Optimisation is about making the best or most effective use of a situation or resource.
At present, we utilise the world’s natural resources with little thought to where our food comes from, how much energy is used and how we can minimise waste.
This is no longer sustainable and the necessary transition to a more optimal way of living will create significant investment opportunities as consumption habits, energy use and industrial practices are radically transformed.
Overshooting Earth’s resources
Human activity has long jeopardised biodiversity. Our take, make, waste economic model has a destabilising effect on air and water quality, land use and the climate.
The impact of living beyond our planet’s means has been quantified as Earth Overshoot Day – the date when demand for ecological resources and services in a given year exceeds what Earth can regenerate in that year. In 2023, Earth Overshoot Day fell on 2 August, a date that is occurring earlier each year as we continually fail to address this problem. Clearly, this is not optimal.
It also presents serious implications for investors. Research suggests that 55% of the world’s GDP is exposed to material natural risks and the value chain of all economic sectors has some dependency on nature. Among the most exposed industries are energy, mining, utilities and food & beverages. Biodiversity loss not only has the potential to impact businesses through direct risks; associated risks such as litigation and regulatory change could also have a significant financial impact.
While these economic habits are unlikely to change overnight, an effort can be made to reduce humanity’s footprint on biodiversity. Decoupling economic growth from resource use would create a more circular economic model, a resilient system where materials can be recycled, reused or repurposed rather than discarded. In this circular world, efficiency gains are crucial – this not only means recycling more waste, but getting more from what we recycle; using electric mobility solutions; embracing digital products; and reducing packaging (particularly plastic).
A more optimised economic system should engender virtuous industrial practices, reduce pressure on resources and boost economic growth through job creation, thus generating value for investors.
The energy efficiency equation
The International Energy Agency (IEA) names energy efficiency as the “first fuel” for clean energy transitions. Its definition of energy efficiency not only considers how we generate power but also how we use it. Therefore, the energy system not only requires the transition away from fossil fuels that is so integral to meeting net zero targets, but must also be combined with other measures, such as greater electrification of transport systems, behavioural changes and altering industrial practices.
Firstly how we generate power is less than optimal. Fossil fuels are not only harmful to the environment but, due to the energy and manpower required for extraction, only a portion of their original energy potential is converted into electricity. Because renewable energy is sourced from natural, inexhaustible elements, such as the wind, the sun or water (in the case of hydroelectricity), its conversion rate is much greater. As an example, coal converts just 29% of its original energy into electricity but for wind this is a massive 1164%.
While we are making better-than-expected headway on the clean energy part of the energy efficiency equation, the IEA now forecasts that demand for oil, natural gas and coal will peak before 2030, how we use energy also needs to be rethought. On the domestic front, that means better insulation of our homes, switching from gas-fuelled boilers to heat pumps and more energy-efficient appliances. For industry, updating and retrofitting industrial plants to the best available systems will aid efficiency, while improving the repairability of products and ending planned obsolescence will reduce wastage. These initiatives will not happen without considerable cost and could create value for investors.
Critical mineral conundrum
The vision of an optimised world relies heavily on the digitisation and electrification of existing economic systems, such as transport and clean energy production. Rare minerals are an essential component in these technologies, but rising demand for these minerals has resulted in an emergence of monopolies and protectionism as nations strive to secure supplies.
From an environmental perspective, the mining of critical minerals fuels unease over water withdrawals, greenhouse gas emissions and biodiversity. Nearly 1,300 mines and exploration sites are found in ‘Key Biodiversity Areas’ – places that have been designated as important for conserving biodiversity.
To safeguard supply and minimise the environmental impact of their extraction, critical minerals could be used more efficiently and judiciously. Better public transport systems and railway networks, as well as the development of lighter vehicles and technologies to aid car sharing would help reduce demand. Meanwhile, investing in better recycling facilities would help tackle the growing problem of e-waste.
Optimising our use of critical minerals is fundamental for the planet’s future and could lead to some exciting investment opportunities.
Rethinking the food chain
The way we produce food to meet the needs of a growing population is far from optimal. Taking the journey from farm to fork as an example, these days we enjoy food that originates from all areas of the world, all year round. While this may appease our appetites, it is not sustainable – particularly as a rising human population (which is expected to increase from between 59% to 98% by 2050) is placing ever-greater demands on food supply
There are already several technological solutions to help improve the food supply chain – vertical farms are successfully growing crops in urban locations, while precision agricultural technology assists farmers in making complex decisions such as when to irrigate or harvest. Yet, such innovations are only used on a small scale today and, therefore, should be accompanied by other measures such as mitigating food waste.
Throughout the food value chain there is immense wastage – in production, processing, retail, storage, transport and in its ultimate consumption. In fact, over 30% of food is wasted each year. Governments have introduced policy initiatives to combat food waste, such as reducing portion sizes and prohibiting discounts that encourage overbuying. Similarly, companies are mitigating waste by keeping it out of landfills or donating leftovers to charities.
Given resource efficiency is a central pillar for a transition to a more optimal world, alongside the enormous financial incentives to reduce costly waste, investors could find long-term opportunities from companies offering effective solutions to this challenge.
Doing digital better
Optimisation is not solely restricted to the natural world. The advance of technology is creating huge efficiencies in consumption, time and human capital deployment.
One of the key areas of digital optimisation in business has been companies shifting IT activities to the cloud. Cloud computing is the online availability of computer systems, especially data storage and computing power, that eliminates the need to buy, own or maintain physical equipment such as servers. Not only does this provide cost efficiencies, but it also offers the benefits of elasticity – a company can scale its computing needs according to changes in demand. With an annual growth rate of around 18%, the cloud computing market is projected to reach USD 1.2 billion by 2027. For investors, cloud computing is seen as a long-term structural trend: to remain best-in-class, companies will continuously need to adapt their operating systems to keep up with the ongoing digital transformation.
The pace of digital transformation has been accelerated by the commercialisation of generative artificial intelligence (AI). As well as unlocking new growth avenues, generative AI will drastically help companies become cost-efficient by enabling businesses to do more with less. Developers can write more code per hour; AI can assist with customer service by handling questions without human intervention; emails can be personalised according to client preferences; and huge volumes of data can be processed rapidly – helping to pass on meaningful insights.
Yet, amid AI’s positive attributes, worries have emerged about workforce displacement, the potential for subversion and misuse, and its high energy consumption – for example, just one AI company can use more power than an entire city such as San Francisco. The disruptive potential of AI will inevitably be an attraction for investors, so being mindful of the risks will be prudent.
Optimisation = opportunity
The forces driving a shift to a more optimised world are largely united by the need to make more efficient use of the planet’s natural resources. There is challenge and opportunity in the way people’s lifestyles and business practices will change; in the way technological advancement is embraced or resisted; and, in the transition to a more circular economy, how replenishment, reuse and recycling can be used to build longevity. This constant optimisation will create constant opportunity.
At BNP Paribas Asset Management, we see greater optimisation as a core priority within sustainable investment. Understanding how companies can optimise their use of materials, while limiting consumption and the unproductive use of resources, will not only be key to generating long-term investment returns but will also help deliver a more sustainable future.
