GLOBAL MACRO RESEARCH SEEKING A SUSTAINABLE FUTUREAN INTERVIEW WITH SIR IAN BOYD, FORMER CHIEF SCIENTIFIC ADVISER TO THE UK GOVERNMENT ON FOOD AND THE ENVIRONMENT.

FEBRUARY 2020

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO THE IMPORTANT INFORMATION AT THE BACK OF THIS DOCUMENT.

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IAN BOYDProfessor Sir Ian Boyd was Chief Scientific Adviser to the UK Government on Food

and the Environment, a post he held for seven years, and is currently a professor

at the University of St Andrews.

He previously served as the first Director of the Scottish Oceans Institute and

as Director of the Sea Mammal Research Unit. Sir Ian is leading the move to

sustainability at the University of St Andrews, chairing the institution’s Environmental

Sustainability Board. As marine and polar scientist, Sir Ian spent 14 years leading

a research programme in Antarctica and is a recipient of the Polar Medal and the

Bruce Medal for Polar Science. He is Chair of the UK Research Integrity Office

and a member of a number of other trusts and companies. He originally graduated from the University of

Aberdeen with a degree in Zoology and gained his PhD at Cambridge University. He has also been awarded

several honorary degrees. He was knighted in 2019 for services to Science and Economics in government.

SECTION 1: Climate change 3• Why have attitudes to climate change shifted so dramatically?

• Where should policymakers concentrate their efforts?

• What role does the market play?

SECTION 2: Politics, policy and process 5• What goes into deciding and setting government policy on environmental issues?

• How might the growing focus on environmental issues translate into government action?

• What is the role of lobbying, and how do subject-matter experts affect policy?

• How do governments analyse whether to adopt a policy, on both the national and international level?

SECTION 3: The future of food 8• What are the implications of a growing population and climate change on food production?

• What are the main issues facing food producers today?

• What innovations or technology will have the biggest impact on food production over the next 10 years?

SECTION 4: Consumption and resource availability 10• What might make a difference to how we use resources in a sustainable way?

• Is reducing consumption a realistic outcome?

• How might the use of resources actually be reduced?

SECTION 5: The investor perspective 14• What does this mean for the investor community over the longer term?

• What might be the impact of a lack of proactive policymaking on these issues?

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JOSHUA: Let's begin with climate change. This has been

recognised as a major risk for many years, of course, but

it seems it is finally being recognised at the top level that

environmental issues are urgent and must be dealt with.

For example, in January, the World Economic Forum's

annual risks report's top five risks were all environmental –

for the first time in the report's history1. Why have attitudes

changed so dramatically?

SIR IAN: I think there are four factors here. The first is that the

evidence for climate change and environmental impacts is

becoming stronger and stronger, particularly the underlying

modelling. It also suggests the implications are worse than we

thought. The climate system appears to be more sensitive to

greenhouse gases than previously thought.

The impact of activism is also pretty obvious. I work on a university

campus, and it's clear our students feel very strongly about this.

There's a real groundswell, particularly in the younger cohorts

coming through, that there is a major problem here and that

they will inherit the legacy of that problem. Of course, that drives

political ambition – in my experience working with politicians,

they are only ambitious when they have a constituency behind

them driving a policy.

I would say the third thing is that much more work has been done

on the pathways to adaptation or mitigation, which means we

understand a lot more about what needs to be done. The UK

Committee on Climate Change, for example, has done a lot of very

good work on this2. We're in a better position to understand what the

costs are, and the trade-offs associated with the things we need to do.

Finally, I think many of the negative voices around climate change

are fading into the background. They are much less influential.

JOSHUA: The natural question is what action to take. There are

many strong opinions out there about how to act, and clearly,

government policy and policymakers are going to play a

critical role in any transition. Given the scientific evidence,

where should policymakers concentrate their efforts?

SIR IAN: Having worked in a policy environment for a long time,

I think policies are most effective when they're simple and quite

high level, meaning they're driving systemic change and shifting

behaviours in a very simple way.

One of the highest-level policies you could bring in is a carbon tax,

or carbon pricing in some form, which would drive the trade and

manufacturing system to shift to new ways of working. Such policies

need not be introduced in a sudden or abrupt way: they can be

introduced progressively over a long period of time – even decades.

We've done that quite effectively at a much smaller scale. For

example, with waste, a small number of countries have a landfill

tax, which has risen gradually over many years. It's been very,

very effective at reducing the amount of waste that goes to

landfill. Whether that's a good thing is another point. But it shows

you can drive a whole system through fiscal measures.

On the other hand, while highly desirable and very effective,

the plastic bag charge (or ban, depending on the country) has

probably made little overall difference to the use of plastics or

their impact on the environment. By contrast, taxing raw materials

produced from fossil fuels, or of a certain type of chemistry,

would create a market incentive to develop alternative and

more degradable forms of plastic.

The government can also regulate, and I think it needs to do so to

provide a level playing field for the development of markets – for

example, for environmental or green bonds. And where there are

market failures, the government needs to address those too.

SECTION 1 CLIMATE CHANGE

1 Global Risks Report 2020, World Economic Forum. Available at https://www.weforum.org/reports/the-global-risks-report-2020 2 For more information, please see: https://www.theccc.org.uk/

• Why have attitudes to climate change shifted so dramatically? • Where should policymakers concentrate their efforts? • What role does the market play?

The focus is sharpening on the environment. Extreme weather events are dominating the headlines, green policies are increasingly influential, and activists are growing more vocal. Joshua Kendall, Senior ESG Analyst, speaks to Professor Sir Ian Boyd, former Chief Scientific Adviser to the UK Government on Food and the Environment, about issues including climate change, the dynamics that underlie government policy, and the future for food production and consumption.

