There are significant risks to businesses as high levels of material resource scarcity arise. This may result in price increases and volatility, new rules and regulations, and changing customer preferences. Despite these risks, the issue of material resource scarcity is often overlooked as a material ESG factor. Hence these can be said to be ‘betting on infinity’. To overcome this challenge, Cambridge Institute for Sustainability Leadership (CISL) and KPMG have developed the Sustainable Investment Framework Navigator (the Navigator) that provides asset managers insight into the material resource consumption associated with their investments.
Not considering material resource consumption implies betting on infinity
Material resource scarcity is expected to increase dramatically (total demand for resources is expected to reach 130 billion tons by 2050, up from 50 billion tons in 20141). This is due to four major factors:
- The global population continues to grow (from approximately 7.8 billion today to approx. 10.5 billion by 20502);
- Developing countries continue to industrialize rapidly (about 55% of people live in cities today, which is expected to grow to roughly 75% by 20502);
- Global stocks of virgin technical materials and the natural capacity of the global ecosystem to grow biological resources continue to decline (e.g. as per some estimates, the global stock of virgin lithium, mainly used in batteries, may deplete before 20403; according to experts, a fifth of countries worldwide are at risk from ecosystem collapse4); and
- Most models of production are ‘linear’ (estimated at 91% by a Dutch NGO). Under linear models of production, virgin materials are extracted from the ground and used to make products that are consumed, with limited attention for the phase in the life cycle after the product is consumed.
The increase in material resource scarcity is expected to be so substantial that technology may not advance sufficiently to reduce our demand to a sustainable level6. Such a scenario would lead to significant business risks such as price increases and volatility, new rules and regulations, changing customer preferences, and even physical constraints on production.
In spite of these risks, material resource scarcity is often not considered as a material ESG factor. This implies ‘betting on infinity’.
...material resource scarcity is often not considered as a material ESG factor. This implies ‘betting on infinity’.
The extraction, growing and processing of material resources leads to large environmental and social impacts
The extraction and processing of technical materials or the growing and processing of biological materials comes with a range of environmental and social impacts, which can have severe consequences. Technical materials generally require huge amounts of energy, labor and effort to be extracted, refined and consumed. Additionally, the growing, harvesting and processing of biological materials have substantial impact on, among others, soil, water and air quality, landscape amenity value, and biodiversity.
The Navigator provides insight into resource security
Given these risks and impacts, asset managers should assess the level of resource security for their portfolio. Resource security can be achieved by organizations through adopting ‘circular’ models. In contrast to ‘linear’ models, ‘circular’ models aim to decouple production from any unsustainable practices in the supply chain.
In order for asset managers to be able to assess this, they need access to material, consistent and comparable data on the level of circularity of organizations. This data is currently lacking as there is no consensus on the approach for how organizations can measure their effectiveness in moving toward more circular business models. In recent years, however, the Circular Transition Indicators framework of the World Business Council for Sustainable Development has gained traction7. This is supported by trends such as investor demand and regulation for better non-financial reporting that are driving better availability and accuracy of corporate non-financial data.
In the meantime, asset managers need to be pragmatic. For instance, the Navigator developed by CISL and KPMG provides asset managers with insight into the resource security of their portfolio in terms of the: total net waste (total waste arising minus total waste recycled) in metric tons per USD million invested. It is recognized that the net waste indicator provides limited insight into issues related to material resource scarcity and related risks. This is due to current limitations in the availability of data. CISL’s objective is that, over time, the Navigator provides insight into the absolute sustainability of a portfolio. The current metrics such as total net waste could be considered as practical (base) metrics that offer a courageous ‘best effort’ to kick-start impact analysis based on data that is currently available. To assess the absolute sustainability of a portfolio in terms of resource security, CISL foresees an indicator that takes the difference between technical and biological materials into account.
In moving towards more ideal impact metrics we can provide better insight into the impact that can be associated with investments.
The SIFN is a solution that helps investors measure the impact of investments on resource security, based on currently available data. To learn more about SIFN, click here to request a demo.
1 UNEP International Resource Panel (2016), Global Material Flows and Resource Productivity Assessment Report
2 United Nations (2017), World Population Prospects: The 2017 Revision
3 European Commission (2021), Raw Materials Information System
4 IPBES (2020), Global Assessment Report on Biodiversity and Ecosystem Services
5 Circle Economy (2020), Circularity Gap Report 2020
6 Global Footprint Network (2016), Living Planet Report
7 World Business Council for Sustainable Development & KPMG (2017), Circular Transition Indicators V1.0: Metrics for business, by business