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Two Steps Forward

Why investors are betting on biodiversity

They understand that biodiversity is a fundamental component of long-term business success.

Money & nature

GreenBiz photocollage, via Shutterstock

Those of you whose memories still stretch all the way back to the beforetime — January and February — may recall that 2020 was to be a "super year" for biodiversity. Plans called for several global events focusing on the role of nature in mitigating the climate crisis, protecting us against the next pandemic, ensuring adequate food and water, promoting sustainable development and, in essence, maintaining the global economy.

Of course, things didn’t quite work out that way. Those mega-events largely have been canceled or postponed, but the focus on biodiversity, including its role in the world’s economic system, continues to grow, adapt and evolve, much like natural systems themselves.

It won’t be long until biodiversity becomes yet another mainstay of shareholder proposals during annual meeting season.

Case in point: The past year has brought a burgeoning interest among mainstream investors about the role of biodiversity in mitigating corporate risk.

Why, you ask? There’s an extinction crisis in progress, and it stands to negatively affect firms across a range of sectors. Companies, after all, rely on countless species, genes and ecosystem services as critical inputs. They also rely on healthy ecosystems to treat and dissipate waste, maintain fertile soil and ensure water and air quality, as well as the health and well-being of their employees, suppliers, customers and communities.

Trillions, with a T

Investors get this. They understand that biodiversity is a fundamental component of long-term business success.

And we’re talking real money — and real material outcomes. A 2020 report from the Global Futures initiative — a partnership of WWF, the Global Trade Analysis Project and the Natural Capital Project — found that "unless we reverse nature loss, trillions of dollars will be wiped off the world’s economies, industries will be disrupted and the lives of millions will be affected."

That research looked at the benefits nature provides nations and industries through ecosystem services such as crop pollination, coastal protection, wildfire mitigation, freshwater supply, timber production, marine fisheries and carbon storage. It assessed how the natural assets that provide these services — forests, soils, wetlands, coral reefs, fish stocks and all the rest — would change under various future development scenarios and, in turn, how consequent changes in ecosystem services would negatively affect such economic outcomes as GDP, trade, industrial production and commodity prices.

The price tag: Under a business-as-usual scenario, the total cumulative loss would be $9.87 trillion between 2011 and 2050. And while that may average out to only about $250 billion annually over a 40-year span — a mere blip amid the $80 trillion annual global GDP — those costs likely would be more heavily exacted in the later years.

But the impact could be much greater than that. According to the World Economic Forum (WEF), more than half of the world’s total gross domestic product, or $44 trillion, involves activities that are moderately or highly dependent on nature, including around half of pharmaceutical products.

Perhaps more dramatically, a Swiss Re report issued in September revealed that a fifth of nations worldwide are at risk from ecosystem collapse due to a decline in biodiversity. As more than one academic study has revealed, ecosystem collapse could have existential consequences for humanity. While largely theoretical, it’s not a theory we want to test.

And that’s all before one calculates the role of biodiversity in preventing the next pandemic.

As an aside, none of this is taught in economics classes. A review of "Principles of Economics," said to be the world’s most widely used economics textbook and a prototype for many others, found no mention of 11 key terms, including "biosphere," "climate change," "ecosystem" or "greenhouse gas."

Follow the money

Still, financial professionals are beginning to take note. In January, four asset managers — AXA Investment Managers, BNP Paribas Asset Management, Sycomore Asset Management and Mirova — asked investors to increase their focus on biodiversity preservation. To date, most environmental ESG data has focused largely on climate change. They believe that’s too narrow of a view. The asset managers said they seek ways to measure the impact of companies on biodiversity — and vice versa — and to incorporate this into corporate ESG data. 

Measuring the impact of companies on biodiversity has long vexed investors and others. Unlike climate change, for which there are such cross-sectoral metrics as "CO2 equivalent," there’s no standard measurement for biodiversity. Several have been proposed — species abundance per square kilometer, for example — but none has yet enabled consistently comparing companies’ impacts, let alone across sectors and borders.

That may be changing. This fall, a Task Force on Nature-related Financial Disclosures (TNFD) was formed to "help financial institutions shift finance from destructive activities and toward nature-based solutions," in the words of United Nations Secretary-General António Guterres. Based on the success of the Task Force on Climate-related Financial Disclosures, the new working group includes a global consortium of financial institutions. Following initial discussions this year, a TNFD framework will be developed in 2021 and launched in 2022.

Meanwhile, the WEF report notes, "Ratings agencies have started to include nature-related disclosures in their assessments, while institutional investors are demanding more accountability in terms of the environmental risks of business operations. This means companies will incur higher costs of capital when engaging in nature-degrading practices." But it’s still early days.

Nonetheless, financial institutions that fund companies linked to ecosystem destruction are already finding themselves in the crosshairs of activists. A report issued last month by the advocacy group Portfolio Earth found that the world's largest financial institutions loaned more than $2.6 trillion in 2019 to sectors driving the climate crisis and wildlife destruction.

It noted: "None of the banks assessed have chosen to put sufficient systems in place to monitor or measure the impact of their loans on biodiversity, nor do they have comprehensive policies to halt it."

Financial institutions that fund companies linked to ecosystem destruction are already finding themselves in the crosshairs of activists.

All of this is destined to make its way through the investment ecosystem, from the world’s largest institutional investors and pension funds to retail products such as ETFs and mutual funds. And it will be aided by the growth of metrics and an increased push for disclosure by stakeholders.

It won’t be long until biodiversity becomes yet another mainstay of shareholder proposals during annual meeting season.

How quickly investor interest in biodiversity ramps up remains to be seen. But activist and other pressure groups are already advancing, leading companies to step up their messaging, if not their metrics. In the short term, expect to see a rash of corporate claims, such as "net-zero biodiversity loss" or "biodiversity-positive."

Or, god forbid, "nature-friendly."

I invite you to follow me on Twitter, subscribe to my Monday morning newsletter, GreenBuzz, and listen to GreenBiz 350, my weekly podcast, co-hosted with Heather Clancy.

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