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The market in an unsupervised form can produce odd and extremely damaging outcomes. This is where government

intervention is needed, either to regulate for certain strategic outcomes or to address

market failures when they happen.

JOSHUA: What role does the market play in effecting change in this area?

SIR IAN: It's crucial these developments are delivered through the market,

because we need a shift in the structure of the economy. Innovation in

many forms is going to sit at the heart of solving the current problems

and environmental challenges. This includes technical innovation, such

as in energy storage, but it will also include innovations in how capital

is diverted to solve these problems – such as how we incentivise and

reward people for their contributions.

In the end, human imagination – which is what has got us in to the current

difficulties in the first place – is going to have to power us out of the difficulties

and top-down, command-and-control, approaches are proven not to be

good at unlocking this resource. This is where the market comes in.

However, the market in an unsupervised form can produce odd and

extremely damaging outcomes. This is where government intervention is

needed, either to regulate for certain strategic outcomes or to address

market failures when they happen. For example, we need to regulate

so that we do not solve the problem of reducing carbon emissions by

reducing air quality. Both improving air quality and reducing carbon

emissions need to happen simultaneously. Also, the risks involved in

delivering some major infrastructure and research investments to shift

markets are often too high for the market to bear, and government would

need to step in to drive change.

As an example over 60 governments have set the target of getting to

net zero emissions by 2050. This is a strategic goal, but to achieve it, the

institutions sitting within the economy are going to have to play their part.

This may mean changing business models to cope with the transition, but

it may also involve buying carbon offsets. However, there are just not

enough offsets to cater for everybody’s needs.

By setting the strategic goal, government has established the background

ambitions which call for financial instruments to be developed to supply

offsets to cater for rapidly rising demand. We are still a long way from

achieving such a market, but it's sorely needed. I think government needs

to come together to work with those who are creating those sorts of

financial instruments – such as green bonds – to come up with clear

criteria by which environmental benefits will be judged.

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SECTION 2 POLITICS, POLICY AND PROCESS

• What goes into deciding and setting government policy on environmental issues?

• How might the growing focus on environmental issues translate into government action?

• What is the role of lobbying, and how do subject-matter experts affect policy?

• How do governments analyse whether to adopt a policy, on both the national and international level?

JOSHUA: Setting government policy in theory, and

implementing it in practice, are very different things. For

example, the scientific evidence in a particular area may

seem quite clear, but the policy implications – let alone the

political calculations – can be complex. In your experience,

what are the factors that go into deciding and setting

policy in areas like this?

SIR IAN: Governments have a tendency to take quite a short-

term view. I was in government for seven years: for the first five,

the government never looked beyond about 18 months ahead.

Then we shifted to thinking more strategically and broadly

about the environment, developing and publishing strategies

such as the 25 Year Environment Plan3, thinking about the future

for food and farming4, and considering areas such as resource

use and waste. These effectively took a systems approach to

how people interact with the rest of the planet.

In the background of these policy discussions, of course, is the

inevitable short-termism of government, driven by the politics

behind it. I think the politics of the environment is changing,

and the government is being forced to take a longer-term view.

But one should never underestimate the extent to which

approaches within government – certainly with respect to the

environment – are driven by the personal opinions of those in

leadership positions, and fundamentally the prime minister or

president. I'm not sure the current UK prime minister and US

president get the environment, and so I'm not that hopeful that

we would see the head of steam that has been built up over the

last couple of years, certainly within environment departments,

being carried through by the current governments.

JOSHUA: You don't think the growing focus on

environmental issues will lead governments to take action?

SIR IAN: It could be hard for them to ignore the groundswell of

opinion on these issues, but there is a question as to whether

that groundswell is a neoliberal minority becoming more and

more vocal. The current US government – and maybe quite a

number of others around the world – may believe it is actually

a minority who are becoming more politically active, but are

not actually going to carry the day.

The counterpoint is that other stakeholders are clearly

interested in these issues. In the City, among investors,

bankers and insurers, there is huge interest. This is partly

driven by the insurance industry, which is seeing the real cost

of climate change beginning come in, and there are convincing

pieces of evidence coming through that our insurance costs

are rising because of natural events and other related matters.

If there's going to be a genuine cost associated with that, it

will affect long-term investment and the politics of financial

institutions – and that will eventually feed back to

governments. I think they'll listen to that side of the opinion

more than the activist side.

For me, the jury is out at the moment on how this new UK

government is going to react, and whether it will carry through

on the promising direction of travel of the last couple of years.

3 Available at: https://www.gov.uk/government/publications/25-year-environment-plan 4 Available at: https://www.gov.uk/government/publications/the-future-for-food-farming-and-the-environment-policy-statement-2018

In the City, among investors, bankers and insurers, there is huge interest... I think the government will listen

to that side of the opinion more than the activist side.

JOSHUA: As you say, there are a lot of influential voices that can drive policy.

How does lobbying on specific issues work and affect policy? And what is

the role of subject-matter experts?

SIR IAN: Lobbying works on a number of levels. It works partly through

responding to trends within government thinking through the formal consultation

process. Legally, if it's coming out with new policies, it has to consult, and there

are ways and means of lobbying within that context. So there are policy and

political contexts within which lobbying can be effective.

However, lobbying tends not to be very effective if there isn't a willing ear within

government. I certainly learned that if there is no political interest, it's almost

pointless to push on the door that simply is not ready to be opened.

JOSHUA: Are there any examples of areas in which you successfully influenced

government policy?

