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

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.