Read this article to understand:
- How markets and economies depend on nature
- The need for policy measures and market reforms to reduce the risks related to biodiversity loss
- Why coordinated action among governments, companies, investors, scientists and environmental organisations is starting to make a difference on biodiversity
The rugged Alaskan coastline is a haven for nature. Bald eagles wheel above the pines. Sea otters paddle in the surf. Beneath the waves, schools of fish dart through emerald-green kelp forests.
At least, this is how it should be. In the 1970s, parts of Alaska looked very different. The kelp forests and most of the animals had disappeared. The only signs of life were colonies of purple sea urchins marching over the seabed, gobbling up everything in their path.
A scientist named James Estes worked out what happened. For decades, humans hunted the otters, sea urchins’ main predator, for their fur. In some areas they were completely wiped out. Without otters to prey on them, the urchins grew in number and ate the kelp, depriving other creatures of food and shelter. Sea otters were the “keystone species” holding the entire ecosystem together.1
The role of keystone species is one of the hidden rules that govern nature. Many of these principles became known only recently, explains biologist Sean B. Carroll, author of The Serengeti Rules: The Quest to Discover How Life Works and Why It Matters.
“By understanding these connections, we now understand more about how nature works, but also why things could be unravelling and how the loss of a single species could have a domino effect on so many other things,” he says. (See Nature’s domino effects: An interview with Sean B. Carroll on the biodiversity crisis).
The dominos are now toppling all over the world. And the killing of keystone species is not the only way humans are damaging the complex variety of life on Earth – what’s known as biodiversity.
Since 1970, there has been an average fall in global animal populations of 68 per cent, mostly due to human-driven habitat loss, pollution and climate change.2 Numerous species have disappeared altogether in what has been dubbed the sixth mass extinction. These creatures spent hundreds of thousands of years adapting to specialised niches, finding exquisitely different ways of living in the world. Now they are being lost in the relative blink of an eye.
If this is an ecological tragedy, it is also a big problem for human civilisation, which relies on nature for resources. We need air to breathe, food to eat and water to drink. Healthy ecosystems regulate the climate and protect us from extreme weather. Take kelp forests: they not only support fish stocks and absorb carbon from the atmosphere, but also buffer the impact of storms on human settlements, bringing economic benefits estimated at €442,000-€885,000 per kilometre of coastline.3 So those urchin-hunting, kelp-protecting sea otters are doing valuable work.
Globally, experts estimate the sum of “natural services” at $44 trillion, or around 55 per cent of global GDP.4 The collapse of the planet’s ecosystems and the services they support would therefore bring catastrophic economic losses.
While asset owners and asset managers have begun to incorporate climate risk into their portfolios, they have taken longer to wake up to the distinct implications of biodiversity loss. But now, some investors are starting to manage the hazards associated with the destruction of nature – and identifying opportunities that arise from sustainable alternatives. This could be good for both investment returns and the health of the planet.
“The financial sector is an economy’s main mechanism for allocating resources and distributing risks, and it therefore has a critical role to play in addressing the global biodiversity crisis,” says Elizabeth Maruma Mrema, executive secretary of the United Nations’ Convention on Biological Diversity and co-chair of the Task Force on Nature-related Financial Disclosures (TNFD).
Biodiversity depends on complex – and often surprising – connections between animals, plants and the environment. It is now known that wolf packs influence the health of forests and the shape of river systems.5 Minerals in the Saharan sands, blown thousands of miles across the Atlantic, nourish the humid rainforests of the Amazon Delta.6
Human activity is radically disrupting these intricate dynamics. Sir Partha Dasgupta’s landmark Economics of Biodiversity report, commissioned by the UK government and published in February 2021, carried a stark message: “The extent to which we have collectively degraded the biosphere has created extreme risks and uncertainties, endangered our economies and livelihoods, and given rise to existential risks for humanity.”7
Dasgupta outlined how biodiversity underpins “natural capital”, a term that refers to the stock of natural resources that yields a flow of benefits to human beings. Conventional economics does not recognise natural capital in its models, which means humans have been exploiting renewable and non-renewable natural assets – whether they be fossil fuels, redwood trees, sperm whales, or pasturelands – without properly accounting for the impact on other economic assets and services. Natural capital has declined by an astonishing 40 per cent per head since 1992 (see Figure 1).
