This framework was devised in a 2009 paper1 by a group of internationally renowned scientists and has since attracted the attention of policymakers, business leaders, and asset managers. We describe this approach to environmental investing here in a nontechnical version of an article published in 2018.2
The Planetary Boundaries framework identifies nine dimensions of planetary health—measurable criteria such as concentrations of greenhouse gases and biodiversity loss. It then attempts to establish how far each of these dimensions can change without risk of provoking sudden, irreversible damage to the environment.
Applying the Planetary Boundaries framework to an investment portfolio
At Pictet Asset Management, we’ve devised an innovative application of the Planetary Boundaries framework to investment decisions; specifically, we quantify the environmental impact for every US$1 million of annual revenue that businesses generate.
If a company’s activities lie within the safe levels for each of the nine dimensions over the whole of the product value chain, then the firm—and potentially the stocks and bonds that it issues—can be viewed as being environmentally sustainable. If the company’s activities don’t lie within safe levels of each of these dimensions, then the business is likely to be accelerating the process of global environmental degradation.
The nine dimensions of the planetary boundaries framework
- Climate change
- Biodiversity loss
- Biochemical flows
- Chemical pollution
- Land-system change
- Freshwater use
- Ocean acidification
- Ozone depletion
- Atmospheric aerosol loading
In this piece, we examine each of these dimensions, suggesting changes that we think are necessary to make the metrics more relevant to the investment process.
Investment is often focused on short-term metrics, while planetary health demands a long-term horizon. We’ve chosen short-term, local metrics that have long-term, globally systemic consequences. But we acknowledge that this also implies an assumption that incremental changes are sufficient to maintain planetary health.
The overwhelming scientific consensus is that greenhouse gases generated by human activity—primarily carbon dioxide (CO2), methane, and nitrous oxide—are the dominant cause of the global warming observed since the mid-20th century. The Planetary Boundaries framework measures our impact on the climate in atmospheric concentrations of greenhouse gases and their heat-trapping effects.
On its own, this measurement isn’t useful for investors, because it focuses on the end state rather than on the amount of greenhouse gases emitted per unit of economic activity. To address this need, we propose a pragmatic simplification. In order to keep global warming to less than 2˚C from preindustrial temperatures, the United Nations Framework Convention on Climate Change says that an allowable emissions level is equivalent to 14.25 billion tons of CO2 per year globally.3 That’s about one-third of current emission levels. Dividing that figure by annual world economic output of US$75.6 trillion,4 we reach a boundary threshold equivalent to 188.5 tons of CO2 per US$1 million of output. The current level is 639 tons per US$1 million,4 meaning that emissions will have to drop by 70%. And as the economy grows, that figure will have to fall even further.
Human activity—notably resource extraction and the expansion of agricultural and pastoral land—has accelerated the loss of plant and animal species. Measuring the rate of actual and natural extinction—or, indeed, even having a clear idea of how many species there are—is fraught with difficulty. However, given the possible range at which natural extinctions occur, the planetary boundaries model estimates that the yearly safe rate of extinctions is below 10 extinctions per 1 million species. Our calculations show that the extinction rate must be less than 0.13 per million species for every US$1 trillion of corporate revenue generated. The current pace of extinction is estimated to be around 10 times higher than the threshold level.
Nitrogen (N) and phosphorus (P) are macronutrients used extensively in fertilizers. Intensive farming, industrial activity, and population growth have increased the quantity of both nutrients in rivers and oceans to dangerous levels, frequently triggering rampant growth of algae. This is damaging to the ecosystem because algae deplete oxygen in water, killing aquatic plants and fish.
We translate P into N-equivalents and come up with a Planetary Boundary of 142.3 million tons of N-equivalent per year. Currently, the flow is 205.7 million tons per year, by our calculations, exceeding the boundary by a factor of 1.44. In order to bring the flow of macronutrients back into ecological balance, companies should not emit more than 161 kilograms per US$1 million of annual revenue.
Chemical pollution and environmental release of novel entities
As with aerosols, scientific literature suggests that chemical pollution is a vital indicator of planetary health,5 but it doesn’t give a quantitative boundary. Chemical pollution comes in many forms: Pesticides, heavy metals, hormones, and antibiotics are pollutants when used excessively. Following the same approach we used to calculate aerosol loading, we took criteria such as toxic releases into the air, surface water, underground water, and soil, by kilogram, and ecotoxicity and human health effects. Using this framework, we again created a virtual metric, n-kg CP—calibrated as 1/1,000th of the current level—and set the Planetary Boundary at 3,000 n-kg CP per US$1 million. Based on our calculations, this is three times the current emissions level. As for aerosols, this may be an overly generous boundary; however, in the absence of scientific quantifications for a stronger constraint, we’ve opted to start with this flexible approach.
Land is the ultimate scarce resource. Forests are particularly vital to the climate system and biodiversity. Our calculations show that humans must not convert any more than 8.3 billion of the world’s 13 billion hectares of available wooded areas if we’re to maintain a healthy and sustainable environment. Once we’ve adjusted for the fact that agricultural land is largely converted from one-time forests, this translates to an acceptable usage of 33 hectares per US$1 million of annual revenue. Current use is 39 hectares per US$1 million, which means we’ve breached the boundary.
Human interference with the freshwater cycle—whether through agriculture, industrial use, or poor wastewater management—has negative effects on water availability, ecosystems, health, and food security.
