In almost everything they do, responsible investors face the dilemma of “risk-washing”.
They know that many sustainability objectives need a “business case” to drive action. So they wash these objectives in the “risk” dye to make sustainability palatable for the hard-nosed portfolio manager and CIO.
This isn’t a nefarious con job. It is a messaging choice. Climate is arguably the most prominent example.
Sure, Citigroup may have got a bit too excited in 2015 when they identified $100 trillion in potential stranded assets if the Paris Agreement were to be met (I must admit, I do miss those days!) and yes, the narrow “fossil fuel stranded assets” framing has not materialised. But transition risks more broadly have. As have physical risks!
For the past few years, nature advocates have sought to follow in those footsteps. A now-seminal study from the Green Finance Institute in 2024 suggested nature risks in the UK could exceed the GDP impacts of the global financial crisis and the Covid-19 pandemic.
Another report from the UK Institute and Faculty of Actuaries and Anglia Ruskin University described the potential collapse of nature as “a realistic possibility”. The Task Force on Climate-related Financial Disclosures inspired the Taskforce on Nature-related Financial Disclosures, which published its recommendations last year.
And nature risk tools are increasingly integrated into the offerings of commercial ESG data providers.
I am sure you, like me, can’t help but be reminded of German sociologist Max Weber when reflecting on these initiatives, and his concept of Zweckrationalität (all the young people are saying it!).
Zweckrationalität, or instrumental reason (for some reason the English language draws a line at compound nouns with more than six syllables), is the idea that reason or rationale takes goals as pre-given and only calculates the rational, optimal path towards achieving them.
The concept, later underpinning the core thesis of Adorno and Horkheimer’s Dialectic of Enlightenment (come for the responsible investment takes, stay for the philosophy sidebars!), applied to nature risk assessment suggests that we should be assessing nature from the vantage point of optimising economic and financial outcomes. The messaging strategy that helped mainstream climate!
And so, the nature discourse has turned into a profit-loss calculation where we treat nature and ecosystems only as an economic input or economic hazard.
Two obvious red flags emerge. The first is that the nature risk assessments that have followed this Zweckrationalität don’t seem to be motivating action.
The ENCORE nature risk tool is a good example of this issue. It finds that 66 percent of the gross value-add of the German real estate sector is nature-dependent.
For investors, this surely raises more questions than answers. How plausible is it to think that two-thirds of the value of real estate in Germany is “at risk” from nature, and how actionable is that figure? Should we reallocate to Danish real estate that is only exposed 65 percent?
Whatever the rigour of the underlying methodology, these numbers don’t pass the smell test (if we do think German real estate is 66 percent exposed to nature, then we might as well go all the way to 100 percent!).
What’s more, nature models are still struggling to move from sector to company risk assessments, critical to driving meaningful allocation strategies.
‘Large number fatigue’
Meanwhile, the “macro” risk exercises, like those of the Green Finance Institute, do what they say on the tin, namely model nature collapse. While that might work for the purpose of designing stress tests, it is unlikely to motivate day-to-day portfolio management.
More broadly, there is a “large-number fatigue” setting in where it seems like not a month goes by without a study predicting that sustainability theme X will cause economic collapse and societal destruction.
At some point, investors become inured to this work, however accurate it may be.
Also, the historical economic impact of ecosystem service loss – like many social and sustainability objectives – manifests itself as unrealised gains and thus is typically not noticed nor accounted for.
This isn’t a comment about nature risks themselves. But as somebody who has built his fair share of models, I have the scars to know that it doesn’t matter how good your model is if you can’t convince folks about the assumptions that power the model.
There is a reason markets didn’t move when we published our alien invasion stress-test analysis (and it wasn’t just that it was an April Fool’s joke!). They don’t believe it.
One can agree that nature is at the core of economic activity and be concerned about nature breakdown without identifying a strong “risk-return” case in a portfolio strategy.
The morality of nature
There is another issue, however, with counting nature in dollars and cents: we become blind to morality.
This is where nature is different from climate. There isn’t an intrinsic morality to a thermometer reading. But there is to biodiversity, to cultural services from ecosystems, to the beauty of nature. All these things are imbued with a morality that goes beyond balance sheets.
One of the most prominent approaches to measuring biodiversity loss is through sound. I am literally writing these words to the sounds of birds chirping outside my window and it sparks joy.
But not every bird is an economic asset and so, in our narrow risk view, not every bird matters.
Yet in a world where we have snookered ourselves into requiring an economic imperative in order to motivate sustainability action, we only care about the bird when it is also an asset. Our cynicism has led us to that conclusion.
I would argue the opposite is true. The numbers have created a disenchantment (Entzauberung, in Weber’s words) – they have alienated us from nature.
All investors “consume” and enjoy nature beyond its narrow economic benefits. But nature is already moving down the priority list of investors I speak to, never having managed to make it that far up the totem pole in the first place.
This isn’t just my opinion. Academic research backs the idea that emotional and experiential relationships with nature support pro-environmental behaviour. The celebrations around David Attenborough’s 100th birthday this month have helped remind us of this truth.
In 1944, German philosopher Theodor Adorno, inspired by Max Weber, concluded: “What human beings seek to learn from nature is how to use it to dominate wholly both it and human beings. Nothing else counts.”
Perhaps, just perhaps, something else should count…
Jakob Thomä is co-founder of Theia Finance Labs (formerly Two Degrees Investing Initiative), research director at Inevitable Policy Response and professor in practice at University of London SOAS.
