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AIQ Editorial TeamGlobal Investment Thinking @avivainvestors
The concepts of biodiversity and ‘natural capital’ have been largely ignored by business and finance until recently. Investors are now starting to take the issue seriously and build it into their thinking.
Since 1970, there has been an average fall in global wildlife populations of 68 per cent, mostly due to human-driven habitat loss, pollution and climate change.1 Numerous species have disappeared altogether in what has been dubbed the ‘sixth mass extinction’.
Globally, experts estimate the value of “natural services” at $44 trillion, around 55 per cent of global economic output.2 The collapse of the planet’s ecosystems and the services they support would therefore bring catastrophic economic losses.
Yet there is still time to turn things around if we act swiftly and decisively.
Cause and effect
While unsustainable agriculture is the main culprit, many other sectors are to blame. The energy industry devastates ecosystems and provides the raw fuel that powers climate change, the main threat to wildlife over the longer term. Textiles manufacturers grow pesticide-intensive crops, degrade the soil and pollute rivers.3 Chemicals companies have allowed their products to leach into watercourses and spread around the world.4
With momentum building among governments and business, investors must be ready to act
With momentum building among governments and business, investors must be ready to act. As with climate change, investors face physical risks from biodiversity loss, such as direct damage to assets, as well as other threats.
To identify and act on these risks and opportunities, investors require better data on how companies impact nature, and how biodiversity loss will impact their interests.
Initiatives such as the Taskforce on Nature-related Financial Disclosures (TNFD), which is developing a risk management and disclosure framework for companies to report and act on nature-related risks, should help bring greater transparency.5
Better-quality data should help companies focus on how changing conditions in the natural world might impact their financial performance, and what might happen in future scenarios, with the goal of channelling investment to more sustainable activities.
For now, being able to assess the potential investment impacts of natural capital issues remains challenging. Companies’ effects on nature are numerous and cannot usually be quantified or compared in quite the same way as the carbon emissions causing climate change.
On the plus side, the links between companies’ practices and their own commercial prospects can be more easily made than is the case with climate risk. A big fishing company, for example, that wipes out fish stocks will find it harder to bring in a catch, affecting its profits.
While emitting carbon is not (yet) illegal, many activities that damage nature, are prohibited under law
Similarly, while emitting carbon is not (yet) illegal, many activities that damage nature, such as poisoning rivers or cutting down trees in protected areas, are prohibited under law. This gives investors a basis on which to identify wrongdoing and potentially exclude the companies responsible from portfolios.
While much more needs to be done, coordinated action among governments, companies, investors, scientists and environmental organisations is starting to make a difference on biodiversity. And there is growing evidence that, given a little time and space, nature can bounce back.
Three points to remember
- Biodiversity loss could have a significant impact on the global economy and presents a real threat to investors
- Investors require more and better data on how companies affect nature, and how biodiversity loss will impact their investments
- Coordinated action among governments, companies, investors, scientists and environmental organisations can make a difference
