Davos Update – Polycrisis And Planetary Boundaries Meet The Anthropocene While ESG Prevails
January 24, 2023
The news from Davos this past week was diverse and enlightening, yet more of the same. While some understandably criticized the use of corporate jets and the EU raised concerns about protectionism, for Responsible Alpha’s seven-person team attending Davos, what we observed was the polycrisis and planetary boundaries meeting the Anthropocene.
Responsible Alpha notes that Institutional investors, mainstream and climate alike, view strengthened, vigorous and transparent use of ESG metrics globally as a required means of mitigating climate conditions while diminishing economic and climate risks and creating a pathway to mitigating climate change.
Figure 1: Responsible Alpha CEO, Gabriel Thoumi, CFA, FRM joins global economists and climate finance experts in Davos, Switzerland at the Green Accelerator supporting as a consultant lenders, investors, and corporations that are transitioning to a low-carbon, sustainable, and equitable future.
Compounding Risks
According to the WEF’s Global Risks Report 2023, our decade has been particularly disrupted by the effects of the COVID-19 pandemic followed by both a global energy and food crisis, Russia’s unprovoked war on Ukraine, supply chain disruptions, fears of inflation and increases in cost-of-living, emerging market capital outflows, and a stagnant economy. These factors are compounded by increasingly virulent planetary boundary risks from climate change, water scarcity, chemical dispersion and plastic pollution, along with biodiversity collapse, which all threaten our global sustainability.
The WEF says we now live in the polycrisis which they explain as how, “present and future risks can also interact with each other to form a ‘polycrisis’ – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part”.
Yet this polycrisis is also compounded by our global economy crossing multiple planetary boundaries. While climate change and its negative feedback loops are most often discussed – such as chronic and acute risks including sea-level rise and extreme weather increasingly stressing our fragile global economic systems, similarly concerning is that we are in the midst of the 6th Great Extinction in geologic history while we face unprecedented pollution from chemical dispersion – nitrogen, phosphorous, and other molecules – and increasing plastic use globally while our planet’s lungs – its oceans and forests are being destroyed.
We now live in the Anthropocene – the epic during which humans have had a substantial impact on our planet – where economies globally face polycrisis.
Figure 2:Dr. Nouriel Roubini was a panelist with Mr. Thoumi at the Green Accelerator in Davos where both addressed the relationship between inflation, economics, and climate risk.
ESG Lifts the Fog in Davos
While Larry Fink, CEO, BlackRock chastised the personal attacks he faces for requiring the world’s largest asset manager to use ESG metrics and work towards mitigating climate change,[1] our Responsible Alpha team were reminded again and again in Davos how ESG creates efficiency and innovation in the capital markets in moving capital to align with more profitable and healthier outcomes for the planet.
Yet the rebuttal is in the data – in 2022, while BlackRock reported $4 billion in anti-ESG outflows, the world’s largest asset manager reported $230 billion in ESG-related inflows, a factor of 50:1 in favor of ESG supported asset management services.[2]
One specific example often discussed in Davos was how a large oil and gas trader was caught misstating in its financial accounts and their negative impact on the environment. The misstatement resulted in a multi-million-dollar impairment which subsequently was a key factor that pushed the firm into bankruptcy.
Yet economy wide, our team often heard how ESG and its reliance on transparent data that improves a sectors or a company’s governance can be traced to responses to the Great Depression 90 years ago when securities laws were put in place to protect society from opaque economics and unscrupulous actions.[3], [4]
As with any innovative technology, over time processes improve, just like our flip-phone of 15 years ago is different from our smartphone today, ESG too has grown to become more sophisticated benefiting from increasing transparency, now often mandated by law in the EU and elsewhere.[5], [6], [7], [8], [9]
What our Responsible Alpha teams saw in Davos, across the six different events we moderated or spoke at, was a uniform recognition that ESG over the past 20 years has migrated from a best practice to business-as-usual, now uniformly deployed by asset managers, asset owners, banks, insurers, and corporates alike globally in their efforts to address how our polycrisis has meet planetary boundaries in the Anthropocene.
[1] Fortune. (January 17, 2023). Larry Fink, the face of ESG, says ‘the attacks are now personal’ for the first time in his career. ‘They are trying to demonize issues.’ Available here. [2] Reuters. (January 17, 2023). Davos 2023: BlackRock U.S. (ESG) Inflows Dwarf $4bn Lost in ESG Backlash Notes CEO. Available here. [3] Securities and Exchange Commission. (1933). Securities Act of 1933. Available here. [4] Securities and Exchange Commission. (1934). Securities Act of 1934. Available here. [5] European Commission. (5 August 2020). Renewed Sustainable Finance Strategy and Implementation of the Action Plan on Financing Sustainable Growth. Available here. [6] Official Journal of the European Union (22 June 2020). Taxonomy Regulation. EU Taxonomy on Sustainable Activities. Available here. [7] European Commission: EU Technical Expert Group on Sustainable Finance. (9 March 2020). Usability Guide for the EU Green Bond Standard. Available here. [8] European Commission. (9 December 2019). A Regulation on Sustainability-Related Disclosure in the Financial Services Sector. Available here. [9] Securities and Exchange Commission. (21 March 2022). SEC Proposes Rule to Enhance and Standardize Climate-Related Disclosures for Investors. Proposed Rule. Available here.