The tragedy of the commons

20 March 2020

Being stuck in traffic is no fun. No one likes the jerky start stops, increased stress and delayed schedules. It is tempting to wonder what would happen if half the people driving took the bus instead. Everyone would probably get where they needed to be much faster!

This scenario nicely sums up what is known as “the tragedy of the commons”. This is when each individual user of a shared resource – eg a road – uses that resource in a way that is detrimental to all the other users.

A road has limited space. In fact, we can say the road has certain boundaries. If we take up too much space on the road, we end up crashing the system. Similarly, the earth has boundaries as well. There are limits to the amount of resources we can use.

For example, air and water are shared resources that can be used indiscriminately. Historically we have never had to think about the earth’s resources as being finite.

Population explosion

Early in the 20th century scientists found a way to efficiently create artificial fertilizer from atmospheric nitrogen. This could be used to grow food crops very efficiently. After things settled down post World War Two, there was a huge baby boom that could not have occurred without the crops grown with artificial fertilizer. The global population exploded from about 2.5 billion in 1950 to nearly 7.5 billion today.

This population boom has helped drive economic growth during the last fifty years. Still, it is worth remembering that half of all people alive today live on less than $5.50 a day. Many people in developing countries do not have access to basic utilities like piped water, sewage and electricity.

As their countries develop and they aspire to a better lifestyle it is a natural consequence that there will be more CO2 emissions released into the air and more stress placed on fresh water.

Pushing planetary boundaries

Current patterns of consumption, if adopted by everyone in the world, breach our planetary boundaries. In fact, we have already crossed the 350 parts per million threshold of CO2 in the air.

Several parts of the world are also facing severe water stress. A sobering example is Cape Town, which faced an unprecedented water shortage in 2017 - almost becoming the first major city in the world to run out of fresh water.

In December 2015, countries around the world agreed to voluntary commitments to reduce their carbon emission in recognition of this challenge. This change is not easy, and no individual person, institution or country can do this alone.

Investing for our future

The finance industry has a few strategies to deal with these challenges that complement traditional financial analysis. A cornerstone of these approaches is the demand for companies to release Environmental, Social and Governance data (also known as ESG). This ESG data can be integrated with financial data to create a risk snapshot.

Companies who have questionable management practices, negative environmental impacts and detrimental social outcomes can be more easily identified. They can then be engaged with to change or simply not considered as a suitable investment at all.

< Read: Responsible investing toolkit

Ian Author

By Ian de Souza, CFA

Ian is a global equity analyst on our research team. He has a keen interest in economics, investing and ecosystems. One can usually find him wrestling with an excel spreadsheet, immersed in the Financial Times or digging up eclectic charts and figures on social media, reddit and twitter.