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Resource Efficiency: A Case Study in Carbon and Water Use Explore the potential impact of resource efficiency on risk and performance

In recent years, there has been increasing awareness of the threats and opportunities arising from climate change. The asset management industry is well aware of these changes and has acted by forming associations, such as the Portfolio Decarbonization Coalition and the Montreal Carbon Pledge, a commitment to reduce the carbon footprint of at least USD 100 billion of institutional equity investments between 2014 and 2015. Interest in this area was further heightened subsequent to the United Nations sponsored COP21 Climate Change Conference, where politicians and business leaders worked together in order to stem the ever-increasing global temperature and reverse some of the devastating effects associated with global warming.

The commitment to keep the global temperature increase to well below 2˚C, or ideally 1.5˚C, above pre-industrial levels is a direct result of that collaboration. There is widespread recognition that the failure to keep the temperature increase under control could cause substantial loss of lives and property. According to research conducted by Climate Central, an increase of 4˚C would see the homes of 760 million people eventually submerged (Euractiv, 2015) and large parts of Belgium and the Netherlands vanish. For this reason, climate change has featured prominently on the agenda of policymakers and investors. While the focus on carbon emissions is necessary, the underlying causes that have given rise to extreme weather conditions and altered weather patterns have also strained other depletable resources in the environment—namely, water and land—upon which human life and economic activity rely. Given this, it seems reasonable to examine the way in which we are using our natural resources as a whole to generate economic activity and its concomitant impact on the environment.

Until now, consumption has underpinned global economic development, and it was the unprecedented drop in the price of key resources—by almost one-half in real terms (Dobbs et al, 2013)—that sustained much of the growth in the 20th century. However, we are entering an era of unparalleled resource pressure, driven chiefly by population growth and the emergence of a sizeable middle class in developing countries. The consequence is that the prices of resources are expected to become much more volatile and less predictable. Moreover, in many cases, resources were not even priced in a manner that reflected the entire cost of production (for example, unpriced water or energy subsidies) and the negative externalities (side effects), such as carbon emissions, in relation to their use. This implies that the resource-dependent growth model to which we are so accustomed may no longer be sustainable. The issue is therefore about decoupling the relationship between economic growth and resource consumption, and improving resource efficiency may be part of the answer.

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