Natural Resources, Biodiversity & Pollution

Climate change gets most of the headlines, but the environmental pressures facing investors extend well beyond the atmosphere. The depletion of freshwater, the collapse of biodiversity, the toxicity of pollution, and the waste crisis are all financially material, and they are deeply interconnected with climate change itself.

Pressures on Natural Resources

A World Under Resource Stress

The global economy depends entirely on natural resources, the soils, waters, minerals, forests, and living systems that provide raw materials, clean air, food, and stable climate. For much of modern history, these resources were treated as effectively limitless, available for free. That assumption is no longer tenable.

Three interlocking forces are intensifying pressure on natural resources worldwide:

1. Population growth, the world's 7.6 billion people are expected to reach 9.8 billion by 2050 and 11.2 billion by 2100.
2. Rising affluence, a growing global middle class consumes more energy, meat, water, and manufactured goods per person.
3. Resource-intensive technologies, the clean energy transition itself requires vastly more minerals than the fossil fuel economy it replaces. An electric car uses approximately five times as many minerals as a conventional vehicle; an onshore wind turbine requires eight times more minerals than a gas-fired power plant of equivalent capacity.

This dynamic illustrates what economists call the Jevons paradox: efficiency improvements in the use of a resource often lead to greater total consumption, not less, because lower unit costs stimulate increased demand.

Water: The Overlooked Constraint

Nearly 70% of the Earth's surface is covered by water, but only 2.5% of it is fresh. Of that freshwater, most is locked away in ice caps or deep underground. Practically accessible freshwater is actually extraordinarily scarce.

Water scarcity is the lack of sufficient freshwater to meet demand. It affects every continent. The UN estimates that over two billion people currently experience high water stress.

For investors, water creates three main financial risks:

• Physical risk: Companies in water-scarce regions face sudden supply cuts, stalling production.
• Regulatory risk: Governments are tightening rules and increasing the price of water withdrawal.
• Reputational risk: When local communities and massive corporations compete for the same drying well, conflicts escalate and attract negative media attention.

Biodiversity Loss and Its Financial Implications

Biodiversity refers to the enormous variety of life on Earth. It underpins ecosystem services: the vital, invisible benefits that nature provides to human society, from bees pollinating crops to wetlands controlling floods.

The scale of biodiversity loss currently underway is alarming. A landmark 2019 report found that approximately one million plant and animal species are now threatened with extinction.

How does this actually impact investors and companies?

• Food systems: Over 75% of global food crops rely on animal pollination.
• Pharmaceuticals: An estimated 70% of cancer drugs are derived directly from natural substances.
• Supply chain disruption: Entire business models in agriculture, forestry, and tourism face fundamental disruption as these ecosystems degrade.

The Dasgupta Review: Valuing Nature as an Economic Asset

In 2021, economist Sir Partha Dasgupta published "The Economics of Biodiversity," commissioned by the UK government. Its central argument was striking: we have been treating nature as a free input into the economy, but nature is in fact an asset, one that is being run down faster than it can replenish itself. The review called for a fundamental rethink of how economic success is measured, arguing that GDP growth achieved by liquidating natural capital is not genuine growth at all.

For investors, the Dasgupta Review signalled that biodiversity would increasingly be priced into investment risk, just as climate risk has been over the past decade. It has helped accelerate the development of investor frameworks for nature-related financial risks, most notably the TNFD (discussed below).

TNFD: The Nature Equivalent of TCFD

The Taskforce on Nature-related Financial Disclosures (TNFD), established in 2020, is doing for nature what the TCFD has done for climate: creating a standardised framework for companies and financial institutions to assess and disclose their nature-related dependencies, impacts, and risks.

Where the TCFD asks "how does climate change affect your business?", the TNFD asks "how does your business depend on and affect nature?" For companies whose supply chains run through tropical forests, ocean fisheries, or freshwater systems, the answers matter enormously to their long-term viability.

Land Use and Deforestation

Forests cover approximately 30% of the world's land area. They are vital carbon sinks, biodiversity hotspots, and providers of fresh water. The IPCC estimates that agriculture, forestry, and land use combined (the AFOLU sector) account for 23% of total net anthropogenic emissions, primarily from deforestation and agricultural emissions.

Deforestation is accelerating. Between 2001 and 2019, an area of forest cover equivalent to a 9.7% decrease since 2000 was lost globally, releasing around 105 gigatonnes of CO₂. Agricultural commodity production, soy, palm oil, beef, and timber, drives up to two-thirds of deforestation.