“Mass extinctions of species over the last century are mostly attributed to the explosion of the human population and intensive use of natural capital via industrialisation,” says Julie Zhuang, portfolio manager of the Aviva Investors Natural Capital Transition strategy. “Exploiting nature in this way has fuelled global GDP growth, but it will lead to damaging economic effects over the longer term, as we lose our life-support systems.”
Figure 1: Global wealth per capita, 1992-2014 (per cent)
Source: ‘The economics of biodiversity: The Dasgupta Review’, February 20218
Slash and burn
The decline of natural capital is becoming an urgent problem for the billions of people in the global south who earn a living directly from crops, forests or fish. According to the UN Environment Programme, 70 per cent of those living in poverty worldwide depend on these natural resources for their livelihoods.
But the impact of biodiversity loss will affect everyone. The COVID-19 pandemic has highlighted both the deep linkages between human and animal life – the virus is thought to have jumped the species barrier from a pangolin or bat, a knock-on effect of habitat encroachment – and the interconnections between global markets and supply chains. Other nature-related risks could soon be rippling across borders in much the same way.
Take deforestation in the Amazon. Around 80 per cent of tree-felling in the region is attributable to cattle-ranching, driven by rising global demand for red meat. Cattle pastures can be disastrous for nature: they increase the risk of fire, cause soil erosion and contaminate aquatic ecosystems.9
But unsustainable cattle farming is not just damaging the Amazon. It also erodes natural capital many thousands of miles further north. Research shows that 20-30 per cent more deforestation in parts of the Amazon would lead to desertification, affecting wind patterns and altering farming conditions in the central United States.10 The damage to nature caused by farming in one part of the world is thereby threatening the viability of crops in another.
Given its combination of local and global effects, it is not surprising that agriculture is the main driver of biodiversity loss. Farming is responsible for 80 per cent of worldwide deforestation, 29 per cent of the world’s greenhouse-gas (GHG) emissions and up to 70 per cent of global freshwater use. Making matters worse, agriculture tends to be massively inefficient.11
One third of the food we produce is lost, illustrating the need to improve production and supply chain efficiency
“The key question is: how do we balance the need to feed people with the interests of the planet as a whole?” says Jonathan Toub, portfolio manager of the Aviva Investors Natural Capital Transition strategy. “While 820 million people on the planet face hunger or food insecurity, one third of the food we produce is lost, either through supply-chain issues or from food simply being thrown away. This illustrates the need to improve the efficiency of agricultural production and supply chains.”
While unsustainable agriculture is the main culprit, many other sectors share blame for biodiversity loss. 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.12 Chemicals companies have allowed their products to leach into watercourses and spread around the world. A toxic substance called PFOA, used by US chemicals giant DuPont in the production of Teflon, is now found in almost every living being on Earth, including the bodies of albatrosses living on remote Pacific islands.13
Due to government policies and mounting consumer pressure, many companies implicated in climate change have started to adjust their operations to reduce carbon emissions. For a mixture of societal, logistical and economic reasons, progress has been slower among companies that damage biodiversity.
There are fewer incentives for companies to curb practices that are harmful to nature
“The destruction of nature has not been seen as an existential crisis in quite the same way as climate change,” explains Eugenie Mathieu, senior impact analyst at Aviva Investors and Earth lead on the Aviva Investors Natural Capital Transition strategy.
“Secondly, while there is a strong economic incentive to reduce energy usage and therefore emissions, there are fewer incentives for companies to curb practices that are harmful to nature. Unfortunately, nature is currently free to exploit. Cutting down trees for new farmland, or releasing battery-chicken effluent into local rivers, is essentially free of charge,” she adds.
Bending the curve: Policy, incentives and financial flows
If we are to put an end to nature-destructive practices, tougher regulation will be a vital first step. In the same way the Paris Agreement aims to limit temperature rises via a coordinated reduction in carbon emissions, policymakers are now trying to “bend the curve” of biodiversity loss through a range of interventions.
COP15 saw more than 100 countries commit to “ambitious and transformative action” on nature
In October 2021, part one of the Conference of Parties to the Convention on Biological Diversity (COP15) took place in Kunming, China. After an introductory address from Chinese President Xi Jinping, delegates thrashed out the details of a “post-2020 biodiversity framework” – an intergovernmental plan to tackle the crisis. The event closed with the Kunming Declaration, which saw more than 100 countries commit to “ambitious and transformative action” on nature, including more protected areas for wildlife and new mechanisms for monitoring, reporting and reviewing biodiversity loss.
