Biodiversity is declining at an alarming rate and preventing this is becoming a new frontier in sustainable investing.
Biodiversity is the set of different types of living organisms in a region. From variety of animals to plants, fungi and even microorganisms like bacteria that make up our natural world.
The World Wildlife Fund’s 2022 Living Planet Index found that mammals, birds, amphibians, reptiles and fish have declined by an average of 69% since 1970. The report identifies several key drivers of biodiversity decline , including habitat loss, overexploitation of species, invasive species, pollution, climate change and disease.
This calls on governments and businesses around the world to assess how they can strive to be ‘nature positive’, as well as ‘net zero’.
While net zero encourages businesses to reduce their greenhouse gas emissions, nature positive means building the resilience of our planet and societies to halt and reverse the loss of nature. This involves reducing our negative impact on nature and biodiversity, and taking proactive steps to restore and replenish.
The loss of biodiversity represents a great challenge for society, which also offers opportunities for investment. We look at why biodiversity matters to investors and how you can include it in your portfolio.
This article is not financial advice. If you are unsure whether an investment is right for you, seek financial advice. All investments can fall or rise in value, so you may get back less than you invest.
Why is biodiversity important for investors?
The integrity of the biosphere is one of the nine planetary boundaries. These represent the limits within which human civilization can safely operate. Crossing these boundaries increases the risk of generating abrupt or irreversible large-scale environmental changes, and the boundary of biosphere integrity has already been crossed, leading to biodiversity loss and extinction.
This does not mean that it is too late to act, but puts the preservation of biodiversity at the top of the list of global priorities.
Additionally, healthy ecosystems and biodiversity are the backbone of many communities’ livelihoods. Biodiversity sustains our food, drinking water, medicine, shelter and economy. In fact, half of the world’s GDP depends on nature and 75% of the world’s poor depend on agriculture for their livelihoods.
Without healthy biodiversity, we cannot have a healthy economy.
What are governments doing?
The United Nations Conference on Biodiversity (COP 15) takes place in December in Canada. This will be the largest biodiversity conference in a decade.
The conference should lead to an increase in funding for nature and a share of climate funding dedicated to biodiversity. And since half of the planet’s habitable land surface is used for agriculture, the focus is expected to be on land use.
The UK government has pledged to protect 30% of land and oceans by 2030 “30 by 30”. However, many activists have pointed out that the country is not on track to achieve this goal. Two years after the commitment, only 3% of English territory is effectively protected and managed.
Now that Rishi Sunak is in power, he assured the cabinet that he would lead an “environmentally-focused government”. Time will tell if the UK will protect and restore biodiversity at the pace needed.
What are companies doing?
Awareness of biodiversity loss may be growing, but there is still some uncertainty about how companies can assess their impact on nature.
The Task Force on Nature-Related Financial Disclosures (TNFD) is due to release its framework next year. The global initiative aims to describe how companies can assess their positive or negative impact on nature, and how nature affects company financial performance or long-term risk.
This means that investors will be able to assess companies’ TNFD reports, as they can with companies that have made statements against the task force on climate-related financial disclosures.
What do fund managers do?
Many fund managers don’t want to risk being left behind on biodiversity, as many have been on climate change. That’s why many managers we talk to incorporate biodiversity metrics into their broader ESG assessment. But also engage on topics related to biodiversity with the companies in which they invest.
Deirdre Cooper and Graeme Baker, principal managers of the Ninety One Global Environment Fund, aim to deliver “sustainability with substance” through in-depth analyzes of the companies’ services and products. This helps the team understand the impact of companies and their suppliers on biodiversity.
Biodiversity is also one of the fund’s main engagement themes. For example, they have engaged with Croda, a major producer of bio-based chemicals, in its decarbonization efforts. This year, they have expanded their discussions with the company to include its broader impacts on our natural capital. They set a commitment target to encourage the company to set targets and report on land use and biodiversity.
Legal & General is another fund group that champions biodiversity. Their Biodiversity Policy underscores their belief that it is essential for businesses to proactively consider and address biodiversity issues to generate sustainable results and value for all stakeholders. This broader commitment to hold companies to account means that they now consider biodiversity as a central indicator in their ESG rating.
For Legal & General’s Future World ESG Developed Index Fund, this ESG score dictates the fund’s capital allocation. The fund will invest more in companies that score higher, and those with low scores will most likely be underweight.
Most responsible funds produce a sustainability, ESG or impact report. This often describes their approach to ESG integration and their engagement priorities. You can find them on individual fund group websites.
Learn more about the different approaches to responsible investing
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