Back to nature

Why we must act now on the biodiversity crisis

Policymakers, businesses and financial institutions are beginning to acknowledge the risks associated with biodiversity loss, along with the opportunities from nature-positive solutions.

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
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.

Related views

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805.  Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ.  Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583. In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 27, 101 Collins Street, Melbourne, VIC 3000 Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas LLC ("AIA") is a federally registered investment advisor with the US Securities and Exchange Commission. AIA is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our Privacy Policy.