Conversations with clients on incorporating environmental issues including how to manage climate-related risk are now best-practice in institutional settings and subject to increasing regulatory oversight by APRA. More broadly, society is increasingly concerned about the risks and opportunities posed by climate change and its relationship to business and investments. This in part is evidenced by record financial flows into sustainability focused managed funds.
Investors are actively seeking to reduce emissions and allocate capital to opportunities that come from a net zero carbon economy. Investors are also aligning their investment strategies to global sustainability goals like the Sustainable Development Goals (SDGs). Information from companies to support these decisions is still largely voluntary and underdeveloped but is being supported by disclosure frameworks like the Task Force on Climate-related Financial Disclosures (TCFD).
While these climate related trends will continue to accelerate, there is a further conversation that needs to happen on biodiversity, an interconnected environmental issue that, like climate change, is resulting in significant environmental and social harms, with deep implications for companies and their investors. In this article, we explain why biodiversity matters to investors and provide some resources to help you become more confident on the topic of biodiversity from a finance and investment perspective.
What is biodiversity?
Biodiversity is the variety of all living things on Earth, it encompasses the unique biological processes that form the ecosystem services on which life depends.
Ecosystem services include pollination, coastal protection e.g. mangroves, water yield for agriculture, timber production, fish production and carbon sequestration. The services ecosystems provide are necessary to the functioning and sustainability of the economy and security of humanity.
The World Economic Forum found that 15% of global GDP ($13 trillion) is generated by industries (construction, agriculture, food and beverage) highly dependent on nature. Moreover, 37% ($31 trillion) are moderately dependent on nature. That is $44 trillion of economic value generation which is more than half of the world’s total GDP. However, it is important to note that all businesses depend on nature either directly or through their supply chains.
Why does biodiversity matter?
A business as usual scenario is forecast to result in a loss of ecosystem services, hitting food and agricultural sectors the hardest due to their heavy reliance on nature and threatening the global supply of commodities such as timber, cotton and crops. A combination of climate change, habitat loss due to deforestation, overfishing and species extinction including a decrease in pollinators will affect our supply of food.
Urgent change is needed. Jeremy Grantham, GMO’s founder and long-term investment strategist argues that modern capitalism is not equipped to deal with long-term problems like climate change, soil erosion and biodiversity loss which are threatening humanity’s ability to feed a projected population of 11.2 billion people in 2100. Health and medicine are also impacted by biodiversity loss, 25% of pharmaceutical drugs are derived from rainforest plants and increases in zoonotic diseases like COVID-19 have been linked to habitat encroachment. Due to the rate of plant extinction one major drug is lost every two years.
Failing to consider the impact of investments on biodiversity brings financial and reputational risks. Bakun Dam in Malaysian Borneo was expected to cost US$564 million, but it cost 6 times more from excluding indigenous perspectives at the planning stage. The Penan community opposed the dam due to the proposed deforestation impacting their livelihoods and wellbeing. Indigenous people constitute less than 5% of the world’s population however, they conserve an estimated 80% of the world’s biodiversity. Inclusion of indigenous communities’ free, prior and informed consent respects indigenous rights and mitigates costly risks.
The role of finance
Finance can play a crucial part in preventing biodiversity loss and fostering an economy where nature thrives.
The major gaps in biodiversity financing present a significant investment opportunity. Investments that conserve and regenerate biodiversity (nature-positive transitions) could generate up to US$10.1 trillion in annual business value and create 395 million jobs by 2030, according to the World Economic Forum. To take advantage of this opportunity we need to incorporate nature into economic and financial decision making as argued for in the UK’s Dasgupta Review on the economics of biodiversity.
“We are part of Nature, not separate from it…Nature is therefore an asset, just as produced capital (roads, buildings and factories) and human capital (health, knowledge and skills) are assets”. Sir Partha Dasgupta
In the attempt to provide a solution to biodiversity loss and environmental degradation, one solution proposed is to translate ecosystem services into monetary terms (natural capital) to make it easier for nature to be compared to other goods and services. The System of Environmental-Economic Accounting (SEEA) offers a framework to begin accounting for nature as capital.
Alternatively, environmentalists argue that nature is priceless and that pricing nature (natural capital) will not protect it. Environmental activists like George Monbiot argue that commodifying nature within the same growth-driven economic structure, which is the cause of environmental degradation, will fail to protect it. Rather than seeing nature in terms of what it can do for us (economic services), its greatness is the motivation for our care and respect.
Accounting for biodiversity is still new territory for the investment industry. There is a lack of understanding about how business processes and supply chains rely on and impact biodiversity. Data is needed to understand different industries’ relationship to nature. While in its early development The Taskforce on Nature-related Financial Disclosures (TNFD) is seeking to bridge this gap by providing a framework for business and financial institutions to assess, manage and report on their relationship and impact on nature.
Governments are beginning to take nature-related disclosures seriously by introducing legislation requiring investors to disclose biodiversity impacts. In France, Article 173 legislates that asset owners and managers report their biodiversity impact. Germany also has an emerging supply chain law that will require mandatory deforestation disclosures. Leading international and foreign government regulation along with increased domestic pressure to protect biodiversity could see Australia mandate nature-related disclosures.
All businesses depend on nature. Knowing how to talk about biodiversity is increasingly important to understand clients’ environmental values and manage nature-related risk. Protecting nature’s inherent value is crucial to economic prosperity and all life on Earth.
For more resources visit www.altiorem.org, a community-built, freely available library that supports its members to be more effective sustainable finance advocates and to implement the changes needed to make it reality.