SIR IAN: Take waste for an example. For about five years of my tenure, waste was a

deeply politically uninteresting subject. Nobody on the political side was interested

in it; there was no point in doing anything on it or trying to make any changes.

But as soon as the whole plastics issue arose, it suddenly became the opposite –

it was the hot issue of the day and every minister wanted to have something to

say about waste. And if you're an effective lobbyist, you need to understand that

dynamic. For some things which are politically unacceptable or uninteresting now,

at some point the window will open, and you need to be ready with all your

arguments and evidence – because that window won't be open for very long.

On waste, a colleague and I put together a major report on waste at a time when it

was deeply unpopular. When it suddenly became popular, that report hit the desks,

and it made a huge difference. It drove the government's resource strategy.

You can't tell when those opportunities will come up, but you can plan for them

and have all the evidence ready – that's how strategically, lobbying is most

effective. But a lot of this is driven by personalities and personal relationships.

Often, I would be aware that people were raising issues with government

ministers, because ministers would bring points to me and ask me how we might

deal with them. People clearly had the ear of ministers; the ministers listened;

they took it seriously enough to want to seek advice.

I think one of the most effective ways to work is for different sectors to be clear

among themselves as to what they want of government, and then to approach

government in unison, shoulder to shoulder. Government then can feel confident it

can do something without some sort of backlash. Under those circumstances it can

be more difficult for government to say no. Some industries are good at that – such

as the car and aviation industries. Others are very poor, such as the farming industry.

JOSHUA: When governments and policymakers think about whether a policy

is going to be successful, what kind of analysis will they undertake, and how

do they decide how to measure performance?

SIR IAN: Any policy in government needs an impact assessment, as defined in

the UK by the Green Book published by the Treasury5. It's quite surprising to many

people outside government how ministers' hands are tied by this. You may think

these people are elected and then they can make decisions; but they can only

5 Available at: https://www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent

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implement a policy if the impact assessment shows a positive outcome under a

cost/benefit analysis. That impact assessment is driven by the economists within

government, and there is a very well developed process, and economic models,

underlying that.

What is not done so well, however, is the post-implementation evaluation process.

The government simply doesn't put enough resource into policy evaluation.

The other thing about the impact assessments is that I think a lot of the economic

models that underlie these are very questionable. Essentially, the power in government

lies with the economists. They can say a policy is right, and if they put a tick in the

box, the policy will probably go ahead. Or they can say it's wrong. As a group,

they have huge power. I think that is not widely understood outside government.

Of course, politicians can step over those bounds, but they have to write a letter

to the head of the department stating that they are doing so and overruling the

economic analysis. In all my time in government I haven’t seen that happen –

the political impact of writing a letter saying "I'm going to ignore the evidence"

is too much for any minister to risk.

JOSHUA: How about international policymaking? Do economic assessments

also influence how governments interact with each other?

SIR IAN: The analyses done by the UK Committee for Climate Change are typical

of the kind of analysis that would be done for any impact assessment. At an

international level, the national analyses tend to be brought together and

discrepancies are sorted out. But then a political overlay is applied.

Take fisheries management, for example. There are very well-developed bio-

economic models that underpin the decision-making process for how much fish

you can take out of the sea. That work is done, the numbers are put in front of

the decision-makers, and then a political overlay is put over the top of that.

So in that circumstance, the economists and scientists are setting out the

parameters for operation – the upper and lower bounds within which political

decisions should be made. Unlike at the national level, it is easier for politicians

to step over those bounds at the international level. That's why, with the climate

talks for example, we tend not to get very far a lot of the time.

The power in government lies with the economists… as a group, they have huge power. They can say a policy is right, and if they put a tick in the box,

the policy will probably go ahead.

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SECTION 3 THE FUTURE OF FOOD

• What are the implications of a growing population and climate change on food production?

• What are the main issues facing food producers today?

• What innovations or technology will have the biggest impact on food production over the next 10 years?

JOSHUA: A key area of concern is food production. As we face

a growing population and a sharpening focus on climate

change, the need to produce enough food for the world –

in a sustainable manner – is growing clearer. What are

the implications here?

SIR IAN: The food system is technologically very backward

compared with other sectors of the economy. Fundamentally,

we produce food in a very inefficient way, and there are massive

efficiencies that can be built into that. If we reoriented our

mindset for food production away from agriculture and towards

manufacturing, that would be a significant step.

Compared to other sectors of the economy, the agricultural

system is about three to four times less resource-efficient than the

next most efficient area of the economy. We need to get five to 10

times the amount out of the material inputs we put into agriculture

by the middle of the century than we do at the moment. That is

the massive transformation that has to happen if we're going

to feed the world and not ruin the planet at the same time.

There is the trade-off: people are very focused on carbon, but

they forget that we have to work out how to feed people without

ruining the planet. Food production consumes large amounts

of land, energy and material resources, and it's killing off

biodiversity, and affecting the quality of soil and water.

Actually, consumption of food is really the biggest single issue.

JOSHUA: So what are the main issues facing food producers today?

SIR IAN: I think there are three:

• the continued growth in the cross-border food market,

normally called the 'global food system',

• the impact of new methods of food production, and

• shifting consumer demand.

First, there is a lot of sense in growing specific types of food in

those parts of the world most suited to that form of production.

Even if farmers and consumers like the idea of local production,

often it makes little sense if the climates and soils are not of

the right type. Even trade barriers are not very effective at

counterbalancing this globalisation of production because

so much of our food is now in the form of derived materials

or reformulated products.

So long as the full life-cycle analysis shows that production

elsewhere, even when combined with bulk transport to market, is

energetically and environmentally sound then different places will

increasingly be forced to specialise on those crops best suited to

local soils and climate.

