Photo by Sheherazade Photography

“Technologies like renewables have their limits,” says Markus Muller. “The real potential for a sustainable global economy lies in using the wonders of nature to help rectify the planet.”

As has been previously discussed, a fundamental issue underpinning climate change is that the current economic system does not recognise nature as capital. We use and degrade nature freely. But we can go further than that, and say that putting nature at centre stage and appreciating the ecosystem services that it can deliver, would significantly help us counter climate change.

Markus Müller

It is easy to believe that technology, correctly implemented, will be enough to combat climate change. And it is true that technological transformation, moving away from fossil fuel based production chains towards more electric and alternative energy based production chains, will support the reduction in CO2 emissions and in mitigating the climate change problem. But, if we wanted to electrify the entire world so that everything is based on renewable energy, it would require a vast amount of commodities that we currently do not have. Current estimates suggest we would need 500% of the commodities we already use today. And the extraction of these commodities will harm nature as well. So, technology has natural limits in its ability of adapting to a future counteracting climate change.

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We need the help of nature.

Nature based solutions (NBS) are one of the most important ingredients here. As defined by the IUCN, they leverage nature and the power of healthy ecosystems, to protect people, optimise infrastructure and safeguard a stable and biodiverse future.

Their potential is massive. One exciting aspect is that they can include local communities, especially in the global south, which are currently excluded from global developments. NBS produce societal benefits in a fair and equitable way, in a manner which promotes transparency and broad participation. They also maintain biological and cultural diversity, as well as the ability of ecosystems to evolve over time.

Photo by Francesco Ungaro

The IUCN have estimated that NBS have the potential to reduce roughly 10-18 gigatonnes of CO2 emissions each year (by 2050). This would be a major contribution to reducing CO2 emissions. And NBS also mean the reinvigoration of nature, which will further increase the climate mitigation benefit, including in such crucial areas as the resilience of the coastline.

One discussion in the global market is how to use NBS for carbon credit trading. NBS are one of the carbon sinks and these credits can be traded by companies not just to offset their C02 emissions, but also to steer those companies, via these carbon credit markets, to reduce their greenhouse gas emissions.

And there are other potential benefits. In the ocean, if we put some areas under protection because of NBS, the fish stock will be very likely to recover. The fish stock will swim around, outside the protected area, which could benefit sustainable fisheries also outside such areas; scientists having found that this led to an increase in output. So NBS have multiple potential benefits to the entire planet.

Read more: Markus Müller On Natural Capital

As another example, a healthy coral reef absorbs 97% of the energy of a wave. And this speaks to the further economic potential of NBS. New jobs, for example. We have forest rangers, so why not have coral rangers or gardeners?

Photo by Vishwasa Navada

In fact, they already have coral gardeners in Tahiti, where they are a source of labour on this breakwater. Creating a coral reef produces environmental and biodiversity benefits, creates labour, and can generate a profit.

There is however, a challenge: complacency and the rebound effect. We know this from countries where recycling has become a tool for reducing plastic waste, but the high recycling ability of a country (Germany is a good example) leads to more plastic production. Therefore believing that NBS will do the trick and lead to absorption should not lead us to think that we can emit further CO2. NBS will only ever work while we are reducing CO2 emissions at the same time. The priority is to reduce CO2 emissions while using the ability of NBS for absorbing CO2 as a mitigation strategy.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank

Find out more: deutschewealth.com/esg

Can we put a price tag on nature? Valuing the carbon services of plants and animals is essential to bridging the gap between finance and conservation, says Professor Connel Fullenkamp, the leading academic working at the intersection of science and economics. Here, Fullenkamp speaks to LUX about the importance of engaging capital markets in biodiversity financing, and why necessity is the mother of invention

Professor Connel Fullenkamp

LUX: You have spoken profoundly about the value of natural assets.
CF: We’re bringing economics, finance, and business into an area where it really hasn’t been brought in before. We start with the approach that says these natural assets have a lot of value, but we don’t necessarily know how to put a price tag on that value. So, we start only with the things that we can find a market price for. This is because we want to speak the same language as investors and policymakers who have to keep their eye on the bottom line all the time.

When we go out and try to put a value on a natural asset, be it an elephant or a mangrove forest, we’re really thinking about this as trying to attach the lowest, believable value. We’re trying to convince people that the value is way more than that. That has got a lot of people’s attention, because it acquaints them with the tremendous value that resides in many natural assets.

LUX: Can there be a system that’s devised for transferring payments? For example, if a company destroys a coastal mangrove plantation, who does it pay for that lost value?
CF: Part of the desire behind this is to prevent the destruction from happening in the first place. But we’re living in a world in which we already have those kinds of swaps going on. So, what we’re trying to do is put an adequate value on that. We are also trying to create the impression that the contributions to things like biodiversity are worth even more. In many cases, of course, it’s the government that owns these assets, so we have to inform them what they are worth.

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For example, we were approached by the UK Environment Agency to help them value their salt marshes, given that they have diminished by 90% in the last century or so. If we can put a price tag on these things, we can help governments make the argument that, firstly, you shouldn’t destroy these things in the first place, and secondly, if you do harm these assets, there’s going to be a steep price to pay.

LUX: How hard is it to find a valuation when there are so many different factors? For example, with a salt marsh, you have to incorporate the carbon storage or the flood protection, and then the ecosystem’s biodiversity.
CF: It’s difficult to put a total valuation on most of these natural assets because it has proven to be difficult to value something like the contribution to biodiversity. It’s hard to even define what biodiversity is. Biodiversity in a desert is very different to that 1,000 or more kilometres south in rainforests.

LUX: What opportunities are there in terms of constructing a financial pathway for investors?
CF: This is something we’re very keen to create. Ideally, we’d have investors who are interested in investing in natural capital services, such as carbon sequestration, because there’s a fairly well-established market for it. These investors would like to purchase either carbon offsets or have other reasons for wanting to hold carbon credits. They would pay for certificates that would deliver the carbon credits, and then the proceeds would function like a sovereign wealth fund.

Read more: Professor Nathalie Seddon On Biodiversity And Climate Resilience

Hopefully, the main use of that money would be, of course, to establish conservation restoration programmes. This is a long pathway between the financial markets all the way to the people on the ground doing conservation restoration. But unless we create that pathway, I think we’re missing out on a huge opportunity.

LUX: Which opportunities should investors be looking towards, in terms of creating the new financial system to support this?
CF: There are two things that should create excitement. They’d be investing on the idea that these are natural resources will continue to deliver these different environmental services, like carbon sequestration. We’re betting on the recovery of those things. Also, they’re betting on the plus in which carbon will help us understand what the biodiversity benefits are, that can also then be priced. If we get good at establishing these carbon markets, we kind of wrap in these biodiversity services as a plus.

LUX: What are the main hurdles to be overcome?
CF: Governments are very reluctant to think about selling their natural assets to the private sector. And so, our first hurdle is to convince them that, no, you’re not selling the assets. We’re trying to get you to sell the services of the natural assets; in fact, governments need to retain ownership of these assets.

We have to establish a conduit that will help governments protect these assets so that they can continue to generate services and support: mainly the beauty and culture of their countries. Governments are naturally reluctant because this is a brand new thing that they’ve never seen before. The markets are sceptical for similar reasons, and because there are some less-savoury actors out there who’ve already been trying and failing with certain initiatives.

Also, there is, especially in the case of wild animals, scientific uncertainty. So many of these species are facing near extinction across the board. We don’t have time. We need people to say, okay, the science is good enough. We’re willing to believe in it and bet on it.

LUX: Are these outcomes possible?
CF: I’m optimistic. The reaction we get when we talk to people has been overwhelmingly positive. When you get the capital markets involved, you can unleash a tremendous amount of financing that can do a lot of good, hopefully for conservation and restoration.

It is hard to imagine being able to cover that biodiversity financing gap without the participation of the financial markets. So, one of the things that drives my optimism is the fact that necessity is the mother of invention. For addressing climate change, this is one of our best chances. The trick is to put everybody together and get them to work together toward this common goal.

LUX: Will there be developments in attaching more specific prices, in terms of the science around biodiversity and nature-based capital?
CF: Absolutely. I think there’s a lot of excitement in that research. In particular, for example, one of the leading seagrass researchers is very excited about our work and is writing a paper for us. Seagrass is again one of these unsung heroes of blue carbon that sequesters a tremendous amount of carbon. We still don’t know what the full extent of seagrass coverage is anywhere, because nobody’s really had the money or the gumption to go look for it. So just finding out where the seagrass is, how much it covered it can sequester and where it can be restored: those kinds of issues are the type of research that we see coming out of this in the short term.

LUX: Are there accessible ways of investing in natural capital in the way that you’ve outlined?
CF: What we’ve got in mind is a bit different from, say, the sustainability linked bonds or green bonds that we see out there. There again, I think these are they’re all great and part of the solution here. But really, when you’re investing in something like a sustainability linked or a green bond, you’re basically a bond investor. You’re hoping that the money gets put to a certain type of a purpose. And in some cases, you’re going to get some either yield pick up or yield penalty depending on the performance. But really, you’re not making a direct investment, so to speak, or a direct bet on the actual natural capital itself. You’re really not investing in environmental services. That’s to me, in my mind, that’s a really big difference here, that what we’re what we have in mind and what we’re trying to create is really an asset backed market. And the asset that is being used to back the market is the natural capital services.

Read more: Dimitri Zenghelis on Investing in the Green Transition

LUX: In an optimistic scenario, how do you see this looking in 10 years’ time with the landscape?
CF: This will be just another asset class that people have available to them to invest in and it will have certain properties. Hopefully it will be sufficiently uncorrelated with other types of market returns to make it attractive as a diversification tool, if not for its own sake, and what it represents in terms of investment in the environment. So ideally, that’s what we’d see people would say. Well, I’ve got some of my portfolio in stocks and bonds, real estate alternatives. And one of the alternatives is going to be these natural capital assets.

Connel Fullenkamp is Professor of the Practice and Director of Undergraduate Studies in the Department of Economics at Duke University 

Find out more: duke.edu

Attribution science explores the link between climate and extreme weather

Flooding in South Africa, wildfires in California, heatwaves in India: each new extreme weather event seems the inevitable conclusion of ecological breakdown. But how exactly are climate and weather linked? Leading attribution scientist Dr Friederike Otto explains to LUX why we need to nuance our understanding of climate change

Dr Otto is co-lead of World Weather Attribution, an international organisation analysing the possible influence of climate change on extreme weather events. Named one of TIME’s 100 Most Influential People in 2021, Otto has identified an information gap in the public’s understanding of climate, which, she argues, is hindering the creation of reliable and resilient systems in the face of extreme weather. She tells LUX why everything depends on the decisions we make in the next decade

LUX: How sophisticated is the public’s understanding of what effect climate change is having on weather?

Friederike Otto: There is still quite a big lack of understanding about how climate change affects weather. There are lots of people who assume that everything bad that is happening now in the world and in the weather is because of climate change. That is a misconception. There is a huge difference between how climate change affects heatwaves versus how it affects extreme rainfall or droughts, and that is something we need to get much better in communicating.

