To coincide with World Environment Day and the launch of the UN Decade on Ecosystem Restoration, we examine the increasing importance of biodiversity within the investment agenda.
What is Biodiversity and why is it important for investors?
Biodiversity, put simply, is the variety of living things - plants, animals and micro-organisms that make up our natural world (otherwise known as natural capital). Natural capital is fundamental to the economy and human life on earth, providing us with vital services (ecosystem services) such as, fuel, water and shelter as well as supporting billions of livelihoods, such as through agriculture; and helping to mitigate the effects of climate change through, for example, carbon sequestration. The loss of biodiversity destabilises these ecosystem services creating risks for both businesses and society.
However, as humans, our activities are putting increasing pressure on the planet and the natural resources we so vitally depend on. According to WWF's Living Planet Index, the populations of mammals, fish, birds, reptiles, and amphibians declined 60% between 1970 and 2014. In addition, The UN Decade on Biodiversity came to a close in 2020 without achieving a single target set out by world leaders in Nagoya, Japan in 2010. The 20 Aichi Biodiversity targets intended to slow the destruction of the natural world; however, it is clear there is still a long way to go. With one estimate suggesting an investment of USD$ 967billion is needed each year to reverse the decline of biodiversity by 2030, it is clear stronger global commitments and action is called for, including from those in the investment community.
Attention needs to be paid to which corporate activities rely upon natural resources to produce goods and services, and how they contribute to a decline in biodiversity. In a similar way to climate change, the loss of biodiversity and ecosystem services presents risks to businesses including: physical, transition, litigation and regulatory, and systemic risks, all of which have the potential to affect investment value within different timescales.
On the other hand, taking action for biodiversity can offer opportunities. By protecting and paying attention to issues related to biodiversity, the private sector can reduce the above risks and drive positive biodiversity outcomes. The benefits of such action can include reduced reputational risks; positive improvements in the state of biodiversity in local areas of operation resulting in value creation; decreased costs from reducing the need for inputs to counter biodiversity degradation; brand enhancement through the implementation of conservation initiatives and increased attention from the responsible/ESG investment community.
Rising up the Agenda
Thankfully, biodiversity is rising up the agenda. It is projected to be one of the most important topics in the investment world by 2030 for a number of reasons:
- Biodiversity and its impacts are being explained in more digestible ways.
- The effects of biodiversity loss are real and being evidenced.
- The Covid-19 pandemic has been linked to the destruction of wildlife and ecosystems, and has further highlighted the link between human interaction and the natural environment.
- Economists are beginning to quantify the size of the issue - more than half of the world's GDP, around USD 44 trillion, is moderately or highly dependent on nature and its services, according to the World Economic Forum.
Obstacles to action
Although, issues of biodiversity are increasingly on investors' agendas, a number of obstacles are often cited as the reasons for inaction. These include but are not limited to: a lack of data and comprehensive metrics; a lack of internal expertise and knowledge of the topic and the fear it will harm investments.
What action can investors take now?
The lack of data and metrics to account for biodiversity is a legitimate challenge. Biodiversity is complex and not easily quantifiable or comparable across geographies and industry sectors. Progress, however, is being made in the development of standardised disclosures and targets (more on this in the next section). But, in the meantime, there are actions investors can start taking now to address biodiversity such as:
- Develop an understanding of biodiversity and build internal capacity to ensure awareness of the importance of biodiversity.
- Understand portfolio exposure to different types of risks - geographic and sector specific risk i.e., where are companies operating and sourcing from and/or what sectors are most impacted.
- Make use of current datasets and resource tools that are available, such as:
- Indicate to companies that it is an issue that is being considered. Challenge companies to disclose information on their biodiversity impacts and dependencies and encourage the implementation of the Mitigation Hierarchy (avoid, minimise, restore, adopt actions for positive outcomes).
What's in the pipeline?
In much the same way as their climate counterparts, the following initiatives, through the development of standardised disclosures and targets, aim to further help financial institutions and companies to take nature into account.
- The Taskforce on Nature Related Financial Disclosures (TNFD) - Its goal, much like the Taskforce on Climate-related Financial Disclosures (TCFD), is to provide a standardised framework for financial institutions and corporates to assess, manage and report on their dependencies and impacts on nature, enabling them to take nature into account. The Taskforce is currently in the research and development phase, but aims to have a finalised TNFD Framework ready for dissemination in late 2023.
- The Science Based Targets Network (SBTN) is creating methods and tools for companies and cities to set integrated targets for freshwater, land, oceans, biodiversity, climate. It builds on the momentum of the Science Based Target Initiative which set carbon emission reduction targets in line with the Paris Agreement goals. Companies that set targets for both nature and climate will make it easier to address both issues at once as nature loss is worsening climate change and vice versa. The targets will be available at the end of 2022.
- Carbon Disclosure Project (CDP) and BNP Paribas have recently announced a partnership to develop a common biodiversity corporate reporting metric by 2022-23. The aim is to accelerate corporate environmental disclosures and enable biodiversity conscious investment decision making based on reliable data.
Whilst these initiatives are developed, investors can get a head start by using the resources and datasets that are available, to understand the impact and dependencies their portfolios have on biodiversity and encourage action towards positive outcomes for nature. There will be plenty of conversation and collaboration on biodiversity this year with the launch of the UN Decade on Ecosystem Restoration and the upcoming Convention on Biodiversity COP15 in Kunming China in October 2021 that will set out the Post-2020 Global Biodiversity Framework. As these events aim to mobilize the world to act to protect and restore nature, it is vital that financial institutions recognise the need to play their part if we are to prevent another ‘lost decade for nature'.
References
https://www.brighttalk.com/webcast/14001/471576?utm_campaign=communication_missed_you&utm_medium=email&utm_source=brighttalk-transact&utm_content=webcast
https://ri-uk-2021.responsible-investor.com/talks/plenary-4-how-can-uk-institutional-investors-back-government-policy-to-mitigate-the-cost-of-biodiversity-loss-and-damage-to-ecosystems/
https://www.responsible-investor.com/reports/responsible-investor-and-credit-suisse-or-unearthing-investor-action-on-biodiversity
https://www.unpri.org/sustainability-issues/environmental-social-and-governance-issues/environmental-issues/biodiversity#download
https://www.unepfi.org/wordpress/wp-content/uploads/2020/06/Beyond-Business-As-Usual-Full-Report.pdf
https://www.rspb.org.uk/about-the-rspb/about-us/media-centre/press-releases/review-our-world/
https://livingplanet.panda.org/en-gb/
https://tnfd.info/
https://sciencebasedtargets.org/
https://news.un.org/en/story/2020/09/1072292
https://www.theguardian.com/environment/2020/sep/15/every-global-target-to-stem-destruction-of-nature-by-2020-missed-un-report-aoe
https://www.dw.com/en/coronavirus-pandemic-linked-to-destruction-of-wildlife-and-worlds-ecosystems/a-53078480
https://www.institutionalassetmanager.co.uk/2021/05/19/300489/bnpp-am-and-cdp-partner-develop-biodiversity-reporting-metrics
https://www.cisl.cam.ac.uk/business-action/business-nature/natural-capital-impact-group/doing-business-with-nature/business-and-biodiversity