During the past twenty years Western economies have enjoyed some real success in dealing with a range of discrete environmental issues. Lead in petrol is now thankfully largely consigned to history; water quality in the rivers of the great European capitals has shown steady improvement against most parameters and recycling levels are now routinely above 50% in many parts of the developed world.
The inter-correlation of global financial and environmental risks is new and still poorly understood.
But while we have dealt quite successfully with the ‘output’ of wastes and many types of industrial emissions, the ‘input’ side is looking far less rosy. Time and again we find that the expanding demand for resource use in one area; for food, water and energy for example, reduces capacity to meet demand elsewhere. The decision to divert 40% of US corn production for example to produce biofuels has fed through into increased food prices. The need for greater volumes of potable water in water-stressed regions drives demand for desalination in turn boosting energy demand. Improving agricultural productivity through higher pesticide and fertiliser applications puts pressure on the natural systems that underpin the ecological viability of whole regions.
In all of these cases, one resource problem is solved at the expense of another being externalised and shifted onto another part of the value chain. In the past, the relative scale of economic activity and the size of the planet have meant that this did not matter so much. But now we are discovering that the world is actually rather like a balloon: if you squeeze it in one area, pressure is transferred to another area. The challenge of the next 20 years is therefore to move beyond a linear approach – solving one resource constraint by utilising more of another – and to understand the correlation between resources.
I am writing this for Energydesk because energy is at the crossroads of these issues. Even more so than food prices, energy prices increasingly sit at the nexus of the pressures on natural resources. Desalinating seawater essentially involves trading energy for potable water. Given the intense energy required in the production of nitrogenous fertilisers, energy could also be seen as a trade for temporary lifts in agricultural productivity.
The position of energy in what Sir David King, the UK’s former chief scientist, calls a “carousel of challenges” makes it uniquely placed as a global transmitter of risk. Pressures in any one of these resource areas increasingly transmitted across to others through volatile energy prices.
Correlation itself is nothing new. But the inter-correlation of global financial and environmental risks is new and still poorly understood. Finding ways of avoiding these correlations through the use of new technologies in some forms of renewable energy for example is something that an increasing number of institutional investors understand and are responding to.