For investors, the financial risks from deforestation exposure in portfolios are real:

• Supply chain disruption for companies sourcing from deforested regions
• Cost volatility as regulatory action tightens on forest-risk commodities
• Reputational damage from association with illegal deforestation
• Stranded asset risk for investments in forest-risk commodity producers facing policy clampdowns

Marine Resources: The Blue Economy Under Pressure

The ocean absorbs 50 times more CO₂ than the atmosphere and produces over half the world's oxygen. Ocean-based industries contribute roughly €1.3 trillion per year to global value added. Yet the ocean is under severe and compounding stress.

Due to overfishing, 33% of marine fish stocks were being harvested at unsustainable levels by 2015, and only 7% were harvested below what could be sustainably fished. As the ocean absorbs increasing amounts of CO₂, it is becoming more acidic, a process called ocean acidification, which threatens the shell-forming organisms at the base of marine food chains. Coral reefs, which support an estimated 25% of all marine species, bleach and die as water temperatures rise even by fractions of a degree.

The financial stakes are substantial. The global fishing industry employs over 600 million people along its value chain and provides the primary source of protein for more than three billion people. Companies with exposure to seafood, fishing rights, or coastal assets face growing risks from depleted stocks, regulatory tightening, and the physical impacts of ocean warming.

Coastal and small island communities are particularly exposed. Around 680 million people, nearly 10% of the global population, live in low-lying coastal zones, a number projected to exceed one billion by 2050. The infrastructure, real estate, and insurance markets serving these communities all carry embedded ocean-change risk.

Pollution, Waste, and the Circular Economy

Air Pollution

Clean air is foundational to human health, ecosystem functioning, and economic productivity. Air pollution is responsible for more than one in ten deaths globally, according to the WHO. Research published in 2021 found that fossil fuel combustion alone causes approximately 8.7 million premature deaths per year, more than AIDS, tuberculosis and malaria combined.

The financial implications of air pollution for companies are significant:

• Tightening regulatory standards require costly investment in cleaner processes
• Liability exposure through litigation (particularly in the US, China, and EU)
• Reputational damage affecting brand value and market access
• Monitoring and compliance costs that affect operating margins

Water Pollution

Water pollution occurs when contaminants, whether industrial chemicals, sewage, plastics, or excess nutrients from farming, are introduced into natural water bodies. Fines for water pollution are rising globally as litigation increases and regulators tighten standards.

Waste Management

Waste is both a symptom and a driver of resource inefficiency. As consumption rises, so does waste, imposing costs through landfill taxes, disposal charges, and rising regulatory requirements. Plastic waste has become a particular focus: single-use plastics are a major source of ocean pollution, and the EU's Strategy for Plastics in a Circular Economy requires that all plastic packaging be reusable or recyclable by 2030.

For investors in petrochemicals, an industry increasingly dependent on plastics as a growth driver as fuel demand falls, this regulatory trajectory represents a material transition risk. Carbon Tracker estimates that up to US$400 billion of investments in new petrochemical facilities could become stranded if recycling regulation tightens as expected.

The Circular Economy: A Systemic Solution

The circular economy is a production and consumption model designed to eliminate waste and keep materials in use for as long as possible. It contrasts with the traditional linear economy (take-make-dispose) and operates on three principles:

1. Design out waste and pollution
2. Keep products and materials in use
3. Regenerate natural systems

The Ellen MacArthur Foundation estimates that applying circular economy strategies across just five key areas, cement, aluminium, steel, plastics, and food, could eliminate nearly half of the remaining emissions from the production of goods by 2050. This makes the circular economy not just a waste management strategy, but a critical climate mitigation tool.

Companies operating circular business models are already generating competitive advantages. Schneider Electric generates 12% of revenues from circular activities. Heineken sent zero waste to landfill from 62% of its production units. Singapore's Jurong Island chemical park has developed an industrial ecosystem where one company's output becomes another's feedstock, dramatically reducing raw material consumption and waste costs.

The Planetary Boundaries Framework

All of these issues, water, biodiversity, pollution, land use, connect through the concept of planetary boundaries. The Stockholm Resilience Centre has identified nine Earth-system processes that together maintain the stability of the biosphere. Staying within these boundaries allows the planet to remain in the stable state in which human civilisation developed; overshooting them risks abrupt, potentially catastrophic changes.

As noted in Lesson 1.1, four of the nine boundaries had been breached as of 2017; more recent science places the count at six. Beyond climate change itself, the boundaries most relevant to investors in natural resources and biodiversity are:

• Loss of biosphere integrity (currently in a high-risk zone)
• Land-system change (in a high-risk zone)
• Biogeochemical flows, excess nitrogen and phosphorus from fertilizers polluting waterways and coastal zones (in a high-risk zone)
• Freshwater use, approaching its boundary in many regions, though not yet crossed globally according to source data

For an investor, the planetary boundaries framework is a useful heuristic: if a company's operations systematically push against these limits, they are likely to face rising costs, regulatory pressure, and community opposition over time, all of which are material to financial performance.