LUX: So, how are climate and weather linked?

FO: Climate change can affect the weather in two ways. One is the thermodynamic effect: we have more greenhouse gases in the atmosphere, so the atmosphere gets warmer overall. This means that there is a higher likelihood of heatwaves which are hotter, and a lower likelihood of cold waves, which are warmer than what they would have been. Likewise, because a warmer atmosphere can hold more water vapour that needs to get out of the atmosphere as rain, you have an increase in heavy rainfall.

If that was the only effect, we wouldn’t need to do attribution studies. The second effect is weather, because we have changed the atmosphere’s composition and temperature differences. This second effect can go in the same direction as the warming effect – but the effects can also counteract each other. If you don’t get any weather systems that bring rain, it won’t rain. So here we need attribution studies.

Otto explains the need for reliable and resilient systems in place to respond to extreme weather

LUX: What do you say to those who think ‘what’s the big deal?’ about the atmosphere getting one degree warmer?

FO: One degree in a heatwave is thousands of people dead or alive. People have pointed out that one degree is lower than the global mean temperature change and that is true. But the year-to-year variation in weather and in temperatures is quite small. If you had one degree added to a heatwave in Antarctica, it would indeed be much less of a big deal, because there is a huge variability in temperatures.

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The heatwave in India is, in today’s climate, a one in 100-year event. With this, you can look at the intensity change: how frequent would this event have been in a world without climate change? What is now a one in a hundred year event used to be a one in 3000 year event without climate change. In other words: a one degree change in intensity corresponds to a 30 times increase in the likelihood.

LUX: So the differences, though seemingly marginal to the casual onlooker, can radically change the climate system?

FO: The climate system will be fine, it will just get hotter. But people and ecosystems have adapted over centuries to a certain type of climate. All of our ecosystems and social systems are very much designed for this narrow range of possible weather that we used to get, so, if you push that back even a little bit, it is much harder to deal with.

Climate change has increased dramatically over the last two decades

LUX: What has allowed the field of attributional climate science to thrive in recent years?

FO: Firstly, we are now able to run climate models so that you can actually look at extreme events. Before, you would run a climate model maybe once or twice — and this only gives you one possible realisation of climate and weather. It wouldn’t allow you to look at extreme events.

The second thing is that climate change has increased dramatically over the last couple decades. We see the trends and changes even in weather observations, so we can detect changes without having even touched a climate model. People have really started to develop and design methodologies to use new data and tools to answer these questions.

LUX: How do day-to-day meteorologists react to your discipline, which is still emerging?

FO: Grumblingly, I think – at least at first, because there have been huge divides between meteorologists who have dealt with day-to-day weather forecasts and those working on climate change. Attribution ultimately forces the two together.

Read more: Professor Nathalie Seddon On Biodiversity And Climate Resilience

Attribution has led to a huge recognition now that it is necessary to make meteorology more relevant for the world we live in. Meteorologists have, for a long time, been extremely conservative when it comes to climate science.

LUX: With the rise of quantum computing, do you think there is the possibility that meteorology will also revolutionise?

FO: A lot of new science could be unlocked through that in meteorology. We would have a lot more higher resolution models to look at what is still not very well understood, for example, cloud interaction with aerosols (and so on). It will not mean that we suddenly have an uncertainty-free science. It’s something that people still have a hard time to live with — that there will always be uncertainty when you do scientific studies, and that this is actually nothing special in climate science.

Otto emphasises the need for greater collaboration between scientific disciplines

LUX: Do you think that there is the possibility of more joined-up thinking between climate science, sustainability, science, biodiversity science?

FO: You can’t try and solve one in isolation from the other. It’s still not easy to do that, because most of us are still trained in a very disciplinary way and we speak very different languages, but the upcoming generations of scientists and researchers are better trained in more interdisciplinary research and increasingly funding is being allocated to interdisciplinary research. So it’s happening, but slowly.

LUX: Is there a tendency for governments to use climate change as a scapegoat to avoid accountability?

FO: Definitely. That’s why it’s important to nuance our climate change understanding. With heatwaves, what used to be a 100 year event is now really just ordinary summer in many places. But for many other extremes, the changes are relatively small. For droughts, there are many parts of the world where they are not yet changing because of climate change.

Read more: Melissa Garvey On Saving The Oceans

The drought in Madagascar is a good example: that has led to quite a lot of food insecurity for the population. That was a rare event, and the population was vulnerable, helped only by NGOs. But these NGOs have always come in when there’s a crisis and then gone away again. There has never been a reliable or resilient system to respond to extreme weather. That is a big problem. There is also an element of colonialism, so it’s not something that the global north can completely wash their hands of. But even if we were to immediately stop greenhouse gas emissions, that wouldn’t solve the problem that southern Madagascar has with respect to drought.

Attribution science has led to a huge recognition that it is necessary to make meteorology more relevant for the world we live in

LUX: Personally, do you feel worried about where things are going?

FO: I’m not worried per se; I’m more frustrated. I feel immensely privileged for who I am, that I’m able to live in a world now where I am able to do whatever I want and be whoever I want. Climate change is one result of this societal system that only benefits a few, but it’s not the only one.

LUX: Do you think it’s your role to point out what is happening and let others judge what to do?

FO: It’s my role as a scientist to say ‘this’ is happening because of ‘that’. It’s my role as a human being to say that it is affecting people who are least responsible for the causes. To pretend that climate scientists are not humans: it’s just not useful.

LUX: What will the world and the weather look like in a hundred years?

FO: Everything depends very strongly on the decisions we make in the next decade. Weather changes are very fast with emissions. We still absolutely have the power in our hands to shape the future we want to live in.

Dr Friederike Otto is a Senior Lecturer in Climate Science at the Grantham Institute for Climate Change at Imperial College London, and Co-Lead of World Weather Attribution (WWA)

Find out more: worldweatherattribution.org

Mangroves protect coastlines from erosion and flooding, sequester carbon and provide a home to species not found elsewhere

If human beings are going to create a sustainable economic system, we must recognise the true value of living ecosystems and the services that they provide to society, and price this into our financial decisions. In the long term, the benefits will far outweigh the costs, says Markus Müller

Markus Müller

Our enthusiasm for economic development has detached us from nature. With our focus on the production of goods, we have forgotten that there literally is a natural limit to our endeavours. If we value nature purely in terms of the raw materials it provides, we fail to appreciate the many ‘ecosystem services’ that living creatures and plants provide to society, and research suggests the markets would price these at about $140 trillion.

The world is fast-approaching a point where its natural capital is so depleted that it can no longer provide us with these services. As a species, we are acting rather like a company owner who operates their machinery 24/7 without maintenance, then acts surprised that their production line is no longer able to deliver the goods. The difference with nature is that there is no option of buying a new machine.

Humans, economy and society are embedded in the environment. This applies to food, but also to areas such as medicine. We know, for example, that many of the organisms living in the sea have contributed to the development of cancer treatments and other crucial drugs. It is reasonable to suppose that similar discoveries are waiting to be made in the world’s most biodiverse habitats such as rainforests and coral reefs, and if we kill our planet’s biodiversity then we will undoubtedly kill many such opportunities.

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What does this mean for us in our daily lives, for companies, and also for the economic and financial markets? If we look at the numbers alone the issue of sustainability may appear to already be centre stage. Around the world we see growing regulation, not only in creating transparency but also guiding money flow. Now accounting for more than 36 per cent of funds under management globally, environmental, social and governance (ESG) investments have established themselves as mainstream.

However, while the ESG concept divides up current business activities into three specific categories, making the transition to truly sustainable business practices requires more than just an appreciation of financial risk and return. The ultimate objective must be to promote the health of planet Earth for the benefit of generations to come. As Gro Bruntland, the former Norwegian prime minister, said in 1987: humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.

When discussing the economic opportunities around biodiversity, I always provide a caveat. What we are dealing with is a global common good. We can’t deal with it in the same way as a private good, which is a product we can manufacture. In terms of business opportunities, we need to be careful when we speak of a global common good – like biodiversity, clean air or even the ocean – as there is a risk of doing business as usual, and exploiting these fundamentals of our wellbeing.

The good news is that with the right governance, we can move quickly from over- exploitation to repair and rejuvenation. Take mangroves, for example: they are difficult to plant, but can be reinvigorated easily. And when they are healthy they act as an effective natural carbon sink, as well as lifting the ground level by collecting and storing soil. They represent a cost-effective ‘nature-based solution’ to both climate change and rising sea levels – and, therefore, a potential business opportunity.

Simultaneously, broader economics must be considered. ESG-based investments are increasingly being incorporated into governmental social and economic policies, and should boost economic growth by encouraging more responsible management of the world’s natural resources. The concept of natural capital – valuing living things like other assets, in order to conserve them – is gaining ground with economists, and when industrial leaders begin to realise its significance then it will completely change the way they do business.

As the awareness of biodiversity loss grows, it should become an increasingly important part of corporate strategy and political policy, drawing more attention to shortcomings in existing evaluation approaches while also prompting solutions. Biodiversity loss gives rise to risks (physical, transition, and liability) for companies in myriad ways. Any decision, be it in investment or finance, therefore needs to encompass the entire product life-cycle and examine the whole supply chain.

Read More: Gaggenau: The Calming Influence of Biophilic Design

The framework we use to evaluate biodiversity preservation is likely to evolve, which will have direct implications not only for investors but also for policymakers and economists. Also, the question of property rights will need to be considered in the context of local political and cultural priorities – a tension that may be difficult to resolve. Solving the geopolitical dimension is likely to be even more difficult, as this will require the financially strong First World to demonstrate the will to obtain goods from sustainable production. All this will come at a cost, but it’s most definitely a cost worth paying to ‘protect our portfolio’. The concept of natural capital could herald the beginning of a big story – one of an innovative and equitable economic model – that is worthy of the 21st century. To reiterate my opening message: if all things were similar then there would be no development. The outcome, instead, would be destruction. Let’s embrace this challenge and adapt to a new future, embedded in nature.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank

Find out more: deutschewealth.com/esg

This article appears in the Deutsche Bank Supplement of the Summer 2022 issue of LUX

Jennifer Anderson, Co-Head of Sustainable Investment & ESG at Lazard Asset Management, speaks to LUX Contributing Editor, Samantha Welsh, about the history of her career, the changes in the ESG investment landscape over that time, and offers an insight into why she thinks the industry is at an important inflection point

LUX: What inspired you to pursue a career in sustainable investing?
Jennifer Anderson: My grandmother was a visionary, in my eyes. She was an early campaigner with Greenpeace in the 70s and 80s and often spoke about her work. I remember her talking about her involvement with the Chernobyl Children’s Project, activities to protect the ozone layer and cleaning up local beaches. That certainly sparked my passion for environmental issues. As I continued my education, I sought study options that helped me explore the intersection between business and the environment. At university, I studied environmental economics and development economics. The lightbulb moment was during my work experience with an asset manager, where I first learnt about socially responsible investing (SRI). I remember thinking “Wow, you can have a career in investment focused on understanding how social and environmental issues relate to that”.

