The United Nations COP 26 conference earlier this month has been widely viewed as a climate change summit and yet it has a second and equally important goal – adapting human behaviour to protect communities and natural habitats. This is part of an increasing recognition that protecting our planet does not begin and end with tackling carbon emissions, but needs to address biodiversity loss and the preservation of natural resources.
The problem is a significant one: according to the latest report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, for example, some one million animal and plant species – out of an estimated total of 8 million – face the risk of extinction, many within decades.
Nor is this a new issue – since 1970, World Economic Forum data suggests, 32% of the world’s forest area has been destroyed, 85% of wetlands have been lost, 50% of the world’s coral reef systems have disappeared and there has been, on average, a 60% decline in vertebrate species.
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Such huge biodiversity loss puts mankind at risk. While it may be a stretch to argue environmental degradation directly led to the Covid-19 pandemic, for example, multiple studies have shown a link between environmental change and increased risk of ‘zoonoses’ – that is, diseases transmitted from animals to humans. As the World Bank notes: “Pathogens thrive where there are changes in the environment, like deforestation, and when natural ecosystems are under stress from human activity and climate change.”
Economic impact
The potential economic impact is vast. In stark numbers, the ecosystem services delivered by biodiversity, such as crop pollination, water purification, flood protection and carbon absorption, are worth an estimated $125 trillion (£91 trillion) to $140 trillion per year globally. The World Bank meanwhile estimates the cost of degradation of this ecosystem could be as high as $2.7 trillion annually by 2030. For its part, the EU’s study on policy inaction for biodiversity suggests the cost could reach as high as 7% of global GDP by 2050.
And the biggest hit may come for those economies that can afford it least. The strong reliance of low-income countries on nature means Sub-Saharan Africa and South Asia would, in relative terms, suffer the worst contraction of real GDP, according to The Economic Case for Nature – respectively, 9.7% and 6.5% by 2030.
There are signs the corporate sector is starting to wake up to the risks – notably, volatility in raw material costs and disruptions in operations and supply chains. In 2020, global coalition Business for Nature galvanised 700 companies worldwide, including major blue chips such as Burberry, Citigroup and Proctor & Gamble, to put pressure on governments to reverse nature loss by 2030. In September, more than 100 organisations issued a joint call for governments to strengthen the post-2020 Global Biodiversity Framework being negotiated by governments.
Two strands
COP 26 has two main strands to its ‘protecting communities and natural habitats’ goal. The first is to “protect and restore ecosystems” and the second is to “build defences, warning systems and resilient infrastructure and agriculture to avoid loss of homes, livelihoods and even lives”. On the one hand, this will include initiatives to reverse biodiversity loss from man-made activities such as intensive farming and agriculture. On the other, it will be involve building protection against floods or other natural disasters.
“What many people do not realise is that biodiversity is a distinct environmental indicator and the principal cause of biodiversity loss is not climate change,” says Rize ETF co-founder Stuart Forbes. “Rather, it is the direct and deliberate destruction by humans of the natural habitat necessary to support healthy ecosystems – for example, the systematic clearing of tropical forest for animal agriculture and the pillaging of wild fish stocks by factory fishing fleets.
“It is crucial that we – both the asset management community and consumers generally – distinguish between biodiversity loss and climate change and recognise them as distinct and separate problems given the divergence between the respective causes and solutions applicable to each.”
Incorporation within ESG
Biodiversity and the protection of natural habitats is increasingly being incorporated into ESG analysis by fund groups. “Biodiversity is one of the main ESG issues we consider to be the most strategically and financially material for long-term investors,” says Axa Investment Managers ESG analyst Liudmila Strakodonskaya.
“As a company, we started tackling this issue in 2014 with our policy on palm oil and that was extended earlier this year to deforestation and ecosystems protection. Over the years, we have reinforced our efforts to further integrate biodiversity considerations in our research, engagement and investment processes.”
The company’s work focuses significantly on biodiversity footprint-intensive commodities such as palm oil, soy, timber and cattle, aiming to engage with commodity traders, who represent a fundamental link of the value chain for these raw materials. “Six traders control around 60% of all soy exports from Brazil, which is identified for deforestation risks,” adds Strakodonskaya. “In collaboration with other investors, we encourage traders to increase efforts on no-deforestation commitments, traceability and reporting – and we are seeing positive results from these discussions.”
The deforestation and ecosystem protection policy at Axa Investment Managers sets out clear guidelines to limit investment in companies involved in deforestation and natural ecosystems conversion, including companies operating in the palm oil, soy, timber and cattle industries. It also excludes companies involved in highly controversial practices related to land use and biodiversity
This reflects a broader trend for the financial sector increasingly to focus its attention to this area. The Finance for Biodiversity Pledge now has 75 signatories from across the financial arena, including the likes of Amundi Asset Management, Aviva Investors and Legal & General Investment Management. This and similar initiatives are improving investors’ understanding of biodiversity issues as well as the key area of data measurement. COP 15 – a biodiversity conference held in China in October – should lead to further incentives to continue the fight against global biodiversity loss.
Nonetheless, measurement remains difficult – not least because of the lack of adequate tools and metrics to measure biodiversity performance. As a consequence, some investment managers are bringing in specialists to help them – for example, Axa Investment Managers uses Iceberg Data Lab to help it measure how investments impact biodiversity and integrate these factors into its risk assessments and research. For its part, Schroders recently announced a partnership with Natural Capital Research, which specialises in measuring natural capital assets globally, including soil erosion protection, flood risk management, biodiversity, water quality and recreation.
Ahead of the game
There are also opportunities in businesses that are ahead of the game and, either directly or indirectly, creating solutions for biodiversity protection as well as companies that are properly considering biodiversity risks.
ESG specialist MainStreet Partners highlights four subsectors for companies creating solutions: companies responsible for reducing pollution; those involved in clean energy provision; transportation businesses aiding the transition to cleaner alternatives; and those working towards sustainable fishing and farming.
It highlights the efforts of businesses such as Republic Services, the second-largest US waste management company, and Mondi, a leader in sustainable packaging. In the clean energy supply chain, there are renewables providers such as Vestas – the energy industry’s global leader in wind turbines – and First Solar, a leading global provider of comprehensive photovoltaic solar solutions.
At the same time, investment funds are emerging that seek to tackle biodiversity and environmental degradation directly. Mirova offers a Land Degradation Neutrality fund, Rize runs an Environmental Impact ETF, while Sarasin offers its Sustainable Equity – Green Planet fund. At the same time, biodiversity now makes up an important element of many of the broader sustainable funds.
Encouraging biodiversity and the preservation of habitats is likely to prove as important to the health of the planet as halting climate change. There are significant financial risks for companies associated with inaction, as well as real opportunities for those who can seize the initiative.
This article first appeared in Portfolio Adviser‘s The Professionals’ Guide to COP26 and beyond
