My finances, my projects, my life
August 15, 2022

Towards a 1.5°C lifestyle

  Olivier Goemans myINVEST April 19, 2022 21

In today’s world, all conversation around business models is centred around sustainability and the fight against climate change. But let’s be honest, we are facing a landmine paradox. If sustainability means trying to extend something while protecting the environment and improving social inclusion, we are definitely trying to sustain something that is unsustainable: our lifestyles, our consumption and production patterns.

The first principles design

Having the privilege of being a lecturer at Luxembourg University on banking strategy, part of the story that I’m trying to tell to students on the digital transformation of banks, is the first principles design. My preferred illustration on first principles design, comes from Karl Benz, the German engineer who patented the first practical automobile put into series production in 1885. At that time, everyone else was trying to optimize carriage design for use with horses, following the traditional design by analogy reasoning. Benz, in contrast, reasoned in accordance with the first principles design. He took problems back to the constituent components, right back to the physics of the design and what the design was intended to do. By looking at the fundamentals of transport, he successfully applied the capabilities of the combustion engine to create something new. From there things changed rapidly and the streets of New York were soon dominated by the Ford Model T and drug stores1 began selling gasoline.

As famously stated by Elon Musk, “the normal way we conduct our lives is we reason by analogy. With analogy, we are doing this because it’s like something else that was done, or it is like what other people are doing. With first principles, you boil things down to the most fundamental truths… and then reason up from there”.

Revolutionary ideas, ideas that challenge the status-quo, are part of the recipe of most disruptive technologies. This is true for technology as well as for business models.

Revolutionary ideas, ideas that challenge the status-quo, are part of the recipe of most disruptive technologies. This is true for technology as well as for business models. The core principle of Blue Ocean strategy2, seeking to create and capture uncontested market space, is to look at your users and not at your competitors. From the marketers lens, this is nothing other than avoiding the marketing myopia pitfalls.

From polluting less to regenerating biodiversity

Simply looking at climate change, everyone agrees that greening our economy is not enough. Investing in renewable energy is great, but we also need to stop subsidizing the carbon economy and implement full cost accounting practices, incorporating externalities (e.g., pricing carbon emissions).It’s a fact, climate preservation is also intrinsically linked to the preservation of nature and the diversity of living “things”: biodiversity.

Conventional practices are driving us beyond planet Earth’s tipping points, a degenerating journey. It’s high time for implementing design for regeneration. We need to bring human activity back within the limits of planet boundaries3, into the “safe operating space”. Most of the changes require a rethinking of existing processes and consideration on how to make them circular, resource efficient and both economically and environmentally viable.

Instead of doing less damage to the environment we need to find restorative and regenerative solutions

What we need is more than incremental changes. Instead of doing less damage to the environment we need to find restorative and regenerative solutions. In essence, we should use nature as a mentor, learning from nature to design biomimicry. Nature holds solutions to many of our challenges: the food we eat, the water we drink, the clothes we wear, our jobs, … It can only succeed by relying on a science-based framework and by avoiding our analogical cognitive biases that would have us find the result we want, as if looking at Rorschach’s inkblots.

Biodiversity is in crisis, we are facing a planetary emergency. It’s high time to rethink our relationship with nature. Unsustainable economic growth has had devastating consequences for ecosystems that are under threat from climate change, species extinction and water insecurity.

Preventing misallocations of capital

Nature conservation and regeneration are now quickly imposing not only as the new frontier for sustainable development, but also for sustainable finance. The way to protect nature is by working on changing attitudes, behaviours, livelihoods and lifestyles.

If the ambition is not only to pull funding from harmful activities but also to proactively invest in a new generation of financial products for nature, analysing and integrating biodiversity impacts measurements can definitively help to prevent misallocations of capital.

In that prospect, 2021 offered some important milestones for biodiversity, with regulators, governments and companies agreeing on the importance of natural capital. Notable achievements include the signing of the Glasgow Leaders’ Declaration on Forests & Land Use during COP26. This particular pledge was signed by over 120 countries, all of whom committed to halt and reverse forest loss and land degradation by 2030. Also of note was the passing of the Kunming Declaration4 which sets the agenda for a Global Biodiversity Framework, calling for the alignment of financial flows with global biodiversity goals and for increasing investment into nature-based solutions for climate.

While the Global Biodiversity framework contains requirements for companies to ‘assess and report on dependencies and impacts on biodiversity’, ‘reduce their negative impacts on biodiversity’ and ‘reduce biodiversity-related risks to businesses’, it will now be crucial to see if, while ambitious, the framework could produce less vague but more clear and consistent guidance on how to calculate biodiversity impact. In that prospect, let’s be optimistic that initiatives such as the Taskforce on Nature-related Financial Disclosures (TNFD) can mirror the success of the TCFD, the Taskforce on Climate Financial Disclosures, enforcing robust biodiversity-related risk disclosures, allowing a shift in norms around nature related risks and opportunities for finance.

As investors we now have to learn how to invest in nature-positive solutions

While companies are learning how to measure and report their impacts on biodiversity, asset managers and bankers are also learning how to integrate those impacts into their assessments of the different business models, their valuation and their creditworthiness, as well as fully disclosing their climate and nature-related financial risks. As citizens of the world we are changing our lifestyles, behaviours and consumption patterns. As investors we now have to learn how to invest in nature-positive solutions. It’s high time to stop to investing in the old destructive ways that will leave future generations with a broken planet. Investing in the future needs to be green, sustainable and regenerative.

1 Prior to the modern day gas station, drivers used to purchase gasoline from local pharmacies and drug stores, the same place they were purchasing kerosene to light their lamps at home.

2 Blue Ocean Strategy is a book published in 2004 written by W. Chan Kim and Renée Mauborgne, professors at INSEAD. Authors argue that in crowded market place, lasting success comes from creating ‘blue oceans’, untapped new market spaces ripe for growth. And the business world has caught on, as companies around the world are skipping the bloody red oceans of rivals and creating their very own blue oceans.

3 The planetary boundaries concept (developed at the Stockholm Resilience Centre) presents a set of nine science-based planetary boundaries within which humanity can continue to develop and thrive for generations to come.

4 The Kunming Declaration was adopted by over 90 countries in October 2021 at the first part of the ongoing virtual 15th meeting of the Conference of the Parties to the United Nations Convention on Biological Diversity. It calls upon the parties to “mainstream” biodiversity protection in decision-making and recognise the importance of conservation in protecting human health.