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My career continued in asset management in the then ‘niche’ area of SRI, with focus on an ecology fund that was the first authorised green unit trust launched in the UK. I then joined an ESG Equity Research team on the sell side, authoring research on BP’s Macondo disaster. I built on this experience at an asset owner, where I spearheaded ESG and climate integration for pension funds. Since 2019 I have focused on the expansion of sustainable investment and ESG integration at Lazard Asset Management.

Jennifer Anderson, Co-Head of Sustainable Investment & ESG at Lazard Asset Management

LUX: There has been a bit of an ESG backlash recently. Is this the beginning of the end for ESG?
JA: Far from it. In some ways the public’s growing scepticism was to be expected, and so one could argue the industry needed to go through this, have healthy debate, and adjust approaches to arrive at a better place. The frequency and severity of extreme weather events is increasing, and income inequality continues to widen. The momentum to correct these imbalances is building, but to many it remains slow. So, it is easy to understand the growing ire. There is also a great deal of noise that investors must cut through in this growing space. News headlines about greenwashing create doubt, the current “one size fits all” corporate scoring approaches create confusion. Recently, the S&P 500 ESG Index dropped Tesla, while keeping Exxon. How are investors meant to make sense of all of this?

A dichotomy has also emerged following the war in Ukraine. The situation makes commitments to reduce the use of fossil fuel, challenging in the near term. Longer term, it could accelerate renewables adoption to help achieve energy independence, but it shows the road ahead could be rocky. Spikes in commodity prices tend to disproportionately affect those on lower incomes as food and fuel costs make up a larger proportion of their overall expenditure.

So, who ultimately pays for the energy transition and how will the effects be managed? These are some of the questions that the concept of a just transition seeks to address. How does the transition out of high-carbon activities into greener ones happen in a way that workers, communities, and countries are protected while also maximising the benefits of climate action? The focus on real-world outcomes is certainly growing. ESG strategies have migrated from approaches largely focused on negative screening and exclusions to those centred on ESG integration. The next stage for the relevant industry participants will be evidencing outcomes and impact, which has traditionally been easier to do in private markets. The industry needs to demonstrate value to break through the scepticism.

LUX: How important is the role of governments and international frameworks such as the United Nations COP meetings in channelling capital to more sustainable activities?
JA: A global challenge requires a globally coordinated response. It is easy to view climate summits in isolation, but having closely followed their progress over several years, I would say the fundamental shifts are clear. I attended COP26—the climate change conference in Glasgow—in November last year. It was the most widely publicised climate conference ever. The scaled-up presence from the private sector was also noticeable. The Glasgow Financial Alliance for Net Zero—comprising 450 financial institutions—have pledged an eye-catching $130 trillion in capital to fight climate change. Investors, companies, and countries are now making net-zero targets the norm. So, if we look back to where we were at COP21 in 2015—where 195 countries adopted the first-ever universal, legally binding global climate deal—it is fair to say a lot of progress has been made since, but there is still a long way to go.

LUX: Is there sufficient data to quantify and price environmental and social issues?
JA: Third party tools and data help with benchmarking or as a starting point, but they can be unreliable in isolation, backward looking, or incomplete. Add to that the fact that ESG and sustainability issues are not uniform in scope, scale, or duration across industries and geographies. Ratings agencies combine data from different sources and condense that information into a score. This is a highly subjective process. What sources of information are used and why? How is the information sourced and “cleaned”? How are information gaps bridged? The methodologies and qualitative analysis used vary significantly between ratings agencies, so the scores produced tend to have a low correlation. As an investor you look at this and wonder which is closer to the truth.

Sure, clarity from standard setters and accounting bodies will help, but this does not replace the expertise that investment professionals offer. They have a deep knowledge of how governments, regulators, companies, and industries operate. At Lazard Asset Management, our investment professionals are responsible for incorporating ESG and sustainability-related risk and opportunity assessments into their relevant analysis and are supported by in-house expertise in ESG and sustainability—including in climate science, the energy transition, stewardship, and net zero—to help them contextualise and size issues when incorporating them into their applicable financial models.

Financial materiality is dynamic. Governance and human and natural capital issues that are material today may not be material in the future. Investors need a forward-looking, active approach.

Read more: Octopus Energy Founder Greg Jackson On The Green Revolution

LUX: What role does engagement play in making sustainable investments?
JA: I believe engagement is everything. Lazard Asset Management recognises that a company’s governance policies and board structure, environmental practices, labour policies etc, can materially affect a company’s long-term financial performance and therefore a security’s valuation. The firm’s fundamental analysts work together to understand issues that follow supply chains or impact certain geographies, and this is what gives our research depth. With this depth of knowledge, the professionals on our fundamental research platform can interact with management in a meaningful way to understand how this relates to corporate strategy and achieving better real-world outcomes.

LUX: What messages do you have for investors starting on their journey on sustainable investment?
JA: Firstly, I would say sustainable investing is no longer seen to be predicated on a trade-off between enhancing returns and having a positive real-world impact. Inadequate governance practices and poor stakeholder management can undermine a company—or even a country’s—long-term prospects, and this can later become negatively priced by capital markets. Secondly, investors need to be very clear on their objectives. Are they ESG-aware and seeking to incorporate financially material ESG issues into their investments and wanting company managements to be challenged on ESG issues that are a cause for concern? Are they sustainability focused—i.e., believe the world is transitioning to a greener, fairer, healthier, and safer place –and wanting to capitalise on this as a structural theme? If so, bottom-up, fundamental strategies can identify the winners and losers from the transition to a more sustainable economy. Beyond this is impact investing, which has a much higher threshold again, and is about evidencing both intentionality and additionally. Every type of investment has different risk-reward profiles. It’s about identifying which ones align with your investment beliefs and objectives.

Find out more: lazardassetmanagement.com/sustainable-investment

Nature provides services worth over $125 trillion per year globally

The planet’s species population sizes have decreased by 70% since the 1970s. Yet while scientists have proven that biodiversity loss is intimately linked with climate change, it continues to be kept in the shadows of the climate agenda

As the Nature-based Solutions Conference kicks off at Oxford University this week, we speak to Professor Nathalie Seddon about why boosting biodiversity is essential to building the resilience of our ecosystems in a warming world – and why planting trees is not the catch-all solution some think it is.

LUX: The mass of living creatures in the world is undergoing a dramatic diminution. What are the effects of this?

Professor Nathalie Seddon

Nathalie Seddon: The statistics are startling. We have lost about 80% of wild fish from the oceans and 82% of wild mammals on land, so our habitats and natural ecosystems are basically empty. 97% of vertebrates on the planet are people and their livestock; only 3% are wild creatures that we share the planet with. 9 million hectares of tropical forest are cut down a year; and we’ve modified over 50% of land use.

Biodiversity is important for multiple reasons – material, cultural and spiritual. Our health is intimately linked to the health of all these ecosystems that we are currently destroying. Our nature systems support us in countless ways, providing clean air, water, food, and genetic resources. Over half of GDP depends on natural ecosystems, which generate over $125 trillion worth of ecosystem services each year – from reducing the impacts of droughts and protecting coastlines from flooding or forests from wildfires. These services are dependent on the species and the diversity of the species within them, and are incredibly important to our resilience in a warming world.

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LUX: Why is there so little awareness around biodiversity loss?

NS: Climate still doesn’t get enough attention or funding, but it is considerably more prominent in discourse than biodiversity is. Our economy has also been developed on the assumption that nature’s resources are infinite. People assume that, with enough money, technology will come to the rescue. I think there is a fundamental reason to explain all of these: the age-old idea that humans are not part of nature but rather separate from it; that we must conquer nature rather than flourish as a part of it. This disconnect between humans and nature is the root cause, and therefore also part of the solution to the trouble we face.

Deforestation contributes to increases in temperatures and changes in rainfall patterns across the world

LUX: Are we at a turning point of the understanding of the importance of biodiversity – not just as a desirable end in itself but as an essential part of combating climate change?

NS: In principle, yes. In the international policy and business community, there’s a lot more talk about biodiversity and climate change as two sides of the same coin. But a lot more work is needed to make sure that there is a robust understanding of what that means in practice and how that translates on the ground. For instance, agriculture or commodity production are the biggest drivers of biodiversity loss and also the second biggest source of greenhouse gas emissions. Protecting and restoring our biodiversity can help reduce emissions, but about 23% of our emissions come from changes in the land use sector in agricultural and forestry and other land use, so improving what happens in those landscapes can also have important impacts on warming. It’s only still quite a small part of the solution.

There has been a step up in terms of the prominence and emphasis on nature as part of the negotiations on nature-based solutions. But there are huge misunderstandings, including a big conflation of commercial forestry with nature-based solutions. You can’t just plant trees and then delay decarbonisation and transition to renewables.

The Glasgow Science Centre played a key role in last year’s COP26 discussions

LUX: What are the most important steps leaders in business and wealthy individuals can take to combating this?

NS: A lot of businesses and governments are making net zero pledges, covering 90% of the global economy. But you look under the bonnet, and most of them are not underpinned by a really robust science based plan or any funding to enact it.

Talking about how nature, biodiversity and climate are connected is good, but we need to ensure that decision makers who are acting on that basis understand what that actually means in practice.That doesn’t mean offsetting carbon emissions by investing in cheap forestry plantations. It means doing everything they possibly can to reduce those emissions and reduce the damage that they’re doing to ecosystems within their supply chains whilst also investing in projects that are biodiversity based and community led and ideally doing that within their supply chains, which is a process that’s called insetting rather than offsetting.

Read more: Cary Fowler on Protecting the Biodiversity of our Planet

Offsetting is when a company will calculate its impact on climate or emissions so it will invest in probably some trees somewhere that probably shouldn’t be there and feel like it is addressing the problem. Insetting is looking within your own supply chain and investing in high quality, valuable projects within that supply chain, so insetting your damage to the biosphere and the climate within your supply chain. In doing so, you are not only meeting your ESG requirements but also increasing the value in resilience of the supply chain itself. It’s about investing in nature in your supply chains to reduce risk, operational risk, supply chain risks as well as reputational risk.

There is a real need to engage fully with the research community to ensure that those pledges can be met in a sustainable, ethical, biodiversity community-based way and so that’s where the work is. Public-private partnerships between researchers and businesses are really important. Companies in general should adopt a generative, circular economy model and then embed proper robust accounting on natural and social capital in their accounting procedures.

Humans have identified just 3 million of over 12 million complex life forms on the planet

LUX: Is it true that we are still discovering exactly how different species, seemingly unrelated, can have a dramatic impact on the health of the planet and the human race?

NS: There’s upwards of about 12 million complex life forms on the planet, and we have only named around 3 million of them. We don’t know what functions all those species play in the ecosystem, we just know that all species matter and that we can’t afford to lose the predicted 1 million species by the end of the century.

That diversity gives ecosystems the resilience they need in a warming world. It’s like having a diverse investment portfolio – the more different sorts of investments you have, the more likely it is to be able to weather the storm, in that case, a financial storm. In a natural world, the more species you have, the more likely it is that that ecosystem can deal with whatever is coming.

