With more than 20 years of experience working on sustainability issues in North America, Europe, and Africa, Sissel advises companies and leads BSR’s Ecosystem Services Working Group.
The ‘Laws’ of Investment
Sunset of the Era of Moore’s Law & the Dawn of Diamond’s Law?
Gordon Moore, founder of Intel, famously noted in a 1965 paper that every two years (though it is often cited as 18 months) there will be a doubling of transistor and integrated circuit capabilities. This accurate assessment of electronic device development has been key in setting corporate R&D goals and calibrating long-range planning. For investors, “Moore’s Law” has meant significant financial capital outlays that offered healthy returns within 4-year cycles.
Almost fifty years after Moore’s original paper, additional dynamics are emerging with relevance for investors.
The characteristics of these dynamics are well described by Jared Diamond in his book Collapse: How Societies Choose to Fail or Succeed, as Bill Campbell, of Equilibrium Capital explained in his talk during The Economist’s World Ocean Summit. Diamond points out that societies, as well as economies, depend upon natural systems. Therefore, undercutting the structure and function of ecological systems has significant negative repercussions for societal and economic systems. Campbell specifically stated his distillation of Diamond’s Law as: “When collapse is threatened, financial wealth, and ecosystem and social health, must create, sustain, and enable each other – or you will lose them all. “
Simply put: financial capital and social capital depend upon, and are ultimately inextricably intertwined with, natural capital. Or, phrased another way, green infrastructure is key to businesses.
Investors will ignore this insight—and a world in which Diamond’s Law may well eclipse Moore’s Law—at their own peril.
Climate change dynamics, freshwater concerns, fisheries collapse, pollinator deaths are all harbingers of changing natural systems—which may or may not continue to reliably function as we expect. Looking forward, our expectations may be dashed more quickly in marine environments and across landscapes where natural systems have been extensively simplified and fragmented. (Consider severely deforested areas, where rains can sweep away topsoil, resulting in loss of productive topsoil as well as sedimentation of rivers. The range of land use options becomes significantly changed.)
For investors and business leaders, the questions are increasingly coming into focus:
- Do we know whether, and how, our company is reliant upon nature and green infrastructure?
- Do we know what we are impacting (negatively or positively)? Do we know what others are impacting in areas upon which we rely on green infrastructure?
- Is the green infrastructure upon which we rely being maintained or undercut? With what implications?
Signaling the business relevance of these issues, the International Finance Corporation (IFC) in January 2012 integrated a new requirement to conduct due diligence on biodiversity and ecosystem services in “Performance Standard 6” (PS6) as well as other standards. And, in turn, the 79 financial services sector companies that have signed on to the Equator Principles are now also committed to assessing impacts and dependencies on biodiversity and ecosystem services—as another dimension of the due diligence process on new loans. The 42 financial services sector signatories of the Natural Capital Declaration also signal acknowledgement that businesses rely on ecological systems.
All of these actions are effectively noting that “ecosystem malfunction risk” is a new financial risk—that must be assessed, avoided when possible, or mitigated.
So, how does an investor consider “ecosystem malfunction risk”—in order to begin to assess both risks and opportunities associated with Diamond’s Law—and integrate it into due diligence and decision-making?
The IFC and Equator Banks point towards the World Resources Institute’s (WRI) Corporate Ecosystem Services Review (ESR). In addition, the WRI Aqueduct Atlas allows for assessment of water risk issues, and the Global Forest Watch tool tracks deforestation around the world through a map-based system developed by WRI, Google and 40 other partners. A wide range of other analytical tools exist, as both BSR and WBCSD have documented, for decision-makers to understand and optimize across multiple ecological metrics, and interrelated dynamics, in order to make decisions that avoid environmental and business risk. Ideally, business actions invest in key green infrastructure with ‘net positive’ results.
Investors are also developing their own screening and review approaches, such as at Equilibrium Capital, which focuses on persistent and higher returns and positive impacts by taking into account resource inefficiencies, stewardship, and long term value creation. Business examples can also be found on the newly launched Natural Capital Business Hub.
Governments and other business sectors are beginning to take note as well. According to recent BSR research, 68 national governments and 47 companies now assert that they are engaging with the seemingly arcane domain of ecosystem services—which is an approach to integrate the concept of natural capital into decision-making through measurable metrics and new analytical tools for identifying risk and opportunity.
The reality is that investors and business leaders alike were judicious to note and integrate Moore’s Law into their business planning. Many were handsomely rewarded, both financially and in terms of accolades and renown.
We are now at a moment in time when the financial services sector, and the broader business sector, would be wise to understand “ecosystem malfunction risk” and ultimately Diamond’s Law as a driver of thinking about investment that restores and maintains all forms of capital.