A month ago, GreenBiz invited me to write about natural capital to help educate readers about this emerging area of finance. In that article, I introduced the topic to readers and explained how much we depend on nature (about half of global GDP depends on nature), introduced the concept of planetary boundaries and discussed how we need to do a better job of valuing nature if we are to protect our future. But wait, there’s more.
Earlier this month, CFA Institute published the report I wrote titled "Integrating Natural Capital and Biodiversity in the Investment Process." The report aims to provide investors, companies and policymakers the tools they need to better value natural capital. The recommendations include:
- Increased education – More training to better value natural capital and biodiversity
- Enhanced natural capital expectations in analyst reports – More analysis on natural capital included in valuation models and sell-side research
- Increased development and disclosure of natural capital metrics – Development of national and international standards for measuring and monitoring natural capital
- Bringing in the experts – Bringing natural capital and biodiversity experts to the table to create standards, analysis and policy
- Engagement with companies on physical and transitions risks around natural capital issues – Dedicating time and resources to engagement around natural capital issues
- Advocating for policy that compliments investor efforts – Support from investors, companies and civil society toward policies that value and protect natural capital
An example of what happens when we ignore natural capital
A recent report by the World Wildlife Fund showed that the size of global wildlife population has fallen by 69 percent since 1970. We aren’t doing a very good job of protecting nature’s bounty. In fact, we have pushed much of earth’s animal population aside to make way for the animals we eat.
Currently, about 60 percent of mammals on earth are livestock; 36 percent are humans, and only 4 percent are wild animals. The bird population of the world offers a similar extreme case; as 70 percent of birds on earth are chicken or poultry, while only 30 percent are wild.
These statistics show that we are sacrificing the diversity and variety of nature for those species that suit our way of life. This has a cost. The protein we raise to eat, particularly livestock, are large users of land, water and other precious resources, and make a significant contribution to greenhouse gas emissions. This isn’t an plea for a vegetarian or more plant-based diet, just an analysis of the facts. Our reshaping of the animal kingdom to accommodate the diets of mainly developed countries has reshaped our world in a way that will ultimately harm us and our ability to survive on earth.
This imbalance in the animal kingdom population is unsustainable. Such a system puts unsustainable strains on our land, water and air natural resources. A move to less animal proteins in our diets is one possible solution that would have benefits for land use, water resources, and could help mitigate the climate crisis.
The tools to help are being developed
The emphasis on measuring and managing natural capital resources has lagged investor and public interest in climate change. However, several forces are working to close that gap; including policymakers in both Europe and the United States, as well the Taskforce on Nature Related Financial Disclosures (TNFD). The TNFD recently released the latest version of the TNFD framework for managing and measuring nature-related risks. I invite all interested parties to read the TNFD draft standard and offer constructive comments. The recommendations follow a similar framework as those development by the Taskforce on Climate-related Financial Disclosures (TCFD), which have become the baseline for investor and company disclosures around climate change. The TNFD aims to publish a final standard for nature related disclosures in September for market adoption.
The International Finance Corporation (IFC) has also developed a natural capital resource for investors. The IFC recently released a Biodiversity Finance Reference Guide. This guide builds on Green Bond Principles and the Green Loan Principles and provides a list of investment projects, activities and components that can help protect, maintain or enhance biodiversity and ecosystem services, as well as promote the sustainable management of natural resources.
COP27? Don’t forget COP15
COP15 is the 15th meeting of the Conference of the Parties to the UN Convention on Biological Diversity (CBD). The two-week event takes place Dec. 9-19 in Montreal, Canada. The conference will be the largest biodiversity-focused conference to date, with participating countries attempting to agree on future measures that can protect and restoring nature. Anyone who is interested in the progress of natural capital as a global issue should pay attention to the developments at COP15.
The investment world looks to have a big presence at COP15. The UNEP Finance Initiative (UNEP FI), the Principles for Responsible Investment (PRI) and the Finance for Biodiversity Foundation have issued a joint statement calling for the adoption of an ambitious Global Biodiversity Framework (GBF) at COP15.
These organizations are calling on governments to provide an agreement that creates the clarity and action to align economic actors, including finance, to halt and reverse nature loss and contribute to nature-based solutions to climate change, a fair and just transition, and other sustainable development challenges.
You will hear more about natural capital
As the impacts of climate change and biodiversity loss become more pronounced, the issue of natural capital will move to the front of investor’s minds.
Ten years ago, we were just beginning to see one or two ESG breakout sessions at global investment conferences. Today, whole conferences and for better or worse, whole industries are focused on ESG. Expect a similar journey for the integration of natural capital in the investment process. There will be many advancements in disclosure, false starts in tracking metrics, policy initiatives to better track biodiversity, as well as the inevitable "nature washing" of investment products and corporate actions.
The interest in natural capital will only increase as investors and society demand that companies and policymakers properly value natural capital and biodiversity. More financial attention on these issues means that understanding natural capital and how to put a value on biodiversity will only increase in importance. Start studying.