LUX: Are there any causes for hope, or is your feeling that we are doing too little too late?

NS: On one hand it’s all very frustrating because we’ve known for a very long time what causes climate change and what drives biodiversity loss, yet very little has been achieved. Put it into perspective: we have lost about 70% of species populations since the 1970s, despite a huge increase in the coverage of protecting it.

But there are lots of countries that are pledging to do the right thing: community and biodiversity based investments and nature-based solutions, at the same time as big commitments to renewables and reducing emissions. Costa Rica is leading on climate policy and the practice of renewables, plus large areas of land are under recovery and protection. [The same goes for] Moldova, Brazil, Chile and Cape Verde, at least on paper, in terms of how they’re incorporating nature into their climate change pledges.

There are also various companies that are taking a high integrity approach to tackling net zero. Netflix is an example of that: they are reducing emissions across all of their operations as fast as they can, as well as investing in projects that are truly verified in terms of their carbon, biodiversity and social benefits. That’s the real point. You can’t invest in nature if you’re not also doing everything you possibly can to reduce emissions.

Nature-based solutions involve the sustainable management and use of natural resources to tackle socio-environmental challenges

LUX: Who are the laggards?

NS: Most of the main fossil fuel companies are talking about decarbonisation but they’re not making enough progress. We need to keep fossil fuels in the ground and we need to invest in nature. It’s not ‘either or’, and some of those big fossil fuel companies are just greenwashing their operations by claiming to invest in so called nature-based solutions which often just turn out to be short rotation commercial forestry plantations. That’s a live issue that needs to be fully addressed.

At the government level, many countries are investing in tree planting, while not ensuring that their existing biodiversity and intact ecosystems are protected properly, and in fact actively opening them up. Decisionmakers seem to think that growing a tree is the same as a tree which is in an intact ecosystem, yet science is really clear that there is no equivalent: you can’t recapture the carbon lost through destroying our intact ecosystem in a timely or sensible way through planting trees. .

Read more: Julie Packard: All In Together

LUX: How would you explain to an intelligent but distracted business leader that the loss of a seemingly trivial habitat in one part of the world can have a fundamental effect on people in the other?

NS: The earth is a big, interconnected system. Deforestation rates in the Amazon are increasing to meet global demand for beef and soya, but because Amazonia is a big water pump, this can cause changes in global patterns of rainfall, therefore compromising food security and causing supply chain issues. For the intelligent but distracted business leader who thinks that it doesn’t really matter if we lose all the monkeys or toucans from a forest, it does, because those species play a critical role in the ecosystems and we need to extract carbon from the atmosphere to keep all of us safe.

Ultimately, we need systemic change in how we run our economies. Our economic system prioritises material wealth and infinite growth on finite resources. Unless that changes, we won’t avert climate change and biodiversity. We need to think about circular and regenerative economies, and we as individuals need to enact big behavioural change as part of that. Otherwise, you’re just rearranging chairs on the Titanic.

Nathalie Seddon is Professor of Biodiversity in the Department of Zoology at the University of Oxford.

Find out more: naturebasedsolutionsoxford.org

Octopus is one of the largest owners and managers of renewable energy assets in Europe

As the International Energy Agency warns that the worst of the energy crisis may be yet to come, governments around the world are stressing the importance of accelerating the move to renewable energy. We speak to Greg Jackson, CEO of Octopus Energy Group, the technology-to-investment energy platform, about the importance of government intervention in energy policy, the role of technology, and how a greener future could be nearer than we think

Greg Jackson founded Octopus Energy in 2015 with a view to using technology to make the green energy revolution faster and cheaper for consumers. Now worth approximately $5bn, the privately held company supplies renewable energy to three million households worldwide. It is also one of the largest owners and managers of renewable energy assets in Europe, with more than £4bn under management. Jackson credits the company’s success to what he calls the “en-tech” model whereby proprietary technology plays a leading role in the company’s value offering. Here, he speaks to Ella Johnson about why there can be no alternative to radically updating the power grid and large-scale investment in renewable energy.

LUX: How will Octopus innovate the energy sector in the long term?

Greg Jackson: Octopus’ long-term goal is to generate roughly as much as its users use, with Kraken, our proprietary technology platform, matching generation and consumption at any time and location to make the most efficient renewable energy company possible.

A decentralised workforce allows us to greatly increase the pace of innovation and learn from many people with many different perspectives. We are a cloud-native company and have had a very successful remote customer operations team for over four years now. This allowed us to ensure we had processes and communication platforms in place when lockdown hit, and it has been absolutely vital as we’ve grown internationally, building successful Octopus Energy hubs in several countries around the globe.

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So far, we deliberately haven’t made a profit. Instead, we’ve focused on scaling the business, investing in new green technologies and making sure there is enough support available to our customers who are struggling. We are lucky to have investors that believe in our long-term goal and are absolutely committed to help us achieve this, so we don’t have to worry about short term profits to achieve our number one purpose, making green energy cheap energy around the world.

Octopus is working to digitalise the power grid through its proprietary Kraken technology

LUX: When did you realise the energy sector was ripe for a tech revolution?

GJ: I had built digital platforms for e-commerce and other sectors before to digitise and increase efficiency, and I quickly realised that applying the same technology to energy would greatly improve the way things are done in the sector.

LUX: What makes Octopus’ operating business model unique?

GJ: Our operating model is unique thanks to Kraken, our technology platform which we built from scratch. Where other suppliers rely on convoluted solutions for different functions, Kraken integrates them all into one giant robot, offering efficiency, better customer service and end-to-end management of the whole supply chain to allow us and our licensees to save costs, take better care of customers and drive the green energy revolution.

But we know we can’t drive change quickly enough if we’re on our own. So we’re licensing Kraken to other large energy companies across the globe who share our vision of a cleaner, better energy future, including E.ON, EDF and Origin Energy.

Octopus has licensed its Kraken technology to support over 20 million customer accounts worldwide

LUX: How must existing infrastructure be adapted to accelerate this shift?

GJ: We need to digitise the power grid so that we can use it more efficiently, cutting bills and making the most of green electrons when they are abundant. The current grid was built to manage a few hundred fossil fuel power plants. We need to make it fit for a decentralised energy world in which millions of electric cars, rooftop solar panels and home batteries will be connected to it, importing and exporting energy from the grid.

LUX: How does Octopus overcome the unreliability of wind and solar sources?

GJ: The key to unlocking a cheap green energy future is to build a digital system that is interconnected and flexible. The sun doesn’t always shine and the wind doesn’t always blow where we are – but they always do somewhere in the world.

Read more: Dimitri Zenghelis on Investing in the Green Transition

Working with other countries and layering different sources of green energy and ways of storing it (like batteries) will allow us to create a system in which we can make the most of solar and wind energy where they are abundant. For example, we invested in Xlinks, the company building the world’s largest subsea power cable. Once built, it will deliver 3.6 GW of green power from Morocco to the UK for an average of 20 hours a day – enough energy to power about 7 million homes. We need more large-scale renewables projects like this.

Renewable energy is the only way to increase our energy security and stop climate change, says Jackson

LUX: One of your tariffs provides carbon neutral gas. What do you say to those who argue carbon offsets are not a real substitute for climate action?

GJ: We have carbon offset our Super Green customers’ gas usage in a few different ways over the years: helping reforest and conserve vast areas of the Amazon, and working with our main offsetting partner, Renewable World, to bring innovative renewable energy technology to fuel-poor communities worldwide.

But while it has very worthwhile applications and can help a lot of people, carbon offsetting is only part of the puzzle in helping fight climate change. It cannot decarbonise the whole energy system and move us away from fossil fuels. For that we need more innovative technology to make energy greener and cheaper for everyone.

LUX: Is natural gas an adequate transition fuel?

GJ: In the short and mid-term, we still need natural gas as a backup energy source for renewables. But in the long term, we will have to wean ourselves off gas completely if we want to increase our energy security and stop climate change – and we can only do that if we go hell for leather for renewables now.

Greg Jackson, Founder and CEO of Octopus Energy Group

LUX: How can policy speed up the mass uptake of renewable energy?

GJ: Historically, the creation, testing and licensing of a vaccine took around 15 years. With Covid, we managed to get the 15-year process of developing a vaccine down to one year. We need to do the same with wind energy. Due to planning approvals and grid connections, it currently takes on average 5-7 years to build and connect a wind farm. This could be done in one year. Do that now and we will literally start seeing bills come down next winter.

Read more: Inside Konstantin Sidorov’s London Technology Club

LUX: What role can renewable energy procurements play in corporations’ broader net zero goals?

GJ: Through our Renewables investment arm, we sign a number of agreements with large energy users to switch to green energy. Those making the choice to go green are taking massive steps forward for decarbonisation agendas across Europe – they are the trailblazers of their industries, and soon the rest will follow their lead.

Greg Jackson is founder and CEO of Octopus Energy Group

Find out more: octopusenergy.group

London Technology Club lunch with Alexandre Mars at The Arts Club

Konstantin Sidorov founded the London Technology Club to create a space for investors and tech professionals to network and exchange ideas within the industry. Here he speaks to Samantha Welsh about the benefits of bringing like-minded individuals together to establish trusted relationships.

Konstantin Sidorov

LUX: What is your opinion on the valuation of tech companies right now?
KS: It is useless to discuss the overall tech market valuation in general – many people have different opinions. Some companies look too expensive, some fairly reasonable. It is worth looking at the valuation of a particular company. And our task as a club is to provide our expertise and opinion to our members regarding the company valuation and potential value growth.

We have always reinforced the need to exercise discipline as a tech investor. At LTC, we examine both the prospects and tech moat of a company – but also the deal terms of an investment opportunity. We source our opportunities from world-class VCs that are often lead investors in a round, and therefore there is conviction from them in terms of the company and its technology.

LUX: Why did you create the London Technology Club?
Konstantin Sidorov: Venture capital is an access class not an asset class, and, when I first moved to London, I found that getting access to the best tech investment deals was all about trusted relationships. I saw that London was the capital of the world for clubs – for wine, automobiles and art – but there was no club to bring together like-minded people passionate about tech investing. So, I turned an initial idea into a sophisticated community of tech investors to have access to the best tech deals. By working with our VC partners, we are able to provide curated, high-quality level of deal flow for our members.

London Technology Club event in Dubai

LUX: Can you tell us about your preferred fund structure and your approach to diversification?
KS: Our trademark fund is the LTC Pledge Fund: a segregated portfolio fund that raises once a year. We diversify through a mix of directs (80%) and funds (20%), and in terms of verticals – from AI to mobility, and impact to fintech. We are also diversified in terms of geography; while a slight majority of our investments go to US, we are also spread across Europe, Asia and MENA. Given the sort of ticket size required for the best growth stage opportunities, by creating our fund we provide access that the limited partnerss would be less able to access on their own.

LUX: You started Pledge Fund I in 2020 and Pledge Fund II in 2021. What have your case studies shown to be your sweet spot – and how are you achieving those internal rates of return (IRR)?
KS: Since the start of Pledge Fund I we have had five exits and they were built off the back of my personal investment exits – such as Airbnb and Spotify. We were able to return 30% of capital of Pledge Fund I back to investors within 20 months with IRR above 86%.

