Thursday, May 2, 2013

The Water-Energy-Food Nexus and Impact Investing – a perfect match?


Undeniably water, food and energy are vital resources that most of us take for granted. Sadly this is not the case for all, roughly 800 million people lack access to clean water (UN, 2012), around 900 million are undernourished (FAO, 2010) and 1.5 billion lack access to electricity (IEA, 2010). Substantial progress has been made the last few decades but to ensure water, food and energy security for every citizen we still have a mountain to climb. Factor in an estimated population of 9 billion in 2050 coupled with rising affluence and the challenge becomes even greater. The fact that global water demand is set to rise by 30 %, energy by 40 % and food by 50 % in 2030 (UNESCO, 2010), while we simultaneously have to reduce the global footprint, implies herculean efforts. Then, the behemoth – climate change, which increases pressure on vital ecosystems and has the potential to adversely upend all scenarios if we are unable to get it under control.

The Nexus

Water, energy and food are fundamental to “get right” given their capacity for knock on effects in other areas, for example Millennium Development Goals like poverty eradication, improving health and ensuring environmental sustainability. They are highly interdependent in relation to extraction, production, delivery and consumption vis-à-vis resulting carbon emissions and implications for the wider ecosystem. Hence, we must look at the entire planet as a system and not risk damaging the whole by trying to address one specific problem.

This very message is championed by the Water-Energy-Food Nexus, which represents a more inclusive and integrated approach, not shying away from the complexity and interconnectedness across the sectors. Investments in either sector can’t be seen in insolation, for example innovative solutions in food production must equally consider effects on water and energy demand and new technologies enhancing water access have to account for the energy source. The Nexus calls for breaking the “silo” perspective, allowing for more accurate policy influence in connected areas such as climate change and biodiversity. Learn more about the Nexus on the Water, Energy and Food Security Nexus Resources Platform.

Adopting a holistic business view opens up for collaborative efforts across sectors including business, government and civil society, identifying synergies, trade-offs and investment opportunities. Forward thinking multinationals are taking this to heart. Using an integrated reporting framework to capture a more all-inclusive view of their operations they are entering strategic alliances and properly pricing externalities. Calculating the true cost of mining for example would include effects on natural capital like damaged water streams, degraded forests etc. It’s a safe bet that these intrepid companies will have a significant edge compared to competitors mired in dated and incomplete valuations methods and strategies.

Wanted: Investments

The scale of the needed investments are staggering. The World Economic Forum’s Green Investment Report from 2013 estimates 5.7 trillion USD/year until 2020 for a green growth scenario in which the temperature rise will be kept to 2 degrees (C°) by 2100. 2.2 trillion USD out of the 5.7 trillion would be earmarked for the water, food and energy sectors. Regardless of the exact figure it’s safe to say that success will require nothing short of massive global cooperation for a sustained period of time. A daunting task in today’s fragmented and tense negotiation climate. Interesting to note is that scenarios for a 4-6 degree rise indicate drastically higher costs according to a 2012 World Bank report. A 4-6 degree rise could also mean that adaptation might be beyond reach, given the risk of crossing planetary boundaries. i.e. critical climatic, geophysical, atmospheric and ecological processes. Crossing certain thresholds and entering an unstable state could mean that the Earth systems stop functioning in the manner in which human civilization have come to expect. Among the 9 identified boundaries are freshwater use and land use change. Learn more about the planetary boundaries concept from the Stockholm Resilience Centre.

To effectively combat climate change, protect natural capital and create resilient ecosystems, using the Nexus approach, investments need to happen now and not in a loosely defined future. One major reason for the slow progress can be linked to the way we view and conduct investments.

The sustainable investment (green, social, ethical, ESG) sector is a step in the right direction but it is still based on the old investment paradigm where focus is on minimizing the negative rather than on maximizing the positive. More to the point, sustainable investing, irrespective of using positive or negative screening methods, still places financial returns over all else. We need to arrive at the insight that protecting and improving natural capital is as important as a healthy financial bottom line. In fact, financial returns will eventually decrease as natural capital is destroyed and over exploited. At the same time we must be vigilant to avoid the pendulum swinging too far, i.e. disregarding the importance of financial capital and attractive returns. Economic growth fuels human development and prosperity and is central to any green growth scenario ahead. 

Impact Investing

Navigating the Nexus successfully for positive environmental impact requires an investment perspective that embraces the same paradigm shift, key aspects being:

Balanced – explicit intent to boost natural and financial capital as well as increasing social capital in the process (planet, profit and people)
Short & Long term - satisfy both current and future generations through investments with different time horizons
Holistic – consider effects of investment in interconnected sectors
Collaborative – push for strategic alliances across stakeholders with shared value and broad positive societal effects
Quantifiable – use verifiable metrics to measure impact of investment in relation to stated goals along the natural and social capital dimension

Answering the call for this shift is the Impact Investing scene, a growing phenomenon, both at the investor and entrepreneur level. The Global Impact Investing Network (GIIN) defines the concept accordingly:

“Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”

GIIN values the market at 9 billion USD in 2013 and Monitor Group estimates 500 billion USD in assets within the decade. Not to be confused with venture philanthropy, impact investors expect market rate returns and according to a 2013 study by GIIN 89 % of investors say returns are as expected or exceeding initial estimates. A full 60 % of impacts investors see no need for a trade off between finance and impact, designated as “yin yang” investors (JP Morgan, 2011). Read more about the nascent sector on the GIIN.

As a burgeoning field impact Investing holds a lot of promise but must ramp up fast in order to really live up to its name and create lasting impact on a large scale. In addition to individual investments in small startups it needs to target 100 million USD + investments involving multinationals, governmental entities, civil society, academia and other relevant stakeholders. The Water-Energy-Food Nexus represents the large scale, interconnected undertakings necessary for Impact Investing to find its forte. The two concepts could, if properly adopted, constitute a perfect match and help provide water, energy and food security for every citizen in a way that keeps us safely within planetary boundaries. The next ten years will reveal if this holds true.

CongressEA will do its part by dedicating itself fully to the mission of catalyzing positive environmental impact investments around the world. We hope you stay tuned for upcoming posts that will further explore the complementing concepts of the Water-Energy-Food Nexus and Impact Investing, applied in a real world context.