However, to compensate, some farmers might find that they are

more suited to growing carbon stores than food crops and there

is a lively debate about what the optimal design of land use should

be. In future, what we call farmers today perhaps might be seen

more as land managers within multifunctional landscapes.

People are very focused on carbon, but they forget that we have to feed people without ruining the planet…

consumption of food is really the biggest single issue.

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As for new methods of food production, new technologies – which

may be cheaper, have less of an environmental impact, and which

also create a high-quality product – are likely to transform how we

produce food in future. This could enable local production of foods

which are not suited to local soils and climate, where transport

costs are high, and where there is a premium in freshness.

With regard to changing consumer tastes, price will mainly drive

patterns of consumption and the viability of different food

production systems in various locations. But we should not

underestimate the sensitivity to the idea that foods contain

chemical residues from pesticides or to the idea that food

production causes pollution of the landscape and the air. There

is a growing appreciation of these things and consumer demands

are likely to change – witness the recent rise of veganism.

JOSHUA: What innovations or technology will have the biggest

impact on food production over the next 10 years?

SIR IAN: I think we will start to see fully scaled controlled-environment

production systems coming online in places close to market.

Here, the business model is to bring the energy and nutrients

to the consumer and to grow the crops close to where they are

consumed. This will start out being especially viable for fresh

produce, but eventually it will become so refined and efficient that

systems will move towards the commodity end of the spectrum.

These need not be close to consumption but might be in places

where energy and water are abundant, such as in association with

hydroelectricity, geothermal or solar energy in coastal desert regions.

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SECTION 4 CONSUMPTION AND RESOURCE AVAILABILITY

• What might make a difference to how we use resources in a sustainable way?

• Is reducing consumption a realistic outcome?

• How might the use of resources actually be reduced?

JOSHUA: What initiatives or approaches might make

a meaningful difference to how we can make use of

the resources available to us in a sustainable way?

SIR IAN: The climate problems we have are due to how we

consume resources.

In any physical system, you have inputs and outputs. In this

case, the outputs are waste. But the only way to reduce that

overall waste, which includes carbon, is by reducing inputs

into the system. We can increase circularity within the

system – in other words we can reuse or retain materials

within the economy for longer. But so long as we consume

them at current rates, the waste products are going to come

out the other end of the economy in some form or another.

What's more, we tend to ship those waste products into

types of materials that give weaker and weaker immediate

feedback on the potential impact, and maybe create longer

and longer feedback. So that's why we're going to end up

with carbon in the atmosphere, which is going to take

hundreds of years to feed back on us.

The fundamental problem is that we need to cut

consumption overall to reduce carbon emissions. There is no

indication whatsoever that we are curbing the consumption

of resources, even if there's an indication that we're actually

in some cases being able to reduce the rate of increase of

carbon emissions. All that we're doing is shifting those

emissions into different forms, which will probably have

negative feedback on us in other ways in future.

Net zero by 2050 is a great thing, but I expect we'll find when

we get to 2050 we haven't actually solved the problem,

because we've effectively shifted it somewhere else. So

that's why I think that demand-side policies are going to be

the way to deal with this – because we need to change

behaviours and expectations to reduce consumption.

JOSHUA: Can you explain how carbon emissions are

shifted into different forms?

SIR IAN: Much is said about the virtues of the 'circular

economy', whereby materials are recycled and reused; but it

is very easy to substitute carbon emissions for the emissions

(usually in the form of waste) of other materials.

This happens because we invest energy in the transformation

of materials at every step in their life cycle, from source

(mining) to sink (waste). In order to maintain materials in the

economy for longer, which is the objective of the circular

economy, we need to inject more energy to, for example,

recycle, remanufacture or refurbish materials. In some cases,

such as plastic, the carbon emissions from the energy

required to re-use materials might be greater than the

carbon emissions from mining new raw materials.

In such cases it would be easier and cheaper to throw plastic

away and manufacture new plastic from virgin fossil fuels.

This causes more plastic to go to landfill or, more likely, to

be incinerated, thus driving up emissions. (At the opposite

end of the scale would be a material like aluminium,

where recycling uses as little as 5% of the energy of mining

the virgin materials.)6

This goes to the heart of the problem of consumption. There

is no free lunch. Everything we do – even eating, sleeping

and breathing – uses resources. And even when we try

to think hard about using fewer resources, we often fail,

because we simply shift how resources flow into pathways

which produce weaker and weaker direct feedbacks on us as

individuals. This means we are getting better at translating

our emissions from unsightly, problematic solid waste in to

hard-to-see gaseous emissions which can float away in to

the atmosphere – out of sight and out of mind. We share

the problem, rather than face up to managing the problem

of our own emissions.

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6 Global Aluminium Recycling: A Cornerstone of Sustainable Development, International Aluminium Institute, 2009. Available at: http://www.world-aluminium.org/media/filer_public/2013/01/15/fl0000181.pdf

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This is why I believe the only way we will ever deal adequately

with our emissions is by reducing the gross consumption of raw

materials. Our adeptness at shifting emissions to apparently more

benign forms, like CO2 or methane in the atmosphere, creates

an impression that we are actually making progress when, if one looks

at the consumption statistics, we are making no progress whatsoever.

JOSHUA: Proposing a policy to reduce consumption doesn't

sound like a votewinner. Is there any likelihood of consumption

being reduced?

SIR IAN: That's a very fair question. It's hard to introduce

demand-side policy because essentially, as a politician, you're

saying to people you want something – but I'm not going to let

you have it. But if we don't face it up that fact, we will reach a

tipping point of resource availability. At some point that is going to

feed back very, very rapidly on us in ways which are very hard to

predict and which could be extremely damaging. Moreover, the

way these feedbacks happen is inherently unpredictable – how

we imagine these consequences will almost certainly not be the

actual, realised outcome.

