investments that put extreme pressure on resources like forests directly, or through consumption of meat and other commodities that are mono-cultured like soy. Soy is used in more and more plant-based products to replace meat, which could be good news from one perspective, but from another perspective it creates risks of natural ecosystems conversion by putting pressure on soil, water and biodiversity.

Biodiversity and natural resource preservation are systemic global problems – it is not country or sector-specific, and a lot of sectors are indirectly exposed to these issues for example through their supply chains. A systemic risk needs a systemic approach, so for us, it is part of our environmental, social and governance (ESG) strategies and global ESG approach, which we apply across asset classes.

At AXA IM, we have committed to reducing our own carbon emissions by at least 25% by 2025 as we further our roadmap to becoming not only the world’s leading responsible investor, but a globally responsible business.

One way that investors can really make a difference is through engagement. In many ways the risks and opportunities relating to natural resources are not entirely understood and therefore not priced in by companies or issuers. As investors, we need to really mobilise and engage companies in thinking around this topic, so that companies can identify their weak spots around biodiversity and natural capital management, and try to find solutions to preserve nature and to preserve value in the long term.

Johann Plé, Green bonds strategy manager, AXA IM

We need to accelerate investment in the energy transition to reduce our consumption of the earth’s natural resources, and I believe green bonds are an ideal tool to support this move.

Given the huge amount of investment required to finance the transition, companies need access to a large amount of investment flows. The bond market is the biggest place that exists to finance such investment, and within the bond market, green bonds offers a very clear label to identify where you are directing your capital.

Green bonds have a huge role to play in the European Union’s recovery plan, which is dedicating 30% of its funds to fighting climate change. We have seen a huge amount of growth already in the green bonds market – by the end of May, issuance was already twice the level issued over the same period in 2020, and we believe total green bond issuance for the whole of 2021 could reach $400bn.

This is partly a reflection of more and more companies implementing targets to reduce their carbon emissions, combined with government commitments to more green financing.

Unfortunately, I believe that the date of Earth Overshoot Day could move earlier still next year. This year we have continued to see the impact of coronavirus; we haven’t had a complete re-opening of economies and for example international travel hasn’t fully restarted. But the efforts we are making as an industry are long-term efforts – we need to continue to take steps now to see the benefit later.

But I am not pessimistic – the momentum we have in green bond markets for instance to me is a message of optimism. It shows that investing in the green transition is not about a specific part of the economy, it is something that is happening across a wide range of sectors and companies, and we should see the benefits in the longer term.

Chris Iggo, CIO Core Investments, AXA IM

It is obvious that investors can help society slow down the rate of depletion of the world’s natural resources and prevent a further moving forward of Earth Overshoot Day.

Initiatives that support the transition to renewable energy and away from production techniques that destroys biodiversity are being supported by investors. In the long run we believe that investors will benefit from superior returns as ‘earth-friendly’ businesses will experience strong growth while ‘earth- unfriendly’ firms will suffer from reduced demand for their goods and services, a higher cost of capital, and potentially, higher taxes.

Moreover, investors can help educate and stress the importance of resource efficiency and the circular economy. We are already seeing disruptive businesses that are challenging resource intensity growing strongly and attracting capital. These trends will accelerate in the years ahead.

Sources

[1] https://eciu.net/news-and-events/press-releases/2021/report-fifth-of-worlds-largest-companiesnowhavenetzerotarget#:~:text=At%20least%20one%20fifth%20(21,ECIU)%20and%20Oxford%20Net%20Zero.

[2] https://www.netzeroassetmanagers.org/

[3] https://www.axa-im.com/content/-/asset_publisher/alpeXKk1gk2N/content/tomorrow-augmented-can-electric-vehicles-evs-help-drive-a-green-recovery-/23818

[4] https://www.unep.org/resources/report/unep-food-waste-index-report-2021

[5] https://www.axaim.com/documents/20195/607482/AXA+IM+Climate+Action+Report+VFIN_.pdf/c5321d84-7490-42a1-8d30-0f60c205c449?t=1623765711996

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