Finance must wake up to the risks associated with biodiversity loss and the opportunities that arise from nature-friendly solutions, argue Eugenie Mathieu, Julie Zhuang and Jonathan Toub.

Read this article to understand:

  • The business risks associated with biodiversity loss
  • How investors can engage with policymakers and companies to tackle the destruction of nature
  • The investment opportunities that derive from nature-positive activities

The erosion of “natural capital” – a phrase that refers to the world’s stock of natural assets, including all living things, but also air, water, geology and soil – presents big financial risks.

Estimates suggest 55 per cent of global GDP, around $44 trillion, is dependent on high-functioning biodiversity and ecosystem services. The destruction of nature therefore threatens companies in a range of industries.1

On a more positive note, some firms are discovering commercial opportunities by proactively greening their operations and devising nature-friendly solutions.

In this Q&A, the team leading Aviva Investors’ Natural Capital Transition strategy, senior impact analyst Eugenie Mathieu (EM), and portfolio managers Julie Zhuang (JZ) and Jonathan Toub (JT), discuss the implications of these trends for investors.

The financial community is beginning to recognise the negative impact humanity is having on nature. Why now?

JZ: Natural disasters have become more frequent over recent decades. Take the Amazon forest fires or the wildfires in California, for instance. These events show the extent to which we have underestimated the erosion of our natural capital and the risks that result. Investors are also starting to appreciate some of the opportunities that come from better management of environmental risks through biodiversity policies.

JT: As investors have integrated climate risk into their portfolios, and looked into potential solutions to climate change, they have become much more aware of the interaction between healthy ecosystems and the climate. Investors also have more information on nature loss than ever before.

Has your research uncovered any particular insights to highlight the vast scale of the human impact on nature? 

Exploiting nature in this way will lead to damaging economic effects over the longer term

JZ: The data on the Sixth Great Extinction of animal species is shocking. According to the World Wildlife Fund’s Living Planet Report, there has been an average decline in wildlife populations of 68 per cent since 1970.2

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.

Which industries are most accountable for biodiversity loss?

JT: The WWF report shows agriculture is responsible for 70 per cent of terrestrial biodiversity loss. The industry is also responsible for 80 per cent of global deforestation, 29 per cent of the world’s greenhouse-gas (GHG) emissions and up to 70 per cent of global freshwater use.3

The key question is: how do we balance the need to feed people with the interests of the planet as a whole? Rather than more intensive farming, we need precision and regenerative agriculture, with more efficient use of fertilisers and irrigation, for example. We also need to reduce food waste.

Other than avoiding industries that harm nature, like intensive farming, how else can investors ensure portfolios are resilient to the risks associated with biodiversity loss?

JZ: Investors can allocate capital to transition leaders in their respective industries and engage with them to move even further and faster. Companies doing the right thing now should outperform in the long run.

Investors can seek out innovative companies that directly protect nature

Investors can also seek out innovative companies providing products or services that directly protect nature or lessen the harmful impact of human activity. Companies involved in precision agriculture, sustainable animal nutrition, wastewater management, meat alternatives, the circular economy, plastic reduction or biodegradable materials could represent potential investment opportunities.

JT: 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. 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.

As investors pay more attention to ESG, are nature-friendly companies attracting a “green premium”?

JZ: There is a green premium attached to some early-stage technology companies working on nature-positive solutions. But over a long-term investment horizon, the opportunities related to, say, biodegradable plastics or meat substitutes could be greater than is currently reflected in share prices.

In many cases, companies’ improving management of biodiversity and environmental risks is currently underappreciated by the market. Companies involved in testing, inspection and certification of natural capital tend to get overlooked, for example, despite facilitating better standards in biodiversity risk management globally.

Could you say a little more about the challenges involved in collecting and analysing data on natural capital?

JZ: It can be difficult to measure a company’s impact on its natural environment, as there is no single metric – as with carbon emissions – that will give you all the information you need.

There is no single metric to measure a company’s impact on its natural environment

Comparison across companies is also challenging. For example, 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.

Investors therefore need to gain a picture of relevant risks on a sectoral basis, collecting data from a variety of sources. We have a proprietary transition risk model that draws on many different datasets to build as complete a picture as possible.

EM: We are seeing progress on industry-wide initiatives to improve and standardise the data available. For example, the Task Force on Nature-related Financial Disclosures (TNFD) is developing a framework, similar to that of the Task Force on Climate-related Financial Disclosures (TCFD), to provide a more accurate picture of companies’ impact on nature and inform better risk management. This is a positive step.

One of the points made in the 2021 Dasgupta Review, The Economics of Biodiversity, is that we must serve as “judge and jury for our own actions”.4 To some extent, asset managers will be the judge for savers and pension holders. Do you see your role in those terms?

JT: It’s exciting that biodiversity is now being recognised in our industry. But there are many nuances to be aware of. I agree our role is to help clients invest sustainably by identifying companies we believe to be leading on reducing their and their customers’ impacts on nature, but to do that we really need to understand the intricacies involved; that’s why good data is so crucial.

Investors in natural capital need to focus on their dual mandate

JZ: To protect their credibility and integrity, investors in natural capital need to focus on their dual mandate: deliver a positive outcome for nature as well as driving investment returns. If investee companies make promises but don’t deliver on them, for instance, it is important to look at engagement or time-bound divestment.

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.

Emerging markets risk

The strategies invest in emerging markets; these markets may be volatile and carry higher risk than developed markets.

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