Part of my background is in researching large ecological systems,

which are not actually very different from large economic systems

in the way they're structured. Highly networked processes have

a way of flipping once they're put under stress: they essentially

bifurcate so they go into a chaotic state, and then settle out in a

different equilibrium. The danger we face is that if we keep driving

our consumption up, we will see some form of crisis or economic

collapse, which will be severe for some segments – or all – of the

global population.

JOSHUA: Is there anything you find encouraging when you

consider these issues, and how they might be dealt with?

SIR IAN: Not really. We're very focused on carbon emissions,

and that is not a bad thing. But the idea of trying to reduce

consumption is not taken seriously at all.

The International Resource Panel, part of the UN Environment

Programme, provides statistics around resource consumption7.

They have been talking for many years about decoupling

economic growth from consumption. The evidence to date

suggests we're being very unsuccessful at doing that. There are

some areas where relative decoupling is beginning to happen,

where we're able to grow the economy without exponentially

increasing consumption, but consumption is still going up for

the relative amount of materials being used.

7 For more information, please see: https://www.resourcepanel.org/

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The trouble is that, whether it's light bulbs or television sets, we

use less and less materials to build and run them, but we make

more and more of them. So we need to reduce the number of light

bulbs we have and reduce the number of television sets, and so

on. Otherwise we won't bank the advantages of producing them

with less resources and using them with less power.

We're very good at supply-side solutions, but not at demand-side

solutions. But we can think much more broadly about what

demand-side solutions might look like. For example, people are

becoming more and more conscious about the environment: but

do they have the information in front of them to understand the

relative environmental impact of the choice in front of them. If

you were to buy flights, it would be useful to know what the

environmental impact of that was. But we do not supply enough of

that information so people can make rational judgments. Once we

supply that information, I think people might start down that road

of potentially reducing consumption. Another approach might

be pricing differentially depending on environmental impact.

The mode of thought at the moment is around a technological

solution. Somehow, science is going to come to the rescue here,

and come up with lots of great things like wonderful batteries

for cars and fusion energy. These might let us off the hook – but

it's a high-risk strategy. There is even evidence that the rate of

innovation is declining relative to the investment in science so

there may be diminishing returns from R&D. The necessary

innovations might not come about. Are we going to get the

technical solutions in place before a collapse occurs?

JOSHUA: You said a lack of resource availability is already

evident in some areas. Could you provide some examples?

SIR IAN: We live within a bounded system – the planet. The only

significant inputs to the system come from solar energy. Any

materials we use which are not created using solar energy

must come from within the bounded planetary system.

As consumers of this limited planetary resource, cumulatively,

how much of these resources have we consumed to date and

are we approaching the limits? This is a hotly argued topic – there

are those who claim that, relative to our rate of use, planetary

resources are effectively unlimited. But I don't think the evidence

supports this.

One issue is that most economic models assume smooth

transitions as resources become scarce, because the laws of

supply and demand will force us to innovate to use resources

more sparingly. They assume that the cost-curve of resources

is vaguely linear.

However, this does not account for our ability to divert the costs

of resource consumption into environmental impacts which we do

not pay for. Essentially, our resource consumption remains high

even when resources are becoming scarce because we do not

pay the real costs of consumption. We are very innovative when

it comes to transferring those costs away from our own accounts

– essentially by placing them out in the environment by forcing

them to be shared. Private costs are transferred into public costs,

meaning cost curves are highly non-linear.

We're very good at supply-side solutions, but not at demand-side solutions. People don’t have the information in front of them to understand the relative environmental impact of the choice in front of them.

13

8 The state of world fisheries and agriculture 2018, Food and Agriculture Organization of the United Nations. Available at: http://www.fao.org/state-of-fisheries-aquaculture/en/ 9 Resource Demand Scenarios for the Major Metals, by Ayman Elshkaki, TE Graedel, Luca Ciacci and Barbara K Reck; Environmental Science & Technology 2018 52 (5), 2491-2497. Available at: https://pubs.acs.org/doi/abs/10.1021/acs.est.7b05154 10 On the materials basis of modern society, by TE Graedel, EM Harper, NT Nassar and Barbara K Reck; PNAS May 19, 2015 112 (20) 6295-6300. Available at: https://www.pnas.org/content/112/20/6295 11 Long-Term Estimates of the Energy-Return-on-Investment (EROI) of Coal, Oil, and Gas Global Productions, by Victor Court and Florian Fizaine; Ecological Economics, Elsevier, vol. 138(C), pages 145-159. Available at: https://ideas.repec.org/a/eee/ecolec/v138y2017icp145-159.html 12 Linking global crop and livestock consumption to local production hotspots, by Zhongxiao Sun, Laura Scherer, Arnold Tukker and Paul Behrens; Global Food Security, 3 October 2019. Available at: https://www.sciencedirect.com/science/article/pii/S2211912419300276?via%3Dihub

Despite the costs of resource use being somewhat disguised

by these mechanisms, there is evidence of resource constraint

kicking in. Global fish stocks are being increasingly overfished8;

by 2050, over a quarter of global energy needs may be absorbed

simply by mining metals needed for goods production9, and there

is a shortage of substitute metals for those likely to be in short

supply10; the energy return on investment in oil has declined

substantially11; and while land use for agriculture peaked decades

ago, as intensity of land use has risen, so has use of mineral

resources as fertilisers12. I would also note that the UK Ministry

of Defence and US Department of Defense note that resource

constraints, and access to resources, are a significant part of their

assessment when it comes to rising global tensions.

