Resilience and regeneration

What does resilience mean and how does it differ from sustainability?

Sustainability is the ability to meet our current needs without compromising the ability of future generations to meet theirs. When it comes to nature, our economy has been operating on a degenerative course – extracting Earth’s resources without enabling the conditions for them to replenish. While nature has the remarkable ability to continuously rebalance when left undisturbed, human activities have disrupted this delicate system, jeopardising our ability to thrive in the long run.

As an analogy, consider another miraculous system, the human body. A well-balanced lifestyle makes it well equipped to recover quickly from setbacks compared to one that is overstressed, nutritionally deficient and lacking sleep. To attain a resilient state of health, the body cannot start from a state of deficiency.

The same principle applies to nature and what scientists have coined its ‘ecosystem services’. As humans, we cannot sustain life in the current state of imbalance: rising atmospheric temperatures, acidifying oceans, depleted forests and declining biodiversity. To attain resilience — an ecosystem’s capacity to recover from disturbances to its state of balance — we must first regenerate nature, from the soil that nurtures our food to the water systems that support all forms of life. Rebuilding planetary resilience will enable activities that are sustainable.

Pictet investors have a long track record of using the Planetary Boundaries framework for strategies with an environmental objective. How does this relate to resilience and regeneration?

The Planetary Boundaries¹ are a scientific framework that allows us to quantify the degree to which our natural ecosystem has deviated from its balanced state. The framework identifies nine broad categories, like climate change and biodiversity (see Figure 1). For those in which we remain within the safe operating space, nature is able to rebalance and restore itself. Where we have breached the safe operating space, resource regeneration is needed to return to the safe operating space, within which we have resilience. Since 2023, six out of nine planetary boundaries have transgressed the safe operating space.

To be clear, this safe operating space applies to us humans, given all of the natural dependencies we require to sustain ourselves. Earth has existed for the vast majority of its history in conditions that would not support the survival of our species, and it will continue long after we are gone. It is therefore helpful to use the Planetary Boundaries framework (see Figure 2) to assess the impact our investments have on our environment, particularly in the areas that are most critical to our continued ability to thrive. Unfortunately, today the number of listed companies whose activities remain within the safe operating space is limited, so it is also useful to look beyond this asset class to identify investable solutions.

How is resilience relevant to investors?

The current polycrisis – the interconnected social, ecological, economic and (geo)political crises - could make future volatility of returns higher than in the past. This means historic market behaviour could become even less reliable as an indication of future returns.

Just as climate change will shift everything from where we construct new buildings to where we grow our food, we will need to look to new models that adequately account for negative impacts (also referred to as externalities) and sources of returns from our investments as our economy transitions to become more resilient and sustainable.

How will the transition to a more resilient and sustainable economy affect the investment landscape?

The transition already presents exciting investment opportunities. There is a burgeoning landscape of highly innovative regenerative businesses developing in pockets around the world, typically near research centres like universities (e.g. Tech4Regeneration) or where local circumstances produce need-driven entrepreneurs (e.g. Impact Hub). These present opportunities to scale and invest in leading-edge solutions that promise to displace current industries across risk appetite and asset classes – from venture capital to listed equities.

At the same time, as with any transition, new investment risks arise, including remaining invested in the status quo. Entire industries as we know them are already being upended due to climate change alone. Take the home insurance industry in the US – areas not even considered as highly vulnerable to extreme weather events are already being abandoned by insurance companies.² Like the loss of a keystone species, the implications of this can reverberate throughout entire local economies, impacting the ability of families to secure mortgages, or even worse, the solvency of entire communities that have no insurance coverage in the wake of a catastrophe.

We expect the transition will also increasingly shift focus to the long term over the short term in investment decision-making. The risks and opportunities outlined above will reinforce this shift, as will regulation and policy, like those linked to financial stability, energy and food security and of course, climate change and biodiversity.

How can we act? Is there room for hope?

Absolutely. The recent experience of developing Covid-19 vaccines and distributing them rapidly shows that humans can defy any forecasting model when focused on channelling resources towards a shared objective. There are also success stories to emulate in the regeneration of nature, like China’s Loess Plateau and Instituto Terra’s reforestation efforts in Brazil.

The closer alignment of private and public investment, policy, and the actions of individuals and corporations will amplify the transition to a more resilient and sustainable economy. Moreover, the transition may not only serve to safeguard humankind, but also to deliver a higher quality of life than today – improving everything from the food we eat to how we move and the air we breathe.