Natural Capital – Biodiversity, a material risk for investors
Mamadou-Abou Sarr, CIFD
President at V-Square Quantitative Management & V-Shares ETFs | Knight of the Order of Arts and Letters (Chevalier de l’ordre des Arts et des Lettres) | French Foreign Trade Advisor | Board Member I Professor I CIFD
May 12, 2023
Although the E of ESG has been centered on climate so far, we must remember that environmental issues also include water management, waste and pollution, and natural capital or biodiversity. Those topics, particularly the risks to the financial system posed by biodiversity loss, are making their way to investors’ agenda as awareness grows.
Biodiversity is defined by the United Nations Convention on Biological Diversity as "the variability among living organisms from all sources, including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part: this includes diversity within species, between species and of ecosystems". Alas, biodiversity has been declining at an alarming rate due to human activity. The World Wildlife Fund (WWF) reports for example that the population of vertebrate species fell by 68% on average worldwide between 1970 and 2016.
Furthermore, biodiversity loss varies by region, with Latin America and the Caribbean having seen the biggest drop in diversity at 94 according to the WWF. The scientific community cites species habitat destruction, overexploitation of natural resources, invasive species, pollution (marine and land), and the emission of greenhouse gases resulting in climate change as the biggest threats to ecosystems. Changing and unstable ecosystems affect the global economy and, in turn, to investors. Companies are being impacted by biodiversity loss and their business behavior is being increasingly scrutinized.
Governments are issuing new regulation and investors are taking action. Analogously to the Task Force on Climate-Related Financial Disclosures (TCFD) for climate, the Task Force on Nature-related Financial Disclosures (TNFD) is developing a risk management and disclosure framework so organizations can report and act on evolving nature-related risks. Biodiversity risks for investors – faced directly and indirectly – can be broken down into physical risks, transition risks, litigation risks, and systemic risks, in the same vein as how climate risk are approached.
Biodiversity and climate change are two interlinked emergencies: climate change causes biodiversity decline and in turn, biodiversity loss destabilizes the ecosystems and drives climate change.
Addressing the biodiversity loss is essential for limiting climate change. In fact, land, forests, oceans are the largest natural carbon sinks, i.e., they help remove half of the greenhouse gas emissions produced by human activity from the atmosphere. They effectively provide nature-based solutions to climate change. For example, protecting, managing, and restoring forests that still represent 30% of the planet’s land, offers roughly two-thirds of the total mitigation potential of all nature-based solutions. Improving nature’s ability to absorb emissions is another welcome tool to fight climate change.
1 World Wildlife Fund (WWF) Living Planet Report 2020.
2 World Wildlife Fund (WWF) Living Planet Index (LPI).
3 Task Force on Climate-related Disclosures.
Climate Science Made Simple
Hydrogen – Not All Hydrogen is created Equal
Hydrogen is the most abundant chemical element on our planet and is a promising solution for reducing emissions in hard-to-abate sectors like shipping, as it does not emit any planet-warming gases when burned. However, producing hydrogen can be environmentally damaging if fossil fuels are used. To avoid this, the world rather needs "green hydrogen," which is made by splitting water using renewable energy. There are two other types of produced hydrogen: "grey" and "blue," which both involve the use of fossil fuels but vary in their carbon emissions. Grey hydrogen is the least sustainable option as it only uses polluting fossil fuels, while blue hydrogen is a transitional option that still burns fossil fuels but also reduces carbon emissions through carbon capture and storage. Green hydrogen is the most sustainable option, but it is currently more expensive to produce than the other types.
Hydrogen has great potential as a sustainable energy source, but it is still costly to produce, store, and transport, and many industries are not yet equipped to use it. Nevertheless, the situation could change with the introduction of significant subsidies for hydrogen from the US climate bill, potentially paving the way for wider adoption of hydrogen as a sustainable energy solution.
Disclosure
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President at V-Square Quantitative Management & V-Shares ETFs | Knight of the Order of Arts and Letters (Chevalier de l’ordre des Arts et des Lettres) | French Foreign Trade Advisor | Board Member I Professor I CIFD
