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Impact Investing

IPE special report May 2018

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The growing problem of resource constraints

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As Senior Advisor to the Asia Investor Group on Climate Change, I have been spending a great deal of my time lately talking to financial institutions across the region about the investment risks and opportunities associated with changing weather patterns. But climate change cannot be discussed in isolation: it is just one of a complex web of sustainable investment themes, including energy security, demand for natural resources and a rapidly growing population.

 Investors have only recently begun to recognise the degree to which all these macro trends are inter-linked.  While it is clear that food, water and energy security are crucial to continued development and economic growth, it is easy to underestimate how significantly the availability of any of these key resources affects the availability and cost of the others: food production requires water and energy; water extraction and distribution requires energy; and energy production requires water.

 More than 70% of total global water demand is used for agriculture. Industrially produced meat is especially water intensive, requiring up to 20,000 litres of water to produce a kilogram, compared to approximately 1,200 litres to produce a kilogramme of grain. Major grain producing areas in Asia, for example in China and India, depend on unsustainable mining of groundwater. Climate change effects could increase drought losses in North Eastern China by over 50% by 2030, and climate-related changes of precipitation have already critically reduced the levels of freshwater supply in Australia. Large-scale production of food is also energy intensive, in its use of fertilisers, irrigation, transport and processing.

 The International Energy Agency (IEA) forecasts the world economy will demand at least 40% more energy by 2030. Producing this energy will draw heavily on freshwater resources. Energy sources which are being developed as alternatives to fossil fuels are no exception. Because of policy incentives designed to reduce vehicle emissions, by 2030 the IEA predicts at least 5% of global road transport will be powered by biofuel. However, producing those fuels - over 3.2m barrels per day - could consume up to 100% of the total quantity of water now used worldwide for agriculture. 

 Climate change acts as an amplifier of the already intense competition over water and energy resources, while the need to meet the growing demand for energy is likely to worsen its impact on society. Over 75% of the global increase in energy use from 2007-2030 is expected to be met through fossil fuels, especially coal, and an estimated 77% of the power stations required to meet demand are yet to be built.

 The scale of global dependence on fossil fuels is enormous. According to Dr. Nathan Lewis of the California Institute of Technology, replacing traditional fuels and supplying the global economy with carbon-free energy would require construction of around 10,000 nuclear power plants. Uranium to support nuclear power on this scale would run out within 10 years.

 Even looking beyond the “water-food-energy nexus” (identified by the World Economic Forum in 2011 as one of three important clusters of risks that have recently emerged) consumption of minerals, metals and other materials has also seen exponential growth. Between 1995 and 2005, material consumption in Asia grew by about 50%. 

 Concerns about the limits of supplies of key materials mirror anxiety about peak oil. The Asian Development Bank reports underground reserves of metals such as iron, cobalt, platinum and palladium are projected to be close to exhaustion by 2050. Moreover, many low carbon technologies - such as wind turbines, hybrid vehicles and batteries - depend on rare earth metals, which have never been available in abundance. Exhaustion of the stock of rare earths could entirely derail the role of technology in tackling climate change.

 Perhaps the most important factor influencing these increasing problems of resource scarcity has been soaring population growth.

 In 1900, the world population was 1.6bn.  In October 2011, it reached 7bn, and a recent UN report projects it will reach 9.3bn by 2050, and over 10bn by the century’s end. Most of this growth will take place in emerging markets - by 2050, Asia may have 60% of the global population. 

 At the same time, many emerging markets are becoming wealthier. McKinsey forecasts in India, the number of households that can afford discretionary spending will grow from the present 8m to an estimated 94m by 2025.  In China, the middle class is expected to grow from an estimated 87m consumers in 2005 to 317m by 2015.

 Greater prosperity and higher living standards are accompanied by rapid urbanisation. According to a report published in April in the UK by the Royal Society, developing countries will be building the equivalent of a city of a million people every five days from now to 2050. McKinsey suggests in China in 2025, 64% of the population will live in cities.

Wealthier populations will demand yet more energy, water and food. McKinsey estimates the global car fleet will double to 1.7bn by 2030, putting great pressure on fuel supplies and increasing greenhouse gas emissions. The UN Food and Agriculture Organisation projects a 50% increase in demand for food by 2030, even as urbanisation on an unprecedented scale could displace up to 30m hectares of the highest quality arable land. There will be much higher meat consumption in emerging economies, and more extensive livestock farming will help to drive at least a 30% increase in demand for water, according to the International Food Policy Research Institute.

 These strains on natural resources are likely to lead to shortages and much greater price volatility. Corporate and consumer appetite for many commodities is already testing the limits of supply, meaning that even small shifts in demand can have a significant impact. This has serious implications for business. In a survey of companies across 24 sectors, carried out by Ernst and Young and GreenBiz at the end of last year, 76% of respondents said they anticipate their company’s core business objectives to be affected by natural resource shortages in the next 3-5 years.

Alexandra Boakes Tracy is Chairman of Association for Sustainable & Responsible Investment in Asia.

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