Our sweet spot is companies with a valuation of $100m – $1bn, with proven revenues and growth. Our five exits to date reinforce our strategic approach where we balance risk and reward.

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LUX: How have you seen ESG emerge during your career, and how do you see it developing from here?
KS: We are incredibly proud of our Future Technology Series reports; we’ve published over 13 in three years. They explore how technology will impact areas that our members are passionate about – from space to art, F1 to longevity, and finance to property.

ESG was one of our recent reports. For me, what has changed is people’s realisation that companies can’t just be focused on shareholder returns. We are part of an interconnected system and have a duty to both people and the planet.

London Technology Club breakfast with UBS Chief Economist Paul Donovan at the Royal Automobile Club

While everyone should be looking at ESG as business hygiene for their own companies, it is also important to consider how ESG is integrated into investments. There is some way to go, especially within venture capital. Many companies are early on in their ESG journey which we see as a good opportunity to ensure they instill ESG into their business processes. We firmly believe there is a strong correlation between companies that have strong ESG fundamentals in place and investment success.

LUX: Where do you see the role for tech in ‘slow’ industries where rarity, heritage and craftsmanship are the inherent values?
KS: We have written reports about the impact of tech on fine wine, art and fashion. From our research, we have seen a move towards the ‘creator economy’ where a craftsman or woman creates and ‘mints’ their product (i.e creates a digital asset as part of the process).

Read more: Volta’s Kamiar Maleki On Supporting New Artistic Talent

NFTs are an example of that currently. Fine wine makers could, for example, by creating digital tokens to accompany their bottles, ensure that they can track the onward sales, opening, value and storage.

This tracking ability means that the creator benefits from smart contracts that dictate that every time that bottle is sold on, the creator receives a percentage commission. It means that the creator, rightly so, reaps more reward from their creation. Tech is at the centre of progress for luxury and collectibles and I would recommend our reports to readers.

London Technology Club Super Tuscan Wine Tasting

LUX: How are you personally leading the deployment of tech to explore solutions to problems in the real world?
KS: For tech to be effective and generate returns it must solve real world problems. We are very interested in climate-first technology and have invested in numerous foodtech companies that are looking to solve challenges on food security, waste, cultivated meats and reduce environmental impacts. We have invested in companies that seek to reduce the cost of transport and improve mobility. We are big believers in tech as a force for good and so hope that our club creates the right environment for investors to be able to deploy their capital for returns that also have a positive impact on societies. As LTC’s General Partner I lead from the front to create such environments.

LUX: At LUX, we share your love of Ornellaia and Sassicaia .. please tell us about how this passion came about?
KS: We are a club known for our regular live events in Mayfair, so when lockdown came we moved quickly to gather the community online. Being based above 67 Pall Mall, the amazing wine club in London, we were able to arrange distribution for wine to be sent out to members. We would do group Zoom calls where we tasted Super Tuscans while discussing tech investments. Both Simon, our COO, and I have a love for Italian wine so it was an easy one to agree internally to do, and it reiterates our mission as a club to provide the best technology investment opportunities, discussion and experiences.

Find out more: londontechnologyclub.com

Unilever, one of the largest suppliers of consumer goods, has committed itself to sustainable ways of working throughout the whole company. Image by Bernard Hermant

Rebecca Marmot is Chief Sustainability Officer at Unilever, the consumer giant whose portfolio spans everything from Dove soap to Ben & Jerry’s ice cream. Under Marmot’s leadership, Unilever has made significant interventions in sustainability milestones like the Paris Agreement and the creation of the UN Sustainable Development Goals – yet, she says, much of the innovation is still to be done. Marmot tells Ella Johnson why companies must embrace transparency and collaboration in order to create a truly green value chain

Rebecca Marmot

LUX: What is essential to the success of a company’s ESG agenda?
Rebecca Marmot: Success relies on everyone being on board – from employees to c-suite to investors. For example, we put our Climate Transition Action Plan – which outlines how we propose to reach our net zero target – to an advisory shareholder vote. Over 99% approved it. Making it public increases our credibility, transparency and accountability and helps us engage with stakeholders.

We also recognise that we can’t do this on our own. We need to draw on the ingenuity and experience of experts and peers across the globe to meet our sustainability targets – from specialists creating plastic alternatives to suppliers supporting initiatives to protect and regenerate nature. We know that pioneering new practices requires partnership. We are also calling on governments to accelerate climate action by setting ambitious national renewable energy targets so that consumers can use our products at home with water heated by clean energy.

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LUX: Can planet and profit ever truly go hand in hand?
Rebecca Marmot: The Unilever Sustainable Living Plan (USLP), which ran from 2010-2020, contained over 70 time-bound targets spanning issues from waste, water and greenhouse gas reduction, to supporting people with training around sustainable agricultural practices. Over 10 years there were notable achievements – including improving the health and hygiene of well over a billion people – as well as valuable lessons in what does and doesn’t work.

The USLP helped clarify our belief that sustainability can unlock superior performance. The business case is clear. Climate change and inequality are huge global challenges, but they also pose very specific risks to the future of our business: for instance, climate-related adverse weather disrupts supply chains and rising inequality limits prosperity and prospects.

Climate change directly affects the success of a consumer goods businesses by disrupting supply chains. Image by Jonathan Ford

LUX: How do you avoid greenwashing?
Rebecca Marmot: We recognise that we are on a journey – and need to be transparent about our failures as well as our successes. We didn’t reach all of our USLP targets by 2020, but in falling short, we learnt new ways to approach and overcome challenges.  For example, the need to engage in advocacy to decarbonise the grid – rather than just focusing on promoting shorter showers!

Here, reporting can play a useful role in tracking progress and preventing greenwash. We are calling for the adoption of high-quality, standardised non-financial reporting to ensure disclosures are consistent and comparable across companies and to facilitate allocation of capital to the most sustainable companies.

LUX: How is Unilever working to eliminate Scope 1 and 2 emissions – those generated by your operations?
Rebecca Marmot: First, we need to put our own house in order by transforming the way our factories run: investing in new technologies, increasing energy efficiency and switching to renewable energy sources. For instance, biogas generated from the manufacturing of Marmite helps power the boilers at our Burton site in the UK.

We are also innovating through our brands.  Our Clean Future programme  commits us to eliminating fossil fuel derived carbon from cleaning and laundry products by 2030, and we also recently launched the word’s first laundry capsule made from captured and recycled industrial carbon emissions in China in partnership with LanzaTech.

One of the biggest challenges is that the lion’s share of our emissions are outside of our direct control. About 60% of our emissions come from raw materials and packaging. So, to reach our target, we are working across our value chain and engaging suppliers, partners and consumers in our decarbonisation journey.

Unilever World Headquarters, London

LUX: Unilever has substantially more influence over its suppliers than consumers. How do you overcome that challenge?
Rebecca Marmot: When you take your Dove soap home and use it in your shower, then clean your shower with Cif bathroom spray, then reward yourself with a Magnum ice cream, the power used to generate the hot water and run your freezer is the area we have the least control over.

We’ve learnt over the last ten years that our ability to influence consumer emissions can be limited; we can’t control how long they spend in the shower or how they source their energy. But increasingly, consumers want to align their purchasing power with their values. We want to make it easy for them to choose our trusted brands – knowing that they are made with respect for the planet and people.

We can design products that help consumers use less carbon – like concentrated laundry detergents which enable people to wash their clothes at lower temperatures. Washing clothes at 30°C instead of 60°C cuts the GHG emissions per load by as much as 50%. We’ve also taken great strides to eliminate phosphates from our laundry products, one of our most GHG-intensive ingredients, which reduces CO2 emissions by up to 50% per consumer use.

LUX: How is Unilever addressing the ‘S’ of ‘ESG’?
Rebecca Marmot: COVID-19 highlighted vast social inequity and reaffirmed our focus on protecting lives and livelihoods. Last year, we committed to ensure that everyone who directly provides goods and services to Unilever earns at least a living wage or living income by 2030.

It also demonstrated global interdependences and the need to work together. At the beginning of the pandemic, Unilever and the UK government established a £100m partnership – The Hygiene and Behaviour Change Coalition (HBCC) – to provide products, infrastructure and education to help tackle COVID-19. Working with 21 NGOs and UN partners in 37 countries, HBCC has reached over 1.4 billion people and has recently been extended for a second phase. Bringing together the influence and expertise of Government and NGOs, with the brand reach and marketing power of business, has proved truly effective in spreading life-saving programmes.

Unilever’s Positive Beauty row

LUX: Is there a risk that those who are last to take on the costs of a green transition will be winners in the short term?
Rebecca Marmot: Inaction is no longer an option. In a world where the effects of climate change and inequality are glaringly apparent, both ability and license to operate will become dependent on being sustainable.  Research shows that consumers are increasingly shunning companies that aren’t responsible, and employees want to work somewhere that reflects their beliefs. Without action to make supply chains more sustainable, companies simply won’t be able to source the raw materials needed for their products and operations will be stalled by floods and extreme weather. Laggards will likely also be hit by taxes on carbon and virgin plastic which are certainly coming down the line.

We believe the growth opportunities in embracing sustainable business are immense. In our experience, brand purpose grows brand power, and brand power drives market share and sales growth. There is no trade-off.

LUX: Which leadership qualities are necessary to implementing a sustainability strategy while meeting the needs of shareholders?
Rebecca Marmot: Delivering superior performance while creating value for multiple stakeholders requires ingenuity, partnership and, above all, a clear, ambitious plan.

Given how interlinked everything is, we also need to shun silos in favour of systems thinking. For example, we take a holistic approach across climate and nature since we recognise that action to solve one crisis can help to address the other.

Read more: Richard Curtis on the Power of Pensions

We also need to be bold. Last year we established the €1 billion Climate & Nature Fund so that our brands can invest in projects that have a positive and meaningful impact. Knorr will have 50 regenerative agriculture projects over the next five years – supporting farmers and building resilient food chains of the future.

And we need to be innovative – identifying new ways to lower our impact without compromising quality or performance. For example, our R&D teams are using the latest technology to create new means of compacting and reducing the resources used to deliver our products and our Foods business is expanding our plant-based offerings to ensure that sustainable options become accessible to all.

Find out more: www.unilever.com

The Library in the Riverstone Kensington

Penny Hughes is the Chairman of Riverstone, a group that is changing the senior living sector. Samantha Welsh speaks to Hughes about why Riverstone is different from other retirement home models.

LUX: You have a track record of leading world class consumer brands, across diverse industries, Coca Cola and Aston Martin, for example.  What qualities have you come to admire in leaders?
Penny Hughes: I strongly admire tenacity, drive and enthusiasm, but most of all I admire leaders with the ability to evolve and overcome change. At the start of my career I had no female role models. As a leader, and through experience, I have moved to being a positive campaigner for diversity, taking decisions that result in enhanced diversity & inclusion.

