WHEB Commentary

Resource scarcity represents a ‘spectacular’ investment opportunity – but handle with care


As an undergraduate studying environmental science in the 1990s, one of the first tasks I was asked to consider was why the authors of the seminal 1972 report The Limits to Growth1 were wrong. This report, produced by the influential think-tank The Club of Rome, had confidently asserted that increases in human population, industrialisation, pollution, food production and the depletion of natural resources would ultimately lead to the collapse of critical ecosystems. At the time, several commentators retorted that the authors had not properly accounted for technological responses to these trends, and this was the critique adopted by our university lecturers.

That was in 1991, nearly twenty years after the report’s publication, but roll the clock forward another twenty years and there is now clear evidence supporting the authors’ original prognosis. The past twelve months alone have seen a slew of commentary on the reality of resource constraints in particular. The management consultancies McKinsey & Company and Bain & Company both published important reports2 at the end of 2011 documenting in some detail the nature of these constraints. The implications for the business community are that it is now faced with:

  • Upward price pressure on commodities;
  • General increased in price volatility (reflecting short-term imbalances in supply and demand, and a surplus of financial capital seeking returns); and,
  • Real constraints in a number of commodities including rare earth metals, copper as well as regional shortages of food and water.

What is less well understood however is that, like a water-filled balloon, the earth is clearly a closed-system. Squeezing on one side of the balloon merely transfers pressure to another part, and so it is with resource constraints. Efforts to expand the supply of energy, for example, by adopting biomass as an alternative source of energy to fossil hydrocarbons, rapidly runs into constraints imposed by growing levels of demand for agricultural land from other sources such as for the use of land for food production.

This is an important insight for investment managers as well as businesses and policy-makers, and is in essence what the concept of sustainability is about. Technologies, businesses or policy responses that seek to address one area of pressure – say water shortages through desalination – without fully understanding the wider consequences of this approach for energy use and climate change are doomed to failure. Many first generation biofuel technologies, and their financial backers, fell into this trap because they failed to understand the knock-on effects of the technology on food production and prices and on climate change. Politics might delay the inevitable, but ultimately if a technology or business fails to adequately address the impacts it has on wider resource and environmental issues, then it is unsustainable in every sense of that word.

As sustainable investment managers, we have for many years been arguing about the dangers of resource constraints. With investment gurus such as Jeremy Grantham now arguing that ‘resource scarcity represents a spectacular investment opportunity’, 2011 may well prove to have been the year when the mainstream investment community caught up. But, for many, taking advantage of resource constraints merely prompts the obvious linear question: ‘how do we find alternative resources?’ Lots of money will – and indeed already is – being raised and invested and in time, will also be lost by managers and businesses who do not also consider the further question of whether these alternatives themselves are sustainable.



1 The Club of Rome, The Limits to Growth, Universe Books, 1972

2 See McKinsey Global Institute, Resource Revolution: Meeting the world’s energy, material, food and water needs, November 2011 and Bain & Company Inc., The Great Eight Trillion-Dollar Growth Trends to 2020, 2011

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