Adrienn Sarandi, Head of ESG Strategy & Development, and Bhaskar Sastry, ESG Content Manager, believe that biodiversity loss is a crisis that could have systemic impacts akin to climate change. Here, they outline considerations for investors seeking to address the issue in their portfolios.
Biodiversity loss is a subject that rarely captures the public’s attention, barring the occasional nature documentary or headline. Yet the unprecedented rate of species loss is a systemic crisis that will impact every area of our lives. Biodiversity is now declining faster than at any time in history,1 with up to a million species facing extinction within decades.2 Indeed, population sizes of mammals, birds, fish, amphibians and reptiles have already fallen almost 70% since 1970.3
Nature’s services underpin our very survival and global economic activity, thus directly influencing wealth creation and preservation. The value of biodiversity and ecosystems to our physical and mental well-being is inestimable. Natural capital also provides critical “ecosystem services” that provide us with huge economic benefits.
Source: Janus Henderson Investors, 2022.
The total economic value that nature provides is estimated to be between a staggering $125 trillion to $140 trillion per year,4 which is more than 1.5 times global gross domestic product (GDP).5 In fact, more than half of the world’s total GDP, or $44 trillion, involves activities that are moderately or highly dependent on nature, according to the World Economic Forum.6
Along with deforestation, biodiversity loss also exacerbates the systemic threat of climate change. Climate change, in turn, is acting to worsen biodiversity loss. Diverse ecosystems with healthy biodiversity are essential for climate change adaptation and mitigation, increasing resilience to future climate impacts. Biodiversity loss also increases the likelihood of the emergence of diseases that can pass from animals to humans, like COVID-19.
Global action to tackle the biodiversity crisis has been slow but will be given added impetus at the UN Biodiversity Conference (COP15) expected to take place in August 2022. COP15 will bring nations together with the aim of galvanizing efforts to protect critical habitats, improve water quality, control invasive species and safeguard connectivity. Furthermore, with the March 2022 publication of the beta Taskforce for Nature-related Financial Disclosures (TNFD) framework, which aims to align corporate reporting and investment to address nature-related risks, the next few months could be critical in terms of efforts to reduce biodiversity loss.
Implications for Investors
We believe investors must accept that biodiversity loss and ecosystem damage represent significant and financially material risks to their portfolios.
The University of Cambridge Institute for Sustainability Leadership (CISL, 2021) has divided nature-related financial risks into three categories that investors should evaluate:
- Physical risks resulting from the degradation of ecosystem services by economic activity (e.g., air quality, water security and food provision).
- Transition risks arising from shifting policy, legal, technology and consumer/market dynamics.
- Liability risks associated with emerging legal cases related to loss or damage from environmental change, including payouts, fines, insurance costs and reputational costs.
The focus should be on institutions and sectors whose operations have the greatest detrimental impact on natural capital. The World Economic Forum (2020) finds that three systems are responsible for endangering 80% of threatened or near threatened species.7
- Food, land and ocean use
- Infrastructure and the built environment
- Energy and extractives
Investors should identify those companies that acknowledge their impact and dependence on nature, particularly agriculture and food. Investors can also use engagement to pressure companies to align with commonly agreed upon nature-based goals and disclose nature-related risks where possible.
Depending on an investor’s desired approach, biodiversity considerations can be integrated into an overall portfolio approach. Some approaches may focus on maximizing risk-adjusted returns and assessing biodiversity from a risk management and opportunities perspective, while others may invest with the aim of achieving a positive impact alongside returns.
Implicit in all approaches is that investors should be guided by a systems-thinking mindset. The climate and biodiversity crises show that nature – on which our survival depends – works as an interconnected, dynamic system with feedback loops. The economic and societal impacts of investors’ decisions are not narrow, short-term and linear, but rather wide-ranging, long-term and highly unpredictable. We believe investors must accept this paradigm if they are to contribute to solutions around biodiversity loss and ecosystem damage.
1 The Economics of Biodiversity: The Dasgupta Review (UK Government, 2021).
2 The Global Assessment Report on Biodiversity and Ecosystem Services (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 2019).
3 Living Planet Report’ (WWF, 2020).
4, 5 Nature4Climate.org (2020).
6 Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy (WEF, 2020).
7 The Future of Nature and Business (World Economic Forum, 2020).
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.