LUX: What has driven the transformation of the senior living sector from Cinderella to a sweet spot in the alternative property assets class?
Penny Hughes: Internationally, 5-7% of the market is focused on later living, while in the UK it is less than 1%. It’s not just a new asset class, it’s an undiscovered one. We are getting older; populations are growing and we are living longer. Research indicates that over 65s want to downsize, they want to release equity to enjoy life, and, most importantly, age in the places they love. Growth in this sector is adding value in creating options for the over 65s to ensure they can live the life they want to live.

Follow LUX on Instagram: luxthemagazine

LUX: Are institutions also meeting ESG targets through investing in later living?
Penny Hughes: Many institutions do not place enough emphasis on the ‘Social’. The pandemic spurred a renewed focus on community living. Already Riverstone is in discussions with local schools to provide engagement for our residents – such as reading clubs with school children – and learning opportunities for the next generation.

LUX: What are the public policy gains offered by the retirement home model?
Penny Hughes: Policy makers are opening their eyes to how bespoke later living schemes can help alleviate pressures on the NHS and the social care system. Our approach aims to focus on prevention rather than cure, yet we are also able to offer on-site GP consultations and prescriptions to residents’ doors should our residents wish to access this service.

Riverstone Fulham Lounge

LUX: Has the pandemic offered new opportunities and ways of repurposing vacant property?
Penny Hughes: The pandemic has placed a heightened importance on our homes; there is a clear focus on what we need and what we don’t. For many of our future residents, they are at the stage in their life where they want to downsize, release equity, and live within a community that encourages healthy and active lifestyles. This further benefits the wider community as it unlocks appropriate and much needed housing for all generations.

LUX: Given the governments targets for delivering new homes, how do you compete with residential developers?
Penny Hughes: We’re living longer. By 2030, one in five people in the UK (21.8%) will be aged 65 or over (Age UK). The Riverstone offering, in prime central London, is meeting the demand for home ownership among the over 65s, which research indicates remains high, whilst also offering residents their own slice of luxury.

LUX: Your communities are disruptors, you celebrate metropolitan living, are you the new place-makers?
Penny Hughes: Metropolitan living is captivating. There is always something exciting going on, and most definitely keeps people active. I wouldn’t say we are place-makers as we choose vibrant established locations, however, we provide a wealth of private amenities and outstanding facilities, such as our gardens, curated by Chelsea Flower Show landscape and garden designer Andy Sturgeon, and our restaurants for the whole community

The Garden at the Riverstone Fulham, landscaped by Andy Sturgeon. Herb garden by Jekka McVicar

LUX: ‘Live the life you want’ – why are the world’s Baby Boomers so demanding and what do they want?
Penny Hughes: We are creating a place that is welcoming and accessible, not too formal. We are also creating The Riverstone Club, which will comprise state-of-the-art wellness spaces including a pool, spa, treatment rooms and yoga studio, alongside cinema, library, espresso bar, and business suites for personal and private affairs. Equally we don’t want people to feel intimidated if they want their privacy, so they can enjoy the chef’s table, or dine with friends.

LUX: What differentiates the Riverstone brand from other equally recognisable names?
Penny Hughes: This is a new asset class for prime central London, there aren’t many operators within this sector. Our competitors are either operating through rental models, or locations that appeal to a different audience.

Read more:6 Questions: Paul White, Four Seasons

LUX: How does the apartment ownership structure assist in managing wealth transfer?
Penny Hughes: 75% of our future residents currently own a large home. Riverstone’s model presents an option to downsize and free up equity. Each apartment is sold with a 150-year lease. A monthly fixed membership fee is charged during residents’ occupation, and this covers staffing, repairs, security, maintenance and general operating costs. Additional care and other services are charged separately on a pay-as-you-go basis. When looking to sell a Riverstone apartment a deferred fee (a percentage of the sale price) is payable when the property is sold. This management fee is a new model for the UK, however widely used in New Zealand and Australia.

Riverstone Kensington Yoga studio

LUX: What is the long term strategy for the group?
Penny Hughes: We are continuing to explore new central London sites as part of our plan to deliver a £3 billion portfolio. We have been very pleased with the reception for our Kensington and Fulham developments after they launched recently.

LUX: And can you share any well-being tips with us?
Penny Hughes: We should all – at every age – dedicate quality time to our own health and well-being. My passion in life is having a purpose and making a difference. I don’t do well sitting at home! Activities such as going to the gym, or paddle boarding on the river help give me space to unwind, whilst also being a fun form of exercise.”

Find out more: riverstoneliving.com

Photograph by Isabella Sheherazade Sanai

The pandemic has accelerated the rise of environmental, social and governance (ESG) investing. However, argues Markus Müller, we must improve global standards continually if ESG is to fulfil its promise of driving economic growth while having a positive impact on the planet

Markus Müller

The coronavirus pandemic has made us acutely aware of risks to our existence and how fragile the global economic system is. Many are making the SARS-CoV-2 pandemic part of the reason why ESG has risen rapidly to the top of the global agenda, moving from rhetoric and ambition to action. At the same time, the many facets of ESG are being discussed and examined across a multitude of investment institutions, to establish what it really means and whether it serves a purpose at all.

In my view, ESG prompts a simple question about why and how we do things, as individuals, as investors and as companies.

ESG originally developed from institutional investors screening out negative risks in investment targets. Today, ESG is much more than a combination of investment ratings and exclusions. With the goal of sustainability as our objective, ESG offers a way of understanding and quantifying the non-financial dimension of economic activity and of avoiding the dangers of a ‘submerged iceberg’.

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This means identifying where the risks lie and developing innovative mitigation strategies. Mid- to long-term risk for an investor comes in many forms. Physical risks (damage or threat to physical assets due to natural or climate change) are accompanied by transition risks (business or investment risks on the journey towards a greener economy) and liability risks (reputational issues, breach of standards). These risks can affect companies in a variety of ways. Production disruption, raw material and share price volatility and capital destruction are just a few examples. Importantly, it all involves understanding nature as an asset, as an input factor in our production function.

Innovation means finding ways to avoid those risks while embracing change and preparing for new future-oriented businesses which are ESG-positive. This has two prerequisites. First, we need more data disclosure to measure the impact of what we are doing. Secondly, we need goals and an evaluation method. These two issues are linked: data will give us an understanding of the impact of economic activity and how to steer economic development, which in turn should allow us to refine these goals.

Systematic decision-making is more than just a means to an end in order to achieve an overarching, positive goal within the Purpose Economy. We must also ensure that, when looking at equitability of impact, a distinction is not merely made between labour- and capital-intensive activities. Rather, impacts should be considered in three ways: the impact of individuals (including companies); the impact of politics (including governments and institutions); and the impact of nature (including natural resources).

Fortunately, we already have broad goals. The UN Sustainable Development Goals and the linked UN Principles for Responsible Investment, along with the Paris Agreements as well as the (failed) Aichi Biodiversity Targets, have set the initial direction. But there is still no consistent global approach about how to go beyond these broad goals and to put them in a detailed synthesis with financial markets. Standards can help. Reporting is widening its scope: the Taskforce on Nature-related Financial Disclosures (TNFD) was recently launched to go beyond ESG scores and climate change, to include the risk factor represented by biodiversity loss. The International Financial Standards Reporting Foundation (IFSR) has also proposed the inclusion of sustainability standards within its constitution as it aims for the establishment of an International Sustainability Standards Board.

Read more: Dimitri Zenghelis on Investing in the Green Transition

So, we are advancing on multiple fronts, but the scale of the task here is enormous: even within rating agencies, ESG ratings and scores vary due to differing methodologies. Global sustainability standards for company reporting would allow integrating data, insights and ESG themes into business strategy, product-development cycles and risk management. Harmonised standards would also allow us to improve scoring, enabling a more sophisticated discussion of what exactly scores mean and the importance of a company improving its ESG score rather than just accepting it or simply trying to ‘game’ it.

At Deutsche Bank’s International Private Bank we continue to develop our methodology to make sense of this evolving landscape on global standards. We use ratings, drawing on the research and analysis of a leading third party provider, but it is important to consider these in context. We realise that we have to give firms credit for improvement on ESG metrics, for example. We also apply exclusions against sectors that go against UN goals and principles and generate long-term risks (around greenhouse gases, for example). Exclusions can also be applied on more individual value-based grounds.

Methodologies such as this require continual improvement through monitoring their effect on sustainability. But the priority should be to ensure that the impact of ESG on a client’s investments should be transparent and that they will lead to improved corporate behaviour on ESG issues. If we wish to make transparent the impact of our ESG activities, and if we want our economies to be ESG-positive, we need to all follow the same methods.

ESG is here to stay as a categorical imperative. It will, at the very least, slow down environmental degradation and will make the world and our lives richer and more meaningful.

Markus Müller is Global Head of the Chief Investment Office at Deutsche Bank’s International Private Bank. Find out more: deutschewealth.com/esg

This article was originally published in the Autumn/Winter 2021 issue.

Dolphin Square, Dolphin House

Justin Travlos is Global Head of Responsible Investment at AXA IM Alts. His management of a diverse investment portfolio is governed by one underlying principle: all decisions are made in the context of understanding where risk is – from a sustainability standpoint. Here, Travlos speaks to Samantha Welsh about the growing importance of proptech, and why sustainable strategy should not be an exercise in cherry-picking ‘green’ assets but embedded across the entire portfolio

Justin Travlos

LUX: You have a track record in driving successful sustainability strategies. Where did this interest come from?
Justin Travlos: Sustainability has long been a personal interest, but it first intersected in a professional capacity in 2007, when I became the head of sustainability for the commercial property business at an Australian real estate investment trust. I worked with a brilliant team to create the foundations of a strategy that was both sustainable and able deliver returns, and is still relevant and performing today. That balance is fundamental. I’ve always seen myself at the nexus of real estate development and sustainability, and the opportunity that brings to make places more appropriate both for people and for the planet.

LUX: Where has AXA been particularly successful in managing buildings to sustainability targets?
Justin Travlos: Asset regeneration always provides a canvas to enable change, and scale helps overcome some of the complexity often associated with these projects. While meeting the latest sustainability credentials is much less complex in new builds, they often raise questions around embodied carbon. Ultimately, it is equally, if not more, important to regenerate existing assets: poor performance of existing stock is a key area of focus for government and regulators when addressing climate change, and thus a key area of transitional risk (and opportunity) for us as real estate investors. Moreover, investing across a diversified, global portfolio allows us to benefit from a number of emerging synergies.

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LUX: AXA IM Alts is Europe’s biggest real estate manager by Assets Under Management (AUM). How do you evolve a best governance strategy for a diverse portfolio of this size?
Justin Travlos: Integration into our investment processes is the key to governance: it was important that our strategy didn’t just have one best-in-class green fund or asset to showcase, but was embedded across our entire portfolio and integral to every investment decision. We look at a broader sweep of both financial and non-financial considerations, and so long as those decisions are made in the context of understanding where risk is, from a sustainability perspective, then that’s the right conversation to have.

While our strategy will continue to evolve, particularly in terms of implementation, it is formed around three the key pillars of decarbonisation, resilience and building tomorrow. Decarbonisation is about reducing our carbon footprint in line with the Paris Agreement targets. Resilience is about understanding the physical and transitional risks of climate change on our assets. And looking at both of these creates insights that inform the types of assets that we regenerate and build – shaping our investments to become building blocks for the future.