All that said, the most profound evidence of resource constraint

is rarely recognised: the large-scale decline in biodiversity, which

is the manifest cost of the consumption of land, energy and

minerals (together with emissions) for food production.

In ecological systems, we see these processes in action. The

consequence of non-linear responses – a bit like pressure building

up in the Earth’s crust, which is released suddenly as an

earthquake or a volcanic explosion – is that a system becomes

unstable and breaks down before settling out in a very different

equilibrium state. If this was to happen to the global economy,

it would be devastating.

In reality, we may be inadvertently building up these kinds of

pressures because of increasingly high consumption and

emissions. They will eventually reach a tipping point; a step-

function in non-linear responses. In a very small way, the 2008

financial collapse showed how quickly these things can happen

in highly networked systems and, relative to what I am talking

about, I think the 2008 crisis and its aftermath will be trivial.

For example, does the current global food system bear the

characteristics of an inherently stable or and inherently unstable

network? Most economists assume that smooth supply-demand

transitions create equilibrium corrections, but how much of a

shock would it take to cause the global food system to collapse?

We do not know – but we should.

14

SECTION 5 THE INVESTOR PERSPECTIVE

JOSHUA: What do you think this all means for the investor

community, when investing over a 10, 20, 30-year period?

And what might be the impact of a lack of proactive

policymaking on these issues?

SIR IAN: My very strong belief is that these problems are going to

be solved by the market, but government needs to recognise that. I

think investors are beginning to realise there is money to be made

here. I gave the example of food: food is produced so inefficiently

that anybody with technical solutions that produce food at less

cost is going to make a lot of money. There are such solutions

coming along, with controlled-system farming and bioreactors,

which are really promising. There are major companies – including

engineering companies – that are looking at that.

We need the financial instruments to allow airlines to offset their

carbon footprints, rather than expecting them to buy forests.

Instruments like this just don't exist at the moment, though there

is progress being made – and there are a large number of

institutions that would want access to them. Government needs

to solve the market failure that exists in that area at the moment,

and they're just not doing that. Perhaps the most significant

challenge is to establish agreed methods for measuring and

crediting the value of financial instruments.

FURTHER READING

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT.

INTRODUCTION

Our clients are increasingly seeking a responsible approach to

fixed income. This paper aims to answer these frequently asked

questions:

1What exactly is responsible investment, and how does it

differ from sustainable and impact investing?

2What does it mean to invest responsibly

in fixed income?

3How can fixed income investors actively engage with

corporate and sovereign issuers over ESG issues?

BACKGROUND

Investing responsibly in fixed income is now part of the

mainstream. Investors increasingly expect their bond portfolios to

take environmental, social and governance (ESG) factors and risks

into account – and asset managers have flocked to meet this

demand.

Signatories to the UN-supported Principles for Responsible

Investment (PRI), the world’s leading proponent for responsible

investment, account for tens of trillions of dollars of assets under

management, of which around 40% is in fixed income.1 Over 150

investors with nearly $30 trillion of assets under management,

and 19 credit rating agencies, have signed the PRI’s statement on

ESG in credit risk and ratings.2

These statements of intent have led to significant progress in fixed

income approaches that take ESG factors into account. Indices for

equity investors focused on ESG issues have been a long-standing

feature in the marketplace, but index providers have moved to

launch bond indices too: for example, in 2018, the JP Morgan ESG

index was launched, focusing on emerging market debt from

issuers with strong ESG practices.

Industry initiatives are also generating research and encouraging

further innovations in this area. One of the most prominent is the

PRI’s multi-year Credit Risk and Ratings Initiative, which aims to

“enhance the transparent and systematic integration of ESG

factors in credit risk analysis” by facilitating dialogue between

credit rating agencies – who are crucial players in global bond

markets – and investors.3

Perhaps the clearest demonstration of investor’s interest in ESG

factors and how they relate to their bond portfolios is the growth

of the impact bond market, whereby bond proceeds are used to

support environmental and/or social progress. Impact bond

issuance in 2019 is set to hit a new record, and demand continues

to outstrip supply.

KEY QUESTIONS

As interest and activity are clearly booming, there are clear

questions for bond investors to consider as they ponder the

possibilities ahead of them, including how to define a responsible

approach, what it means to follow such an approach in fixed

income markets, and how fixed income investors can proactively

engage with corporate and sovereign issuers over ESG issues.

1Defining responsible investment

Responsible investment is defined by the PRI as an

approach to investing that aims to incorporate ESG

factors into investment decisions, to better manage risk and

generate sustainable, long-term returns.4

In other words, responsible investment is about managing risk.

It is not about putting specific ethical considerations ahead of

other criteria when creating portfolios.

This sets it apart from approaches like sustainable or impact

investment, which aim for non-financial, as well as financial,

objectives (see graphic on the next page).

RESPONSIBLE INVESTMENT IN FIXED INCOME A PRIMER

September 2019

1 Source: PRI signatory information snapshot, available at https://www.unpri.org/pri/about-the-pri. 2 For more information, please see https://www.unpri.org/credit-ratings/statement-on-esg-in-credit-risk-and-ratings-also-available-in-chinese/77.article. 3 For more information, please see https://www.unpri.org/credit-ratings. 4 Please see https://www.unpri.org/pri/what-is-responsible-investment.

Responsible investment in fixed income: a primer

What is responsible investment and how

does it differ from sustainable and impact

investing? What does it mean to invest

responsibly in fixed income?

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT.