Research findings suggest that up to 4,000 cubic kilometers of the world’s freshwater supply can be extracted per year without transgressing this Planetary Boundary.1 However, not all water use is extraction, as some freshwater is also polluted through toxic releases into ground or surface water; the ratio of withdrawal to other consumption is given as 1.53.1 Applying this to the extraction level gives a Planetary Boundary of 6,154 cubic kilometers of water per year. At a company level, this implies a water withdrawal boundary of 81,408 cubic kilometers per US$1 million of annual revenue. Currently, withdrawal stands at 29,106 cubic kilometers per US$1 million, meaning we’re within the boundary.
As concentrations of CO2 and other pollutants increase, oceans become more acidic. Increased acidity prevents calcium carbonate skeletons and the shells of various marine organisms from forming properly. This affects both the biosphere and the health of economically important fisheries and shell fisheries.
The Planetary Boundaries framework looks at the marine saturation of a form of calcium carbonate called aragonite. Yet because this doesn’t give an indication of the industrial processes behind acidification, it isn’t particularly useful for making investment decisions.
Instead, we consider the emissions of four acidifying substances—CO2, NO2, SO2, and NH3—and the rate at which they form acidifying H3O+ ions in the ocean. Using some simplifying assumptions, we give a total ocean acidification economic intensity of 0.0370 kilomole H3O+ per US$1 million. Our calculations show the current rate of acidification is 0.0282 kilomole H3O+ per US$1 million, which means we haven’t breached this boundary.
Stratospheric ozone depletion
Ozone in the stratosphere protects us by filtering out life-threatening ultraviolet radiation from the sun. In the early 1980s, it became clear that human emissions of ozone-depleting substances such as chlorofluorocarbons (CFCs) had breached a threshold and caused a chain reaction, opening a large hole in the ozone layer over the Antarctic. An international ozone layer protection treaty called the 1987 Montreal Protocol banned the most harmful substances, and emissions have since slowed. The boundary is no longer being transgressed, although the hole is expected to remain for several more decades.
The 1980 level of emissions was the equivalent of 6.6 billion tons of CFC-11—an ozone-depleting CFC also known as freon-11. That level was low enough to keep stratospheric ozone levels steady. Dividing that figure by global GDP tells us that 2.48 kilograms of CFC-11 equivalents per US$1 million of revenue is the limit for allowable ozone depletion. The current rate is 1.05 kilograms per US$1 million—well within boundaries.
Atmospheric aerosol loading
The concentration of small airborne particles—whether soot, chemicals, metals, or biologically derived dust—in the atmosphere should be considered a key environmental dimension, but the scientific literature doesn’t give a quantitative boundary. Such particles influence the climate system, hydrological cycle, and atmospheric chemical processes, as well as having negative effects on the health of animals and plants. Our model takes seven indicators and has weighted them to give a virtual aerosol unit—n-kg AE—by first setting the current total at 1,000 n-kg AE. We then set the boundary at 3,000 n-kg AE per US$1 million, or three times the current emissions level. While this might seem to be a rather permissive approach, any boundary is more restrictive and useful than setting no boundary at all. In addition, our model can be very easily and quickly adjusted as new scientific findings emerge.
Planetary Boundaries for investment
There is a vast trove of data generated by the roughly 70,000 companies globally that publicly release information about their financial accounts. The data goes far beyond the nuts and bolts of their profits and losses; it offers the potential for real insight into the impact that the corporate sector has on the wider environment.
However, trying to paint a coherent, company-by-company picture is nearly impossible. Instead, we’ve developed a model that divides the corporate world into 250 subindustries. Each of these subindustries is then appraised in terms of the impact it has on the nine dimensions of the Planetary Boundary framework.
We scrutinize the environmental footprint of industries across their entire value chain—from the extraction of raw materials to manufacturing processes, distribution and transport, product use, and disposal and recycling. For example, consider the automobile industry. Cars produce CO2 emissions at the production process, but they generate more pollution and emissions after they’ve left the factory and rolled onto the streets.
We also fine-tune our analysis according to industry-specific factors. For instance, environmental service companies may generate large amounts of emissions when they incinerate waste, but they’re also remediating existing pollution emitted by others.
We believe our framework gives investors a new way of tracking the sustainability of companies—and their portfolios—especially relating to the impact they may have on key environmental challenges. Our model helps highlight those companies that actively contribute to solving environmental problems and helps others reduce their footprints. These are the companies that form part of what we could consider a responsible investment universe.
This paper was written by Pictet Asset Management in partnership with the Stockholm Resilience Centre (SRC). The SRC is an international research center on resilience and sustainability science. Established in 2007, it has conducted world-leading research to address complex challenges facing humanity. The center is a joint initiative between Stockholm University and the Beijer Institute of Ecological Economics at the Royal Swedish Academy Sciences.
Unless otherwise noted, all scientific data referenced above was sourced from the planetary boundaries 2009 paper.
1 “Planetary Boundaries: Exploring the Safe Operating Space for Humanity,” https://www.ecologyandsociety.org/vol14/iss2/art32/, 2009. 2 “Towards defining an environmental investment universe within planetary boundaries,” https://www.ecologyandsociety.org/vol14/iss2/art32/, 2018. 3 United Nations Framework Convention on Climate Change, https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf, 2015. 4 The World Bank DataBank, 2020. 5 Economic input–output life cycle assessment database, Carnegie Mellon University, 2020. 6 "Safeguarding human health in the Anthropocene epoch: report of The Rockefeller Foundation–Lancet Commission on planetary health," The Rockefeller Foundation–Lancet Commission on Planetary Health, November 14, 2015.
The views presented are those of the author(s) and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. John Hancock Investment Management takes no responsibility for the accuracy of the content, and the views may not necessarily reflect those of John Hancock Investment Management. Past performance does not guarantee future results.
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