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
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.1 Numerous species have disappeared altogether in what has been dubbed the sixth mass extinction.
This 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.
Globally, experts estimate the sum of “natural services” at $44 trillion, around 55 per cent of global GDP.2 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.
Connections
Biodiversity depends on complex – and often surprising – connections between animals, plants and the environment. Human activity is radically disrupting these intricate dynamics.
“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,” says Julie Zhuang, portfolio manager of the Aviva Investors Natural Capital Transition strategy.
Figure 1: Global wealth per capita, 1992-2014
Source: ‘The economics of biodiversity: The Dasgupta Review’, February 20213
COVID-19 has highlighted 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.
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.4
Meanwhile, the energy industry devastates ecosystems and provides the raw fuel that powers climate change, the main threat to wildlife over the longer term.
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.
Policy, incentives and financial flows
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.
In October 2021, part one of the Conference of Parties to the Convention on Biological Diversity (COP15) took place in Kunming, China. 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.
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.
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.5 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.
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.
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.6
“Investors have a role to play in engaging with policymakers on macro-level policy initiatives, as there are problems the market cannot solve independently,” says Jonathan Toub, portfolio manager of the Aviva Investors Natural Capital Transition strategy. “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
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.
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 2030.7 Companies innovating with new nature-friendly operations and technologies could be set to thrive over the coming years.
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.
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.8
Companies involved nature-positive in industries could represent potential investment opportunities
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.
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.