There is not yet a recognisable headline target, akin to the Paris Agreement’s 1.5-degree goal, that those seeking a solution on biodiversity can rally behind. Some governments and environmental organisations, including the World Wildlife Fund for Nature, argue for “30 by 30” – the idea 30 per cent of Earth’s land and sea area should be protected by 2030.
The Kunming Declaration “takes note” of the 30-by-30 target and 70 countries, including the US, India and the EU-27 nations, have pledged to meet it as part of a separate High Ambition Coalition for Nature and People.14 The 30-by-30 goal is likely to be high on the agenda at part two of COP15 in the spring of 2022.
Figure 2: Sustainable land use and conservation can help bend the curve on biodiversity
Note: The graphic shows how a mixture of conservation and sustainable land use, via both supply-side and demand-side efforts, could combine to reduce the impact on species, as measured by mean species abundance, or MSA.
Source: ‘Living planet report 2020 - Bending the curve of biodiversity loss’, 202015
Learning the lessons
Though the Kunming Declaration shows political will, governments have missed previous goals set out under the Convention on Biological Diversity, including all of the 2010 Aichi Targets, a set of 20 biodiversity objectives that were meant to be achieved over the last decade.
Mrema, who became executive secretary of the Convention in 2020, says governments can learn from the failure to achieve the Aichi Targets to ensure they deliver on their commitments after COP15. For example, the post-2020 global biodiversity framework aims to do more to support poorer countries monitor and report on biodiversity loss (see Valuing nature: An interview with Elizabeth Maruma Mrema).
Importantly, the Convention now puts greater emphasis on the role of finance and economic incentives in making sure nature is no longer free to exploit. Estimates suggest an additional $800 billion will be required every year to tackle the biodiversity crisis.16 To close the gap, the post-2020 framework recognises the need for policies to redirect financial flows away from harmful activities towards nature-positive ones.
“Companies are too often incentivised to damage the natural world,” says Mathieu. “Fossil fuel producers and the agriculture sector still receive substantial subsidies. Everyone who is making their money directly from exploiting nature should be paying for it.”
Research from the World Economic Forum (WEF) shows governments provide $530 billion a year in subsidies and market-price support for farmers, yet only 15 per cent of these incentives support sustainable outcomes; the rest encourage the overuse of fertilisers and other activities that damage biodiversity.17
Rather than subsidising intensive farming, governments could provide economic incentives for regenerative and precision agriculture, which promises to reduce the impact on land and protect biodiversity while enriching soils and improving yields. A policy to reward farmers with carbon credits for increasing the amounts of carbon sequestered in their soil has successfully been trialled in Australia, for example.18
Reform of finance to align financial flows with biodiversity policies will also be important. In 2019, the world’s biggest banks invested more than $2.6 trillion in sectors that are the main drivers of biodiversity loss. Portfolio Earth, which conducted the study, is calling on regulators to create liability for biodiversity damage and to force financial institutions to disclose biodiversity impacts and stress-test biodiversity risk.19 (Disclosure is already being mandated in some countries: Article 29 of the French law on climate and energy, for instance, requires financial institutions to report biodiversity risks.)
A single “biodiversity tax” is likely to be unworkable due to the complexity of the issue
Unlike carbon taxes, a single “biodiversity tax” is likely to be unworkable due to the complexity of the issue. But governments still have ways to ensure externalities related to biodiversity loss are reflected on company balance sheets: taxes on nature-destructive activities such as fish consumption or travel on cruise ships would help shift corporate behaviour, Mathieu argues. The proceeds could be used to fund natural restoration and protection.
By ensuring firms can no longer damage nature with impunity, governments can tackle the “free-rider” problem and help reward companies doing the right thing. The Business for Nature Coalition, a collaborative initiative that brings together over 100 firms (including Aviva) aiming to reverse nature loss this decade, argues stronger regulation can level the playing field for companies and create a “positive feedback loop” to spur further action.20
“Investors also have a role to play in engaging with policymakers on macro-level policy initiatives, as there are problems the market cannot solve independently,” says Toub. “High-level intergovernmental discussions will shape the playing fields on which all companies operate, and we are working to advocate for improved standards on nature protection.”