22, Bishopsgate. Photo by Edmund Sumner

LUX: Is there variation in how regions adopt responsible investment strategies?
Justin Travlos: Yes, due to the different regulations and market practice in place across the globe. In the EU, businesses are now required to embed sustainability risk management into the investment process. AXA is now reaping the rewards from the groundwork that we laid down a long time ago. But our alignment to the regulatory environment in Europe will be subtly different to what is required in America or AsiaPac. The funds that we have in Australia, for example, are much further ahead in their adoption of ESG performance indicators because the market and its regulations governing environmental management and reporting are significantly advanced.

These strategies are also underpinned by data, much of which is still imperfect. As the dataset grows and visibility improves – and advances in technology will play a big part in this – the ability to finetune performance to reset those decarbonisation benchmarks to specific asset classes in specific countries will become invaluable. It will not only provide very clear targets for asset management teams but will provide a comparative global benchmark for measuring performance, something absent from most current sustainability reporting.

Read more: Standard Chartered’s Eugenia Koh on Next Gen Investors

LUX: To what extent are asset managers using proptech now?
Justin Travlos: There’s always been a rule of thumb that if you pick up an asset that’s just been managed in the day-to-day, you can almost guarantee a 20 to 30% improvement in energy efficiency, simply by utilising the latest technology – which is obviously a win-win because it doesn’t require huge amounts of cap expenditure but does generate savings and financial returns.

Ultimately, some building infrastructure and systems may still need an entire overhaul, but proptech will be integral to assets’ value proposition going forwards, as owners and occupiers ascribe greater value to the provision of these data points to achieve their ESG ambitions.

Forestry Investment, Australia

LUX: Are we collectively doing enough?
Justin Travlos: Looking forwards, I take some comfort from the fact that in just 18 months, humanity has produced not one but several vaccines to bring a population of 7 billion people back from a global pandemic. This shows what can be achieved and I hope against a backdrop of increasing evidence of the impact that climate change is having on the world that that the same sort of ingenuity, thinking and collective effort will prevail. Ultimately, the actions that we take now will have a fundamental impact on where we end up by the end of the century, which is why the urgency of this topic has become central to our approach to sustainability and responsible investment.

LUX: What advice do you have for next gen clients running a lens over family office real estate portfolios?
Justin Travlos: From an ESG perspective, there are three key questions. First, can profitability of the investment be decoupled from carbon? Second, is a change in physical risk going to limit either the operating days of the asset, or the available capital to acquire the asset at the end of the investment horizon? And third, how does the asset support its occupants?

Justin Travlos is Global Head of Responsible Investment at AXA Investment Managers Alts

Eugenia Koh, Head of impact and sustainable investing at Standard Chartered

Eugenia Koh believes that while philanthropic support is essential, capital markets must help to close the funding gap for global sustainable development goals. Here, Koh, head of impact and sustainable investing at Standard Chartered, speaks to Samantha Welsh about current trends among next gen investors and how they are influencing their families to become more sustainable

LUX: Which sectors are your UHNW next generation clients eyeing post-pandemic?
Eugenia Koh: We find that they are particularly passionate about entrepreneurship and sustainable development. We conducted a thought leadership survey at the height of the pandemic, which found that clean water and sanitation, good health and wellbeing, climate action, quality education, and zero hunger were among the causes of highest importance to investors.

LUX: Does this growing preoccupation with ESG have any intergenerational repercussions?
Eugenia Koh: There are increasing demands on the next generation of clients globally as they navigate a wide range of fast-moving challenges which may be very different from those that their parents face. The resilience and increased interest in sustainable investment during the pandemic has helped some next gen investors with educating their families on the topic. One of them had his sustainable portfolio outperform the family’s main portfolio, and this has changed the family’s view to be more receptive to exploring sustainable investments and how they can help with better risk management and performance.

LUX: How easy is it to measure the performance of ESG investments?
Eugenia Koh: It is important not to be overly simplistic in using performance as a marketing tool as not all ESG investments outperform, depending on the strategy used and depth of ESG integration. When linking to performance, the concept of materiality is key. Not all ESG factors are equal and material: ‘E’, ‘S’ and ‘G’ factors differ based on industries. Take, for instance, airlines: their material ESG factors would include fuel efficiency, carbon emissions and health and safety practices, which would have a bigger impact on bottom line and consumer expectations as compared with such issues as child labour. Material ESG factors have a potential impact on financial performance, either in influencing value creation or destruction.

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LUX: How do you foster a sense of community among participants of the Future Global Leaders Programme?
Eugenia Koh: We keep the experience intimate by keeping the number of participants small, but diverse. Our next gen clients come from a variety of backgrounds: some are entrepreneurs themselves; others are involved in their family business, or are doing something completely different. They appreciate the opportunity to discuss topics that are close to their hearts.

LUX: What’s your go-to advice for next gen investors?
Eugenia Koh: To be clear on their objectives. Just as investors demand rigour in their traditional investments to achieve their financial objectives, they should likewise be clear about their impact objectives and the best approaches to achieve this.

LUX: How can investors avoid fraud, greenwashing and Covid-washing?
Eugenia Koh: Investors should ask their advisers about the ESG strategies of the companies into which they are investing, as well as learning about how ESG factors are integrated into the fund manager’s selection process. At Standard Chartered, due diligence is an important part of what we do. We have launched ESG Select, our in-house review framework, to better support clients in their selection of high quality ESG products with a strong performance track record.

Read more: Deloitte’s Jessica Hodges on Sustainable Investing 

LUX: Tell us about Standard Chartered’s sustainable development goals.
Eugenia Koh: We contribute to raising standards across the world and support the fight against climate change while playing our part in reducing poverty and global inequality. For instance, we are contributing to climate action and clean affordable energy with our commitment to provide project financing services for $40 billion of infrastructure projects that promote sustainable development. We are also looking to raise $75 million for our foundation, Futuremakers, in order to reach 50,000 young people, micro and small businesses to reduce inequalities.

Angkor Wat, Cambodia

LUX: What drives your own passion for sustainable, responsible, impact investing?
Eugenia Koh: I remember going to Cambodia as a youth with my church group to engage and help the community there and being struck by the poverty, especially in one of our trips to a garbage slum. My friends and I decided to make an annual trip there to continue engagement with the youths we had befriended, and one of my friends eventually moved to set up a social enterprise in Cambodia. That was my first experience with impact investing and leveraging business to uplift families out of poverty.

My [subsequent] experience in grant-making and CSR has helped me see that while philanthropic support is essential, there is also a role that capital markets and finance can play in sustainable development. There remains a significant funding gap in achieving the [UN] Sustainable Development Goals — the annual financing gap to achieve the SDGs by 2030 currently sits at $2.5 trillion — and we need the private sector and finance to play a role in contributing towards this. I am excited when I come across clients and investors who are passionate about contributing towards this, and to be able to help them in their journey.

Eugenia Koh is Head of Sustainable and Impact Investing at Standard Chartered Bank

Harnessing renewable energy from sources like hydro electric power is essential for investing in the future

Jessica Hodges

From renewable energy to alternative food products, biotech to healthcare, ESG is helping to bring impact to the forefront of investment portfolios. As a partner at Deloitte, Jessica Hodges is responsible for helping private clients build responsible investments into their portfolios. She speaks to LUX about the increasing centrality of ESG to business strategy and why family offices need to be ahead of the curve. By Samantha Welsh, Philanthropy Editor.

LUX: What drove your own interest in ESG?
Jessica Hodges: I was interested in ESG issues from a young age – albeit the acronym didn’t exist yet – and was always keen to get involved in projects that had a social or environmental angle. My job means I come into contact with a large number of families, and I’m keen to ensure that we, and they, make an impact through the work we do. Considering environmental, social and governance (ESG) risks is becoming increasingly central to business strategy.

LUX: What trends are you currently noticing among family offices?
Jessica Hodges: Family offices are all unique, but generally we are seeing more of an interest from the next generation in issues that have a positive impact on the environment and on society. Younger generations are becoming increasingly involved in managing their family’s wealth and demanding investments that align with their values. They are particularly focused on how they measure ESG impact, considering on a case by case basis the impact companies are having and how they may change to align to ESG values, as well as using data to understand it.

Many next gen clients feel a real sense of obligation – particularly if the source of their wealth may not have been considered to have positive impacts in the past. Often in a family with multiple siblings, you might see one sibling managing the family business, one running the family office and one leading the philanthropic side of things.

LUX: Which sectors are next gen investors most interested in?
Jessica Hodges: Areas of focus include renewable energy infrastructure projects; alternative food products; agricultural technology and alternative farming; healthcare and biotech. What is so interesting is how ESG is bringing that ‘impact’ element into the broader investment portfolio – an area I think family offices are ahead of the curve on.

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LUX: What makes family offices potentially well suited to ESG investing?
Jessica Hodges: Family offices typically have more control over deciding and managing their priorities than public funds as they are private. They do not have to respond to shareholder demand in the same way, and have flexibility over how they use their large pools of capital. Their investment horizons are also often long term: instead of looking to make a quick return, they invest over five year periods or more, and do not have the same financial return requirements that larger venture capital firms have.

Being smaller, and typically more flexible and agile, makes it easier to introduce policy change and implement if they have the skillset to do so. Additionally, there are some family offices that are heavily focused on supporting their local community, helping to make more noticeable and measurable change locally rather than on a macro level.

Jessica Hodges delivering a speech at the Deloitte Family Office Conference

LUX: What basic interventions can a family make to incorporate ESG targets into an investment model which has been in place for generations?
Jessica Hodges: Due diligence of sustainability practices is key. This is an area that family offices will need to consider planning for, as a resource for sufficient oversight of external managers could be an issue for smaller organisations. It’s also key to have effective controls in place to measure and monitor fund managers, and ensure strategic objectives set by the family office are met.

ESG-proof due diligence and investment processes are also extremely important. This can include fully understanding the investment philosophy of any external managers (without any complicated jargon), obtaining evidence of shareholder engagement, and verifying performance data. The easiest intervention to make is often an exclusionary policy: the family picks a few areas they are not willing to invest in, such as organisations that negatively impact the environment or public health.

Read more: Professor Peter Newell on why the wealthy need to act on climate change

LUX: The ESG sector is unregulated and family offices value authenticity and trust: how do managers evaluate risks such as data validation, fraud, and greenwashing?
Jessica Hodges: It’s key that family offices have independently verified credentials. Besides checking a firm’s governance mechanisms, internal systems and controls, assurance would focus on whether there is a positive risk or ESG culture and a good level of awareness. In the same way that auditors come in to very financial data, providers will come to verify non-financial data over ESG metrics.

LUX: How is the ESG industry model disrupting traditional investing models?
Jessica Hodges: Firms are trying to determine which of their investments have both positive and negative social or environmental impacts and want to be clear on the implications of these with their public disclosures. They are also figuring out factors that will resonate most with their clients. If product governance is not thought through properly then there could well be negative consequences. My expectation is that there will be increased monitoring requirements with regards to asset portfolios, leading to additional costs – although proponents of this would argue that it is money well spent.

