A difficult balancing act

After several COVID-related delays, this year I finally managed to get away on my honeymoon to Sri Lanka.

It was a trip full of culture, sunshine, and picturesque views. But during the trip there were a few small hints that economic problems were bubbling away in the background. We were often asked if we could pay with dollars, rather than Sri Lankan rupees, due to a shortage of foreign money. Just like in the UK, there were long queues at every petrol station we stopped at. Those working in tourism spoke of the lack of economic support from the government following two years of on-and-off lockdowns.

At the time we didn’t think too much of it. But now it’s obvious that this was all evidence of a three-pronged crisis, unfolding around the world: the impact of the pandemic, the rising cost of servicing sovereign debts, and an alarming increase in the price of food, fuel and other essential commodities. In Sri Lanka, that all led to violent protests over the last few weeks. Given that many other Asian countries, such as Pakistan and Mongolia, have been forced to deal with similar challenges over the course of the pandemic – what turned Sri Lanka’s economic situation from difficult to disastrous? Surprisingly, the answer is organic farming.

A bad harvest in pursuit of good

In April last year the Sri Lankan government decided to abruptly ban the importation of chemical fertilisers and agrochemicals in the name of sustainable agriculture. Unfortunately, in spite of organic farming’s benefits (for example, improving soil quality and reducing water pollution), Sri Lanka’s attempt to adopt it in a hurry has been economically catastrophic. Without chemical fertilisers, crop yields for rice and tea plunged, leading to painful food shortages and slump in foreign exchange payments for exports. The amount of rice Sri Lanka produced dropped 20% in a year, sending the local price soaring 50%.

The crisis forced the government to increase imports, which has worsened the foreign exchange situation. This awful saga is a stark illustration of how interlinked all three dimensions of the UN’s Sustainable Development Goals (SDGs) really are. It’s not enough to simply try and solve one dimension – whether environmental, economic or social – without carefully considering the effect on the other two.

The SDGs are 17 global goals designed to be a blueprint to achieve a better and more sustainable future for all by 2030. Many of these are cross-cutting and have synergies with one another; for example, more sustainable water management can simultaneously benefit ‘SDG 6: Clean water and sanitation’, while also reducing child mortality to benefit several other SDGs including ‘SDG1: No poverty’ and ‘SDG3: Good health and well-being’. However, while improving one SDG can sometimes mean improving many others, on other occasions this inter-connectedness can work the other way as well. If not done properly, trying to solve one sustainability-related goal leads to the detriment of another, which isn’t in line with what the SDGs were actually created to achieve at all.     

Balancing the goals

The significant economic and social uncertainty which has grown in 2022 has shone a light on this exact difficulty. The worsening conflict in Ukraine and sanctions that followed have caused significant and unprecedented energy and food security challenges for nations far flung from Eastern Europe.

The sanctions on Russian hydrocarbons have, in a way, echoed the effect of an accelerated transition to clean energy even as they push companies to invest more in renewable sources today. On the one hand, it’s widely accepted that we need to take huge steps to try and meet our net-zero emissions targets, which involves large amounts of investment into renewable energy and sustainable agriculture. This will benefit a range of SDGs, such as ‘Responsible consumption’, ‘Climate action’, ‘Life under water’ and ‘Life on land’. But how do you balance the importance of these against the equally important SDGs of ‘Affordable and clean energy’, ‘Decent work and economic growth’ and ‘No poverty’?

If well thought out policies are put in place improvements in one sustainability dimension needn’t cause disaster in another, but there is no denying that sometimes it isn’t easy. Energy is one area which illustrates this cross-cutting challenge of sustainable development most markedly. Even before war broke out in Ukraine, energy prices in Europe were hitting records after a sudden slowdown in wind-driven electricity production. This highlighted, that although a move to wind energy is very much needed, governments need to think carefully about their plan and strategy to transition. Of course, we are all aware of the urgency required (partly due to lack of ambitious action in the past) to limit the effects of climate change. Its devastating effects for our planet could also exacerbate poverty, inequality, and social injustice, taking us backwards on our journey to sustainable development regardless. But we must acknowledge that a grown-up conversation is needed to figure out how we are going to meet our net-zero goals without exacerbating economic problems. This does not necessarily mean falling back on more fossil fuels or nuclear power again. But it could instead mean more investment into energy storage to help reduce imbalances between energy demand and more cyclical renewable production, or greater spending on technologies to help improve the efficiency and lower the pollution caused by the mines needed to dig up the commodities for things like electric vehicles.

We must aim for a just transition – one which supports a net-zero and climate-resilient economy in a way that is fair and tackles inequality and injustice. We must ensure no one is left behind. And although this may be difficult, it is achievable. This is fundamental to the objectives of the UN SDGs, which is why, seven years on, they remain a vital way to shape sustainable investing. This is also why we use them as part of the sustainability criteria for our Rathbone Greenbank Multi Asset Portfolios. Every company or entity in our funds is aligned to the SDGs, through their operations or activities. We designed our portfolios with the aim of supporting sustainable development which means protecting both people and the planet – sometimes a difficult balancing act – but a necessary one.

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.