KEY HIGHLIGHTS

• The Financial Reporting Council’s UK Stewardship Code is being

revised and is due to be launched by year-end. The updated

code will impact service providers, asset owners as well as

investment managers, and extend to include fixed income. The

code aims to increase effectiveness, align roles and incentives

of the investment community towards stewardship issues and

reflect the changing landscape of investment and societal

expectations.

• Our approach to responsible investment is underpinned by the

belief that environmental, social and governance (ESG) issues

are important drivers of investment value. We recognise that

delivering superior investment solutions depends on the

effective management of the risks and opportunities presented

by these issues. We continuously develop or update tools that

support the integration of ESG into our corporate credit work,

and have built responsible investment processes into our

emerging markets, sovereign debt, money markets analysis, as

well as our LDI solutions.

• We recognise that information on a company’s ESG risks is not

always available from third-party data providers, which is why

we believe it is essential for investment managers to carry out

their own independent analysis. We have developed

proprietary Insight ESG ratings, streamlining the standard ESG

framework and selectively customising the metrics to make the

data as pertinent as possible to our analysis. Our analysts use

these ratings in addition to or instead of a third-party provider

to make an assessment on the ESG risk posed by the issuer.

At present, around 99% of companies in investment grade

indices have a quantitative Insight ESG rating.

• More than 150 impact bonds we have analysed over the last

three years fully meet our requirements to be classified as an

impact bond, while approximately 15% of impact bonds were

unable to sufficiently meet our threshold requirements. This

highlights the importance of looking beyond the impact bond

label to discern suitability.

Introduction: ESG factors have become increasingly pertinent to our clients

Lucy Speake, Deputy Head of Fixed Income

and Head of European Credit, Insight

Investment

Insight was an early adopter of ESG integration

into credit research; we were a founding UN-supported Principles

for Responsible Investment (PRI) signatory in 2006, and this year

we achieved PRI ratings of A+ or A across all of our processes. Our

responsible investment framework focuses on ensuring we take

ESG risks into account alongside other risks in our fixed income

portfolios.

Over the last twelve months, ESG in fixed income has continued to

be a significant focus for Insight. In addition to developing new

tools (see Figure 2) that support the continued integration of ESG

into our corporate credit work, we have expanded the remit,

building responsible investment into our emerging markets,

sovereign debt, money markets and LDI solutions analysis.

Our key developments during the last twelve months have

included: increasing our focus on data in the ESG space and

expanding our ESG team; further exercising our stewardship role;

building sustainable investment into our portfolios in order to

meet our clients’ objectives; and creating three ESG groups.

These groups each focus on a different area – either corporate

credit, sovereign or Insight’s ESG products – and have a mandate

to review ESG risk factors that may impact investment and

business operations, in order to make sure we meet the demand

of our clients and consultants.

ESG continues to be a very important subject for our

clients; in the UK, ESG factors have become increasingly

pertinent, particularly to pension schemes and local

authorities. Our dedicated ESG strategies have

continued to grow, with an increasing focus on

exclusions, in particular.

ESG IN FIXED INCOMENEW INITIATIVES AND ENHANCEMENTS

October 2019

INSIGHT’S APPROACH TO RESPONSIBLE INVESTMENT IN FIXED INCOME HAS CONTINUED TO EVOLVE, WITH

NEW INITIATIVES AND ACTIVITY SEEKING TO ENHANCE AND DEEPEN THE INTEGRATION OF ENVIRONMENTAL,

SOCIAL AND GOVERNANCE (ESG) RISKS ACROSS OUR INVESTMENT RESEARCH AND DECISION-MAKING. IN THIS

PAPER, OUR PORTFOLIO MANAGERS AND ANALYSTS OUTLINE OUR APPROACH AND RECENT ENHANCEMENTS,

AND CLAUDIA CHAPMAN FROM THE FINANCIAL REPORTING COUNCIL OFFERS AN UPDATE ON THE NEW UK

STEWARDSHIP CODE.

ESG in fixed income: new initiatives and enhancements

Insight’s approach to responsible

investment in fixed income has continued

to evolve. In this paper, our portfolio

managers and analysts outline our

approach and recent enhancements.

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT.

2019 CLIMATE RISK INDEXFOR CORPORATE DEBT ISSUERS

DECEMBER 2019

Climate Risk Index 2019 for corporate debt issuers

The Climate Risk Index provides an annual

assessment of 1,846 corporate fixed

income issuers and analyses how they

are managing the risks and opportunities

presented by climate change. In this paper

we outline our methodology and results

from our 2019 climate risk index.

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT.

Whether they are seeking to boost environmental projects or

social development, fixed income markets are providing new

opportunities for investors to do so. Impact bonds, also known

as sustainability bonds, aim to use their proceeds to support

environmental and social progress. The market has boomed in

recent years (see Figure 1), with issuance in 2019 set to hit a new

record, and demand, so far, has comfortably absorbed supply.

However, questions remain for investors who are considering

sustainable issuance. There are no agreed industry-wide

standards, leading to wide variation in quality and types of

available investments; demand for such debt is so strong that it

has raised concerns about whether there is enough supply in the

market; and as with any investment that incorporates some

element of non-financial objective, investors may be concerned

over whether they will generate returns equivalent to traditional

debt instruments.

WHAT ARE IMPACT BONDS?

There are different types of impact bonds. Most in the market

are green bonds, which aim to use their proceeds to support

environmental progress. There are also social bonds, which

focus on social development, and sustainable bonds which aim

to support both environmental and social projects.

While the proceeds are typically used to support specific

projects or developments, and progress on those projects or

targets may be reported to investors, these bonds will otherwise

operate like conventional debt, offering a coupon and/or

principal to investors.

