Why Biodiversity Is Moving to Top of Mind for Investors
February 2022
Biodiversity, or the variety of life on earth, is declining and is projected to deteriorate faster and further if humans fail to change the status quo. Forestry, agriculture, energy extraction, fisheries, and fashion are just a few of the industries causing damage to ecosystems that we rely on and, in some cases, the damage may be irreparable. A continued loss of biodiversity could lead to environmental destabilization and, ultimately, ecological collapse. Such damage to the ecosystems we depend on to provide pollination, clean water, carbon sequestration, and even protection against infectious disease would almost certainly cause wide-reaching economic consequences for most investors.
Several leading economists say that the value of natural resources and processes is not adequately accounted for in political and economic policy, and therefore, there is insufficient investment in protection and management. Edward Barbier, an economist at Colorado State University, believes that adding a price tag to "ecosystem services” could help financial institutions account for environmental and financial risks. Likewise, Partha Dasgupta, an economist at the University of Cambridge, says that to truly pay for what they consume, countries will need to monitor and publish an inventory of their nature-based assets. This measurement of natural capital could be used to evaluate investment projects and assess the sustainability of economic programs.
The conversation is moving from theoretical to actionable as world leaders negotiate global ambitions and develop new disclosure frameworks. As the specific risks and opportunities from this focus on biodiversity become clearer, the implications for companies and investors will grow. Similar to the COP26 meeting in Scotland that was focused on climate change, the world’s governments will convene in Kunming, China, for part two of the UN Biodiversity Conference (COP15) in April 2022. The purpose of the gathering is to finalize a new accord to halt or even reverse the loss of the planet’s plants, animals, and ecosystems and to create protocols for sharing equitably the benefits from the use of nature.
While the ultimate aim of COP15 is to enable "living in harmony with nature” by 2050, the focus of the meeting will be on achieving more immediate actions, or "milestones.” The 2030 milestones are meant to be targets for getting to net zero biodiversity loss and include the following standouts, among others:
Conserve at least 30% of global land and sea areas
Redirect, repurpose, reform, or eliminate incentives that are harmful for biodiversity
Increase by $200 billion international financial flows from all sources to developing countries
COP15 aims to do for biodiversity what the Paris Agreement did for climate change, and momentum is building. Just a few examples:
Last year, world leaders from countries that contain close to 85% of the world’s forests agreed to end and reverse deforestation by 2030.
Dozens of countries have pledged to protect 30% of the planet’s land and oceans.
A rush of signatories have added their names to the Climate Disclosure Standards Board’s Finance for Biodiversity pledge, a guide for companies seeking to disclose biodiversity risks and opportunities, with the goal of reversing nature loss by 2030.
HSBC launched the world’s first major biodiversity benchmark.
According to a study by the Paulson Institute, in order for COP15 to be successful, total annual investment flows into biodiversity conservation should rise from roughly $140 billion to $700 billion, a five-fold increase from current levels. Reforming—or redirecting—environmentally harmful subsidies may be the biggest opportunity to close this funding gap (Exhibit 1).
Biodiversity and the Bottom Line
Biodiversity is already having a material impact on economic activity. Research by the World Economic Forum suggests that an estimated $44 trillion of global value generation (more than half of the world’s GDP) comes from industries that are highly ($13 trillion) or moderately ($31 trillion) dependant on nature.
Evidence also suggests that biodiversity can act as a first line of defense against infectious disease outbreaks, meaning that regions with a more monolithic array of species may be more prone to damaging outbreaks. As COVID-19 has taught us, the spread of contagious diseases has the potential to disrupt business operations and global supply chains.
Biodiversity is intertwined with more than one systemic risk. Deforestation is the single largest cause of biodiversity loss, but also has clear implications for ameliorating carbon emissions, the dangers of which have been well discussed in many forums. While risks of biodiversity loss vary by sector, some areas are particularly vulnerable, including construction, agriculture, and food and beverages.
However, taking action against biodiversity loss can be a source of new opportunities. The World Economic Forum suggests that companies that develop nature-positive solutions to protect biodiversity have the potential to create $10 trillion in business opportunities and 395 million new jobs by 2030.
Regulations—and Risks—Tasked for Success
In June 2021, G7 nations committed to halting and reversing biodiversity loss, pledging to embed appropriate considerations into their economic and financial decision-making. New regulations and tools to institute them are already emerging:
Taskforce on Nature-Related Financial Disclosures (TNFD): Following the same path as the Taskforce on Climate-Related Financial Disclosures (TCFD), the goal of TNFD is to develop and deliver a global risk management and disclosure framework for organizations to report and act on evolving nature-related risks. The framework is intended to ultimately support a shift in financial flows toward nature-positive outcomes.
The worldwide adoption of a framework that aggregates information on nature-related reporting could promote stronger strategic planning, risk management, and asset allocation decisions.
Lazard Asset Management has joined the TNFD Forum, lending advisory expertise in the development of the framework.
Sustainable Finance Disclosure Regulation: A set of rules in the European Union that aims to make it easier for financial market participants to compare and understand the sustainability and biodiversity profile of investment funds.
The regulations focus on pre-defined metrics for assessing the environmental, social, and governance outcomes of the investment process with emphasis placed on disclosure, including rules that must identify any harmful impact made by investee companies.
Article 29 of France’s Energy and Climate law: All financial institutions are required to disclose biodiversity-related and climate-related risks (as per the European Union taxonomy), using the concept of double materiality, which is the idea that sustainability issues can create risks and opportunities that are material from a financial perspective, an impact perspective, or both.
Financial institutions will have to disclose their strategies for reducing biodiversity impacts, including specific targets and measurements of alignment with international biodiversity goals.
Quickly becoming the gold standard for decarbonization, science-based targets (SBTs) for nature-related goals are increasingly influential and we expect specific protocols to be well developed by the end of 2022. Over the coming year, we expect rules for how companies use land, ocean, freshwater, and biodiversity to be finalized, which should help protect shared natural resources. While similar to targets set for carbon emissions, it is important to make the distinction that nature-based targets will be specific to the threats individual places face.
A Good Conversation to Have
We expect biodiversity loss, like climate change and global warming, to be an increasingly important source of risks—and opportunities—for investors. We believe that fallout from ecosystem destruction has the potential to materially impact global finance, transforming business operations, economies, and societies alike. We also believe that understanding the systemic risks associated with biodiversity loss and working to mitigate the damage is likely to become a mainstay of investment planning and preparation.
AUTHOR
Olivia Tidd
Research Analyst, Sustainable Investment & ESG