The sales part of the investment cycle is more complex since investors in ESG are not seeking to solely meet financial return objectives: at what point do you determine your exit? Historically, family offices – along with private equity – might have been looking to exit at the point when they could maximise their financial profits. Now, family offices will need to consider whether the targets outlined have been achieved, along with the broader impact on society or environment.

LUX: What makes a successful family office?
Jessica Hodges: The most important thing for a ‘successful’ family office is alignment of goals, and understanding what the family hopes to achieve. It is only by knowing where you want to get to that you can understand if you have really got there and measure how you performed!

Landscape photography by Isabella Sanai

Jessica Hodges is an Investment Management Audit and Assurance Partner at Deloitte

Iceberg Between Paulet Island and the Shetland Islands, Antarctica, 2005 by Sebastiao Salgado

As part on an ongoing monthly column for LUX, artnet’s Vice President Sophie Neuendorf discusses how the art industry can support more sustainable businesses practices which will not only benefit the planet, but also the longevity of art and culture

Sophie Neuendorf

Over the past few months, I’ve been hearing a lot about sustainability and ESG reporting. So much so, that it’s even trickling into the art industry. Perhaps, it can be seen as a positive, global reaction to the pandemic – a way of responding to and making sense of a globally shocking and horrific situation. If the last year has taught us anything, it’s that humanity has abused the planet to such an extent that we’re not only facing a pandemic and the ensuing socio-economic consequences, but also rapidly accelerating climate change. And amongst all of this, a new question has surfaced: how do we preserve our personal and cultural heritage in the face of rapidly increasing climate change, a pandemic, and volatile global socio-economic situations?

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The arts industry, like any other industry, should be responsible for affecting positive change. Given that arts and culture define us as individuals as well as nations, the arts arguably have an even greater obligation of setting a positive example to safeguard the future of humanity.

When thinking about sustainability, most of us immediately connect it to climate change and the immediate threat to the environment. Of course, this is true and important, but sustainable business practices are not only about the environment. The three pillars of sustainable business practices are the environment, society, and governance (ESG). The idea behind this multi-lateral approach to conducting business is to promote an equitable, efficient, and environmentally progressive business and society.

Horizontal Aspens, 1958 by Ansel Adams

Similarly, the impact of cultural awareness and investment is no longer limited to the traditional sphere of the art market; it has expanded to include political, economical, and environmental activism. The last two years have seen the rise of the MeToo and Black Lives Matter (BLM) movements, drawing widespread support across multiple industries. Corporations with questionable business ethics across the globe were targeted, just as just, equal opportunity, and environmentally-friendly business practices were sought out and celebrated. As the world seeks to slow the pace of climate change, promote equality, and support billions of people, there are several changes we can make now to spearhead the art world’s support for a sustainable planet.

Read more: Durjoy Rahman on promoting South Asian art

At artnet, I used the past year to compile our first ESG strategy and report. By engaging with Environmental, Social and Corporate Governance (ESG) reporting and initiatives, we are hoping to continue our ethos of spearheading positive change and sustainable business practices – our clients expect it of us, and many of our employees are also advocates of change. As a purely digital business, we have already recognised the environmental benefits of transacting online. We don’t, for example, ship artworks across the globe for viewings, require artworks to be viewed in person, have large, costly office spaces, or print thousands of catalogues per sale.

Infographic courtesy of artnet

Elsewhere in the art world, Christie’s recently announced a pledge to become carbon neutral by 2030, making it the first of the major auction houses to do so. The company will focus four main areas to meet its carbon goals, including transforming its processes with shipping, travel, building energy, and printed material. The pledge also commits to a 50% reduction in carbon emissions, which includes diverting 90 percent of its waste away from landfills. They will provide clients with packaging and printed material that is 100% recyclable, and have also made the decision to stop publishing weighty, glossed paper catalogues.

For context, at least 7,000 auctions are held annually around the world with a median of 120 lots per sale (according to artnet price database). For nearly all of them, auction houses print catalogues to send around the world to potential buyers. In an era of digitalisation, print catalogues are unnecessarily destructive for the environment. Moreover, historical auction data is much better safeguarded, and more easily accessible for private collectors, appraisers, or wealth managers on an online database than in a printed catalogue on a shelf. This is just one of many areas of change that could be enacted immediately.

Mentawai Climbing a Gigantic Tree to Collect, 2008 by Sebastian Salgado

5 tips for building a sustainable art business:

1. Art businesses should first evaluate their corporations in terms of ESG standards of conducting business and then, establish strategies and targets for the next few years.
2. Take steps to reduce your greenhouse gas emissions, which can be direct or indirect emissions. However, it’s important to note that even after significant changes to operations, some emissions will remain.
3. The next step is to calculate the remaining carbon footprint, and take responsibility by financially offsetting those emissions. Money can be invested in projects that plant trees or protect forests, support renewable energy programs, equal opportunity initiatives, or other sustainable business initiatives. Carbon offsetting, which is the process of funding emission-reduction initiatives in an effort to “balance out” your carbon footprint, is one step every responsible art business should take as part of its climate action plan. For context, to offset an equivalent amount of carbon to a cancelled coal power station, $300 million worth of trees would need to be planted. With the carbon calculator recently launched by the Gallery Climate Coalition, artists and galleries can make a good estimate at their carbon footprint and clarify where reductions can be made.
4. Implement checks and balances for not only the environmental changes, but also the social and governance changes (which affect all stakeholders).
5. Make your clients and employees aware of the steps you are taking, and encourage them to join you in this global effort for a sustainable future.

And here’s a final thought: as private collectors, family offices, or businesses, we are often inclined to reduce costs and taxes as much as possible, but I propose the introduction of a voluntary “Green Tax” on the buying and/or selling of art and antiques, which will benefit NGOs working on preserving the environment. Let us forget the short-term gain of wealth accumulation in favour of the long term gain of a greener planet for the next generations.

At the end of the day, it’s up to you to decide how you would like to contribute to a sustainable future, not only for the art industry, but for humanity.

Follow Sophie Neuendorf on Instagram: @sophieneuendorf

Drone footage of Atlantic Forest in Brazil. Image by FG Trade

Can the power of the financial markets be harnessed to address environmental issues such as ocean conservation? LUX talks to Jörg Eigendorf, Head of Corporate Communications, Social Responsibility and Sustainability at Deutsche Bank, about the unique role banks can play to incentivise sustainable investment and consumption

Jörg Eigendorf. Image by Mario Andreya / Deutsche Bank AG

LUX: Sustainability can be an empty word in business. How can you make it meaningful?
Jörg Eigendorf: Put simply, as a company we need to demonstrate that we are willing to integrate it in all parts of our value chain. This starts with our own operations. At Deutsche Bank we made a pledge in 2007 to become carbon-neutral and achieved that goal in 2012, but we have worked continually since then to cut our energy consumption – as well as our usage of water, paper and other resources – and this year we challenged ourselves to get all the electricity we use from renewable sources by 2025. But this is only the minor part: banks also have an additional responsibility, in that we facilitate other forms of business, which can themselves have a positive or negative impact on the world. This is where environmental, social and governance (ESG) principles and practices come into play.

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LUX: ESG investing is in fashion right now. What makes it more than financial jargon?
Jörg Eigendorf: It is already much more than a new piece of financial jargon. It’s a concept that has gone from niche to mainstream in recent years. Investors increasingly want to ensure their money is used to support businesses that care about sustainability. ESG gives them a way to compare and contrast investments based on factors that go beyond financial performance – without sacrificing it. So it really has the potential to transform the whole economic system in a positive way. This is why we feel confident that we will be able to increase our volume of sustainable financing plus our portfolio of ESG investments under management to over €200bn by 2025 – to play our part in contributing to this momentum.

LUX: Can ESG really incentivise better behaviour in the private sector?
Jörg Eigendorf: I’ll give you a practical example: in Singapore, we’ve just provided a $25m ‘sustainability-linked’ loan facility to an agricultural company. If the company meets a set of agreed sustainability targets over the three-year term of the loan (and if these are verified by an external auditor), the interest rate payable on the loan will be lower; otherwise it will be higher. This kind of innovation sets a great example and shows how we can help companies incentivise themselves to do better. Of course, progress is often relative, and in some industries all we can do is try to make things better than they were before, consistently. We can’t stop fossil-fuel usage overnight because we don’t have the means to compensate for this yet. But we need to drive and facilitate change. In the almost five years I’ve been with Deutsche Bank, I’ve realised how important banks are to this transformation process, and that we have a big lever with which to make a real difference.

Read more: Marine biologist Douglas McCauley on environmental philanthropy

LUX: What are the main challenges involved in building sustainability into financial products and services?
Jörg Eigendorf: The biggest is probably asset origination – that is, the process of identifying and acquiring investments that offer ESG benefits alongside traditional benefits such as capital growth. It starts with the question: what is sustainable? This is why we have just published our sustainable finance framework which is closely aligned with the new EU taxonomy on financial services. We need this transparency to give our businesses, as well as investors, some certainty in times when demand for ESG products from both private individuals and institutions is outstripping supply. Having said this, it is still difficult to verify that a particular asset meets particular ESG criteria. There is not enough data, there is not enough clarity and there is not enough consistency in the way that ESG criteria are defined and compared. That’s why we’re helping to develop industry-wide ESG standards – for example, working within various initiatives to develop a framework for comparing and contrasting ESG products.

LUX: What ESG issues do you feel passionate about personally?
Jörg Eigendorf: I feel very strongly about the overconsumption of natural resources, and especially how we treat animals. We are eating up this planet and we should stop it. Every German consumes around 61kg of meat a year on average, and the suffering associated with this is unbelievable. Pigs have much DNA in common with humans. They feel emotions just as we do. So from my point of view it cannot be right that we treat them as a commodity. Meat production is also making a significant contribution to climate change – for example, as rainforests in Latin America are razed to produce grazing land for beef cattle. I also care a lot about ocean conservation, marine ecosystems are vital for the world and the climate, so we cannot risk their collapse. These are matters of life and death for humanity as a whole.

LUX: What’s the future for ESG?
Jörg Eigendorf: It is already mainstream and will become more important every day. The Covid-19 crisis, while terrible in many ways, has also made us aware of how things need to be different. We’ve suddenly become more aware of our environment. We’ve realised that we don’t have to be on the run all day long, travelling left and right, and that in many cases a video conference is enough. I am convinced that this crisis will lead to a change in behaviour and creative solutions. And I think we will be less likely to go back to the old, more inefficient world as a result. At the same time, greater awareness of ESG investing will lead to a virtuous circle in which economic growth is coupled with environmental protection – provided we in the financial sector play our part in leading the development of ESG standards and solutions. We welcome the idea of our clients and investors pushing us to do better: there must be a mutual understanding to drive change.

Find out more: deutschewealth.com/esg

This article originally appeared in the LUX x Deutsche Bank Wealth Management Blue Economy Special in the Autumn/Winter 2020/2021 Issue.