Investing in the nature-positive transition: Risks and opportunities
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 or the loss of ecosystem services vital to the value of the companies they invest in. There will also be liability and transition risks associated with changes in laws, policies and consumer behaviour during the shift to a nature-positive economy.
The knock-on impacts of deforestation could lead to declining agricultural yields
The University of Cambridge Institute for Sustainable Leadership has produced a framework for understanding how damage to nature translates into risks spanning a range of asset classes. For example, the authors describe how the knock-on impacts of deforestation could lead to declining agricultural yields, increasing sovereign debt risk among economies reliant on commodity exports (see case study in Figure 3).21
Deforestation also disrupts natural water supplies, impacting the cost base of industries including utilities, agriculture and textiles, potentially affecting the market values and creditworthiness of affected companies. The destruction of ecosystems eliminates genetic material that could have yielded new medicines, potentially impacting the future earnings potential of pharmaceutical companies that rely on natural ingredients to make blockbuster drugs.
Figure 3: Case study - nature-related impacts and financial risks in the agriculture sector
- Physcial risk - ecosystem services at risk due to:
- Climate change
- Invasive species
- Land use change
- Overexploitation of natural resoures
- Transition risk - in response to nature loss
- Liability risk
- Air quality and local climate
- Food and other goods provision
- Habitat intactness
- Hazard regulation
- Water security
- Policy and regulation
- Business model innovation
- Consumer or investor sentiment
- Disruption of activities or value chain
- Raw material price volatility
- Adjustment or relocation of activities
- Pricing exernatilies
- Stranded assets
- Capital destruction
Source: University of Cambridge Institute for Sustainability Leadership, 202122
“In terms of drug discovery, according to some estimates, our planet is losing at least one important drug every two years because of biodiversity loss,” says Sora Utzinger, senior environmental, social and governance (ESG) analyst at Aviva Investors. “Likewise, there is a loss of traditional knowledge on the medicinal use of certain plants and animals, so there is a social angle as well. I don’t think companies are actively managing this risk.”
A recent joint study between the Central Bank of the Netherlands and PBL Netherlands Environmental Assessment Agency quantified how these kinds of risks are already affecting investors. The study found 36 per cent of the assets managed by Dutch financial institutions worldwide, worth €510 billion, were exposed to the physical risks of climate change. The institutions were also found to have provided €97 billion in financing to companies embroiled in nature-related controversies, suggesting they may also be exposed to significant transition risks.23
A similar study from the French central bank found 42 per cent of the value of securities held by French financial institutions came from issuers that were highly or very highly dependent on one or more ecosystem services. The “terrestrial biodiversity footprint” of the securities, a measure of the amount of nature impacted by the relevant companies’ operations, was estimated to be equivalent to the loss of at least 130,000 km² of “pristine” nature – an area around a quarter the size of France.24
Risk mitigation is not the only compelling reason investors have to incorporate biodiversity into their strategies, though. The WEF estimates a nature-based transition will bring over $10 trillion in business opportunities and create 395 million jobs by 2030.25 Companies innovating with new nature-friendly operations and technologies could be set to thrive over the coming years.
In order for investors to identify and act on these risks and opportunities, they first need better data on how companies impact nature, and how biodiversity loss will impact them in turn.
Initiatives such as the TNFD, which is developing a risk management and disclosure framework for organisations to report and act on nature-related risks, should help bring greater transparency.26 Finance for Biodiversity, a group of 26 financial institutions from around the globe that have committed to protect and restore biodiversity through their activities and investments, is also looking into the possibility of standardised measurement approaches.27
Incorporating the available information on nature loss into investment strategies remains challenging
For now, incorporating the available information on nature loss into investment strategies remains challenging. Companies’ effects on nature are numerous and cannot usually be quantified or compared in quite the same way as carbon emissions.
“A beverage company’s key impacts on nature have to do with its packaging, sourcing of ingredients like coffee or cocoa, and water use; a bank’s will be associated with its policies on lending to high-impact industries. It is currently not possible or meaningful to compare a bank with a beverage company using a similar set of metrics,” says Zhuang.