QUESTIONS FOR INVESTORS

1. With impact bonds, am I getting what I’m paying for?

A primary concern for investors in sustainable issuance is

whether their investment is being used in an appropriate manner

as intended. A lack of agreed standards, patchy reporting and

weak commitments raise significant questions.

For example, green bonds from some property companies

issued in 2019 have included terms that allow the proceeds to

cover payments for other bonds with no green characteristics

— meaning the green bond proceeds would lead to no carbon

reduction.

However, while examples like these rightly raise concerns, they

reinforce the need for detailed analysis. There are many

excellent examples of impact bond issuance: the Netherlands

recently issued a green bond with a clear framework,

aspirational targets and transparent reporting. You can read

about Insight’s sustainable bond analysis framework in our 2019

annual responsible investment report (see page 44).

IMPACT BONDSA BRIEF INTRODUCTION

September 2019

INVESTORS ARE INCREASINGLY SEEKING MORE THAN FINANCIAL RETURNS: DEMAND IS GROWING TO HAVE A

POSITIVE IMPACT WITH THEIR MONEY AS WELL.

1 Source: Insight Investment. As at 30 June 2019.

Figure 1: Impact bond issuance has boomed in recent years1

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Impact bonds: a brief introduction

What are impact bonds, do you get what

you pay for, is there sufficient capacity

and how does performance compare

to traditional bonds?

FOR PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL.PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT.

Our new Insight ESG ratings aim to be more dynamic and

complete, and to integrate our analysts’ research more effectively.

No single ESG data provider aligns with our house opinion on ESG

credit risk, and so we have developed our new methodology using

data from multiple third-party data providers.

We reclassify, reweight and organise the data according to our

analysts’ current views on material risks facing industries to generate

an ESG rating and momentum signal for a wide range of entities.

Insight’s methodology involves five key steps (see Figure 1).

Figure 1: Insight corporate ESG ratings methodology

Ratingsproduction

Qualitycontrol

Frameworkdevelopment

Datamanagement

Datasources

DATA SOURCES

We incorporate ESG data from four sources. These comprise full

ESG datasets from MSCI, Sustainalytics, VigeoEiris, and CDP climate

change and water metrics.

We also use the Bloomberg legal entities for credit risk datasets to

map the ESG records to all issuers within a credit risk tree.

We have created a robust data management infrastructure which

underpins our quantitative analysis – this is highly scalable, and

intended to support the evolution of our ESG ratings as we (i) add

new datasets over time, (ii) perform historical analysis and

back-testing of our ESG strategies, and (iii) implement enhanced

reporting and visualisations for analysts to dig deep into the ESG

profile of issuers, and portfolio managers to review aggregate

levels in portfolios.

DATA MANAGEMENT

Raw data is collected from data providers at the start of month

(or soon after it becomes available in the case of CDP). Preliminary

checks on the datasets flag up any obvious problems with the

datasets. Common problems include fields being added, removed,

or renamed, or the number of records changing drastically

month-on-month.

Once we are satisfied with the high-level reliability of the data, we

use bespoke software and a modified Bloomberg dataset to assign

global company identifiers, and ultimate parent identifiers to the

data provided. In particular, this modified dataset deals with cases

where the ultimate parent of the issuer is sovereign (or a

sovereign agency, central bank, etc), but the issuer’s credit is not

underwritten in any meaningful way by the sovereign entity. The

‘mapped’ raw data is added to our ESG database, giving us a

consistent history of the raw data.

FRAMEWORK DEVELOPMENT

Each metric that contributes to an issuer’s Insight ESG rating has

two key elements:

1. A score (evaluating an issuer’s performance in that metric)

2. A weight (evaluating the materiality of the metric to the issuer)

Both master datasets are then mapped onto one or more key

issues in our framework (see Figure 2 overleaf).

To generate a weight and a score at key-issue level we combine

inputs from our credit analysts together with third-party averages.

The analysts’ views on the materiality of key issues facing each

industry group are merged with views of the data providers, and

the values are averaged (with a 1:2 weighting).

To ensure our ESG ratings are based on good data coverage, we

include only records which (i) have data under each (E, S and G)

pillar, which are based on (ii) five distinct data points and (iii) more

than five distinct data provider fields.

RATINGS PRODUCTION

Our methodology produces two separate ratings for every issuer:

an overall ESG rating and an overall momentum signal.

INSIGHT ESG FIXED INCOME RATINGSCORPORATE METHODOLOGY SUMMARY

January 2020

AT INSIGHT, WE BELIEVE ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) FACTORS CAN HAVE A MATERIAL

IMPACT ON INVESTMENT RISK. IN DEVELOPING OUR PROPRIETARY CORPORATE INSIGHT ESG SCORE, WE HAVE

CREATED A RISK-CENTRIC APPROACH USING ADVANCED QUANTITATIVE TOOLS AND AVOIDING SUBJECTIVE

ETHICAL BIASES. OUR APPROACH LEADS TO HIGH COVERAGE OF GLOBAL BENCHMARKS: OVER 650,000

SUBSIDIARIES FOR 2,600 DIFFERENT PARENT ENTITIES HAVE AN INSIGHT FIXED INCOME ESG RATING.

Insight ESG Fixed Income Ratings: corporate methodology summary

We believe environmental, social and

governance (ESG) factors can have a

material impact on investment risk and

have created a risk-centric approach

using advanced quantitative tools and

avoiding subjective ethical biases.

• What does this mean for the investor community over the longer term?

• What might be the impact of a lack of proactive policymaking on these issues?

CONTRIBUTORS

Joshua Kendall, Senior ESG Analyst, Insight Investment

Phil Craig, Team Leader, Investment Content, Insight Investment

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