The game of investing has been played by the same players, using the same script, for the last 40 years. But due to changing externalities, including the pandemic, war in Ukraine, and increased climate events, the world’s beta, or risk factors, are increasing and getting more entangled. There is concern that globalization has peaked and Gross Domestic Product (GDP) volatility is at its highest since World War II.
As risks to the current system increase, the search for alpha will require new approaches, new thinking, and new players. Driving returns in this environment will be more complex and require systems thinking and partnership across new stakeholder groups, many of whom do not collaborate today. But if done well, investors can drive returns that are more productive and profitable in a way that protects our natural resources.
For the past few centuries, the planet has experienced extraordinary economic output, supported by fossil fuels, as well as an eightfold expansion of the global population. However, the drivers of economic progress are changing, and we need to move beyond the approaches that have gotten us here. The current system is stalling both in its potential and productivity. Life expectancy has had the fastest decline since World War II, and our productivity rates in the developed world have flatlined.
In the next 30 years, the risks are going to increase. At a ten billion-person planet, triple the resources or 1.3 more Earths will be required to generate the output we need to live. But of course, we only have one Earth, and its most important resources are being impacted at an alarming rate. Scientific studies suggest that we have sixty years before we run out of topsoil due to land degradation, 75% of tropical rainforests have lost resilience and over 50% of marine ecosystems could be extinct by 2100.
Our systems are at a point where it is more productive to work with nature than against it. We are entering an age where natural assets can provide more risk-adjusted and higher margin improvements in total factor productivity. Innovation has made our ability to unlock the potential of our natural systems cheaper, faster and in a more democratized manner. For example, the cost of visual sensing has decreased by one hundred times while processing speed has increased by 300,000 times, enabling a step change in our ability to model nature. Genomics and synthetic biology breakthroughs now allow us to leverage natural processes to compete with chemistry and physics to the point that sixty percent of physical inputs could be made by biological means. Robotics and distributed sensing systems can accelerate productivity with low embodied energy.
As a result of these increased risk factors and the acceleration of innovation, the Energy, Agriculture, Forestry and Oceans sectors are transitioning towards systems that are less extractive and more regenerative, at differing stages of maturity. Energy is advancing upward in its J-curve with solar moving from 2% of generation to 10% with a cost decrease of 85% in the last 10 years. Agriculture is just starting to unlock the power of healthy soil. Results from our portfolio companies show that activating the soil microbiome increased the productivity of land between 30 - 50% and that farmland with better soils traded at a two times premium to conventional land. Technology in Forestry has led to better stewardship and a new unlock - the potential for forests to sequester carbon. The Oceans sector is more nascent but presents an investable opportunity that impacts almost every sector of the global economy. It is the world's primary shipping channel, it can be both an energy source and a carbon sink and it offers a new frontier for materials science.
Playing the same game with the same players isn’t going to make the 21st century more productive, profitable, and sustainable. Investors, companies and entrepreneurs need to be creative, take risks and embrace the complexity of natural assets. At S2G, we are taking a systems approach to unlock alpha in natural assets and encourage other investors to use us as a resource if you are interested in learning more about investing in these complex, highly interconnected sectors.
Editors Note: Sanjeev Krishnan presented on this topic at OceanSummit in November 2022. Download the slides from his presentation.