Biodiversity: The next big focus for investors?

In this article, Heidi Ridley and Kathryn McDonald — co-founders of Radiant ESG, an ESG-focused consulting firm — consider why investors should make biodiversity their focus.

 

There is no denying that natural capital — renewable and non-renewable natural resources like plants, animals, soils, minerals and water, from which humans derive a wide variety of services — is critical to our economic wellbeing.

According to the World Economic Forum, more than half of the world’s GDP ($44trn) is moderately or highly dependent on nature and its services. But we are exhausting the resource that is nature at an unsustainable rate.

In an especially troubling finding, TheDasgupta Review found that the “stock of natural capital per person declined by nearly 40% between 1992 and 2014”.  Furthermore, the Review stated that the demands we put on nature far exceed its capacity to supply us with goods and services, estimating that we would require 1.6 Earths to maintain the current world’s living standards.

“According to the World Economic Forum, more than half of the world’s GDP ($44trn) is moderately or highly dependent on nature and its services. But we are exhausting the resource that is nature at an unsustainable rate”

 

At the heart of natural capital is biodiversity, widely defined as the variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are a part. This includes diversity within species, between species and of ecosystems. It represents the living portion of natural capital.

Historically, an individual company’s behaviour with respect to biodiversity preservation or destruction was simply seen as a reputational issue — a gold star or a black eye, noted only by so-called green investors.

However, it is increasingly obvious that biodiversity loss has serious financial knock-on effects for companies in the form of missing or more costly raw materials, supply chain interruptions, reduced crop yields, and even the collapse of ecological systems and political unrest.

“However, it is increasingly obvious that biodiversity loss has serious financial knock-on effects for companies in the form of missing or more costly raw materials, supply chain interruptions, reduced crop yields, and even the collapse of ecological systems and political unrest”

 

In addition, the diversity in biodiversity makes ecosystems more resilient in the face of shocks, even those related to climate change. The ability of mangroves to protect communities from storm surges or peat bogs to act as effective carbon sinks are good examples of complex living systems adding to resilience. We are just now at the beginning of efforts to properly value biodiversity. 

There has been considerable focus on finite and inanimate resources like fossil fuels and minerals in recent years — both with respect to their depletion and the consequences of their use. The existential threat posed by climate change has merited the all-hands-on-deck approach that we see presently.

Until recently, there has been far less effort put into understanding and valuing our living world.  Thankfully, we’re seeing investors starting to awaken to the risks of ignoring the biodiversity crisis, and the potential for positive impact by adopting strategies that seek to bring solutions.

In a recent survey by Credit Suisse and Responsible Investor of 327 institutional investors from 35 countries, 55% said they believe that biodiversity loss needs to be addressed in the next 24 months, with 67% addressing it “to some extent” in their portfolios (most often through engagement and negative screening).

Standards setters are also starting to get on board in earnest.

For example, in September 2020, the Task Force on Nature-related Financial Disclosures working group was launched, inspired by the efforts of the Task Force on Climate-Related Financial Disclosures. This new organisation is made up of investors, government bodies, regulators and other stakeholders, who will work towards creating a framework to assess and report on nature-related risks and impact, improving data and metrics for investors.

Much like climate risk, biodiversity risk is more acute for some industries than others. Viewed from the perspective of dependence, companies in the agriculture, food/beverage, apparel/textiles and pharmaceuticals industries face outsized risks. From the perspective of impact, agriculture, mining, transport and energy have all done considerable harm to biodiversity. 

“The financial sector is also at risk with respect to its indirect dependence (via clients), but its impact on biodiversity may be positive or negative, depending on what is funded or insured”

 

The financial sector is also at risk with respect to its indirect dependence (via clients), but its impact on biodiversity may be positive or negative, depending on what is funded or insured.

The industries that are at the greatest direct risk from biodiversity loss will experience intense pressure to evolve their practices if they are to survive (in a similar way to what we’re witnessing now with respect to the biggest CO₂ emitters). And those with indirect exposure will need to think carefully about their dependencies if they are to remain competitive.

Importantly, there will be opportunities for companies willing to step forward with nature-positive solutions — witness the dramatic rise of meat alternatives.

At Radiant ESG, we see biodiversity occupying the same space as climate did five or even 10 years ago. A large swathe of investors, lenders and insurers, government institutions, non-governmental organisations, regulators and standards setters have woken up to the fact that biodiversity underlies our economy in ways that many never stopped to imagine.

“At Radiant ESG, we see biodiversity occupying the same space as climate did five or even 10 years ago. A large swathe of investors, lenders and insurers, government institutions, non-governmental organisations, regulators and standards setters have woken up to the fact that biodiversity underlies our economy in ways that many never stopped to imagine”

 

We can model our approach to biodiversity on our approach to climate change, leveraging lessons learned, including the economic benefits of taking immediate action.

For investors, the takeaway is clear: biodiversity should be our next big focus. As we have seen with climate, companies that lead on biodiversity should have an advantage relative to their peers, given the overwhelming importance of biodiversity to the existence of companies, our economy and, of course, ourselves. 

 

This article was written for Opto by Heidi Ridley and Kathryn McDonald, co-founders of Radiant ESG. To read more insights from Radiant ESG, visit their site here.