Sustainability and Investor Behaviour

Sustainability and Investor Behaviour

A number of people would argue that climate won’t wait and carbon tax is the need of the hour. On the other side of the pendulum are denialists who have reservations about changing their lifestyle. But, a carbon tax, if imposed, will send a strong signal along all sectors that we need to change our behaviour. The supply chains may be one of the first to feel the impact of a carbon tax; all business decisions will be centred on lower-carbon emission alternatives. Does it have implications for investor as well?

For the consumers, this may seem like making choices they do not want to make. A carbon footprint (typically amount of CO2 released in the atmosphere) of any activity will suddenly become integral to their daily lives. A long distance trip to see the family will be weighed against the carbon footprint and the cost involved to undertake the trip. If the cost of such a trip is too high (when airlines start charging a carbon tax), one may not be inclined to take the trip. The currently proposed carbon tax in the west is of the order of Rs. 500 per tonne of CO2 released in the atmosphere; this is way too low. Global emissions are taxed at higher than that value. Imagine a scenario where the carbon tax were Rs. 50,000 per tonne of CO2. A lot of movement across the planet will be restricted and one would be strongly disincentivized to take an overseas trip. Is this the only way to go about or are we capable of changing our behaviour?

In the context of corporations, food supply chains will take a massive hit. In the west, there are no seasonal variations when it comes to availability of fruits and vegetables; all perishables are available all the year around. Can we not respect the natural production cycle and change our eating habits which match the sustainability paradigm? Should one buy the British tomatoes which are possibly grown in a greenhouse, or the Spanish tomatoes which have far more food miles on the clock? Businesses, for instance, will be switching to solar and incentivised to look for avenues that support the planet. Each segment of the value chain will have to become environment friendly. There is a strong argument that it is unlikely that one would notice a significant cost impact on our day to day essentials.

Investors, unperturbed by the recent COP26 discussions at Glasgow, Scotland, seem to be in overdrive mode with the current equity market valuations. A recent study by McKinsey (2021) has warned of an asset price bubble in the making. The world of investing and environment have always been at odds with each other but climate change requires solutions that are aligned with capital allocation. And investors, asset managers and financial institutions have a major role to play in it. There is a strong link between Securities business and nature. Imagine the cost of goods sold by a company: construction materials, beverages, metals, semiconductors, chemicals (used in vaccine innovations). All of these have been derived from natural resources such as trees, gold, copper, oil, coffee to name a few. An estimate suggests that over half of the world’s GDP (~ $44 Trillion) is at risk as a result of climate change agnostic behaviour.

Investors should increasingly be cognizant of businesses which ignore environmental concerns and are only focussed on protecting their bottom lines. Behaviours can also change if investors are encouraged to engage in the climate change narrative; since most investors think future valuations, they can be made aware about the fact that majority of natural resources other than fossil fuels will be far more valuable in future than they are today.

These viewpoints need to become part of our routine if we are to think about changing investor behaviour. Carbon tax intends to do just that: to reflect the cost of carbon emissions on our pockets and hence our behaviour toward the planet. But are investors willing to listen.