Key Environmental Factors in ESG Investing

Arun Kelshiker

20 years: Asset management and stewardship

In this video, Arun delves into the crucial environmental factors shaping investment decisions. He also explores the impact of the climate crisis, biodiversity loss, pollution, and resource depletion on businesses. He further talks about the direct link between business activities and environmental challenges, presenting both risks and opportunities. and finally discovers the key megatrends influencing environmental change, from global climate policies to international agreements like the Paris Agreement.

Sector and Region Transition

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Key Environmental Factors in ESG Investing

12 mins 20 secs

Key learning objectives:

Outline the key environmental factors investors should consider when making investment decisions
Understand the relationship between business activities and environmental issues
Outline the environmental megatrends influencing environmental change

Overview:

The World Economic Forum's Global Risks Reports from 2021 and 2023 highlight the crucial role of environmental factors, with 6 of the top 10 risks being environmental. Main challenges are the climate crisis, biodiversity loss, pollution, and resource depletion. Earth has warmed by 1.2°C since industrialisation, requiring strategies like climate change mitigation and adaptation. Biodiversity is at risk with countless species nearing extinction and 75% of Earth's land degrading. Air pollution harms health and ecosystems worldwide, while our resources diminish with rising consumption. Drivers of environmental change are trends like climate policies, the Paris Agreement, the UN's SDGs, and tools like carbon pricing. Businesses tied to environmental challenges face risks impacting operations. While regulations push for environmental accountability, achieving net-zero emissions is challenging.

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Summary

What are the key environmental factors investors should consider when making investment decisions?

Climate Crisis: Human-induced alterations, primarily greenhouse gas emissions, have raised Earth's temperature, with significant socio-economic implications.

Biodiversity Loss: Human activities have endangered countless species, with the IPBES noting potential extinctions affecting vast terrestrial and marine regions, impacting ecological stability.

Pollution: Especially air pollution, linked to numerous health issues. WHO reports show a majority live in areas exceeding safe air quality standards. Water pollution is also pressing, with contaminants affecting both human health and aquatic life.

Resource Depletion: Increasing global consumption strains natural resources, influencing food access, water availability, and leading to environmental degradation like deforestation.

What is the relationship between business activities and environmental issues?

Business activities are intertwined with environmental challenges, presenting both physical and transition risks. These risks directly affect companies' core operations and supply chains. While direct impacts can stem from immediate organizational activities like water usage or land conversion, indirect impacts can arise further down the supply chain, such as input production. Sectors like agriculture, construction, and pharmaceuticals are particularly vulnerable. Addressing these challenges not only mitigates risks but also offers avenues for sustainable growth and resilience.

What are the key megatrends influencing environmental change?

Three primary megatrends are shaping environmental change. Firstly, there's a marked increase in environmental and climate policies, with research showcasing a 20-fold surge in global climate-related laws recently. Second, international agreements like the Paris Agreement and the UN's Sustainable Development Goals play a significant role, emphasizing global collaboration for sustainable solutions. Lastly, carbon pricing, through mechanisms like emissions trading systems or direct carbon taxes, is becoming an essential tool for transitioning to a lower carbon economy.

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Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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