On the plus side, connections between companies’ nature-destructive practices and their own commercial prospects can be more linear and easily identifiable than is the case with climate risk. A big fishing company that wipes out fish stocks will find it harder to bring in a catch, affecting its own commercial viability. A steel company that emits large amounts of carbon is not damaging its own operations in quite the same way.
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, as long as they can connect the dots along supply chains.
Investing in the transition
One way asset managers can navigate through these intricacies is to draw on a range of datasets to build a holistic picture of companies’ risk exposures. The World Benchmarking Alliance, the Climate Disclosure Project, Forest 500, the Zoological Society of London’s Sustainability Policy Transparency Toolkit, the Farm Animal Investment Risk and Return Initiative and the Fashion Transparency Index are some of the initiatives providing data on sector-specific biodiversity impacts.
If companies fail to deliver on their promises, investors can engage with them to improve – or divest when appropriate
This information can inform the basis for strategic decision-making. For example, investors may wish to exclude companies with a significant involvement in the production of pesticides, intensive agriculture or those implicated in environmental controversies, while targeting firms taking steps to address the crisis and stand to perform better through the transition. If companies fail to deliver on their promises, investors can engage with them to improve – or divest when appropriate.
Zhuang cites the example of Adidas. As an apparel company, Adidas is classified as having a high impact on biodiversity, but it is also an industry leader on sustainability, using a high percentage of sustainably sourced materials in its products. The company scored highly in the 2020 Fashion Transparency Index, which tracks environmental components of the circular economy, sustainable materials and sustainable management of natural resources.28
Another example is chemicals company DSM, which is working on solutions including a type of animal feed that reduces methane emissions from cattle by more than 30 per cent. DSM also ranked first in a recent benchmark of 35 chemicals companies’ management of hazardous chemicals29 and has committed to phase out all harmful chemical production by 2025. The company’s executives are appropriately incentivised with compensation linked to the development of eco-friendly products, improved energy efficiency and reduced GHG emissions.
Beyond these transition leaders, companies involved in precision agriculture, sustainable animal nutrition, wastewater management, meat alternatives, the circular economy, plastic reduction or biodegradable materials offer investment opportunities.
Near wild heaven
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.
There is growing evidence that, given a little time and space, nature can bounce back
Consider the example of Gorongosa National Park. Situated in Mozambique, at the southern end of the Great Rift Valley, Gorongosa was once a thriving nature reserve. But in the late 20th century it was devastated during the country’s prolonged civil war. Pristine natural habitats were bombed and set ablaze. Elephants were slaughtered for their ivory. Almost all of the park’s large animals were eliminated.
In the 1990s, financing from the European Union and the African Development Bank helped restore the park’s infrastructure, and since 2004 Gorongosa has been protected and managed by a public-private partnership. Thanks to these interventions, it has undergone a remarkable transformation. Species including buffalo, wildebeest and zebra have been reintroduced, supporting the wider ecosystem and allowing predators such as lions, leopards and African wild dogs to return to the savannah. In 2000 there were only 1,000 large animals in the park; there are now 40,000 and counting.30
Diversity and resilience
Crucially, the collaborative efforts to revive the park included local people, who benefited through healthcare, education and employment programmes. Among these initiatives was the creation of a new shade-grown coffee plantation in the mountains above the park, providing jobs and protecting trees that were previously felled to produce maize crops. The trees, in turn, hold the soil together so it absorbs more moisture, regulating the flow of water into Gorongosa.
The same connections and feedback loops through which biodiversity is damaged also work in the other direction
It seems the same connections and feedback loops through which biodiversity is damaged also work in the other direction, with the return of species and regrowth of habitats catalysing rapid progress across ecosystems. Carroll says the rejuvenation of Gorongosa demonstrates nature’s resilience and provides grounds for hope that human beings can reverse biodiversity loss.
“This is happening all over the world, in lakes, rivers, landscapes, farms. There are many opportunities to give nature a chance to come back. What’s exciting is that things can change dramatically in five, ten or 15 years. The reward of doing this work is that nature comes back almost in real time, before our eyes,” he says.
“What is holding us back is not money: it’s a little bit of knowledge, a little bit of will, and a little bit of figuring out how you balance the sometimes-conflicting interests that may be out there; the development interests, say, against the long-term sustainability interests. But I don't think these are impossible puzzles to solve.”