How is growing investor awareness of biodiversity risks playing out in portfolios, and where are investors responding to opportunities as strategies and allocations adapt?
In recent years, biodiversity has become an increasingly common talking point in all sorts of settings. Representing the whole assortment of life on the planet and how it interacts – whether in a specific location or globally – the word has evolved from a fringe phrase into a mainstream topic and a cornerstone for many institutional investors’ sustainability strategies.
Indeed, growing awareness of the impact biodiversity has on wider nature-related risks has forced investors to think far more intensely about how they can better understand its impacts on their investments – and the impacts their investments can have on biodiversity.
“A reduction in biodiversity poses a lot of risks to businesses. Their revenues depend on the [existing] ecosystem, and investing in companies that have a negative impact on nature also leads to a lot of reputational and legal risks,” says Arti Prasad, Mercer’s Client Leader – Sustainable Investment, Pacific.
Why is biodiversity so important?
Average species population decline since 19701
chickens outnumber humans2
hectares of forest lost since 19903
of financial institutions have no policy on deforestation4
increase in crop calories from 2010 to 20505
of food is wasted6
Measuring biodiversity impacts – the response and approach
The ecological regulatory and legal landscape continues to evolve as new commitments are made and metrics studied. It’s no surprise that climate change and biodiversity are linked not only at a fundamental level, but also across their developing regulatory frameworks, says Nick White, Director for Global Strategic Research at Mercer.
The 2015 UN Climate Change Conference (COP 21) led to the Paris Agreement and specific goals to limit climate change, and last year’s UN Biodiversity Conference (COP 15) led to the Global Biodiversity Framework. This included specific long-term goals for 2050 and immediate targets for 2030 intending to limit the human impact on the ecosystem.
The global biodiversity framework sets out four key goals for 2050:
Maintaining or increasing the area of natural ecosystems to halt human-induced extinction of threatened species and reduce the rate of extinction of all species.
Sustainable use and management of biodiversity, to ensure nature’s contributions to humanity are valued, maintained and enhanced.
Fair distribution of the benefits from the utilization of genetic resources.
Ensuring that adequate financing and means of implementing the framework are accessible to all parties, particularly Least Developed Countries and Small Island Developing States.
Two of the framework's targets relate to the “30 by ‘30” rule, which involves having 30% of the planet under protection and 30% of degraded ecosystems under effective restoration by 2030, including firm measures to halt and reverse nature loss.
Such targets are being tackled by the Task Force on Nature-Related Financial Disclosures (TNFD), a set of industry-backed reporting guidelines on biodiversity that mirror the widely-adopted Task Force on Climate-Related Financial Disclosures (TCFD) reporting guidelines for climate change. As new regulations and guidance such as this are brought in, they will likely encourage asset managers to reassess how they currently think about nature-related risks, Nick says.
“Biodiversity is often talked about in terms of physical risks and transition risks across four key areas – land, fresh water, oceans and the atmosphere,” he says. “We somehow need to turn these risks into metrics, which is not easy.”
When it comes to embedding measurements into ongoing portfolio analysis in the area of climate change, says Nick, “one of the big areas is deforestation. There are many providers with statistics on deforestation, but what is important is that we follow the guidance in TNFD and the science-based target network, which talk about levels of deforestation, destruction of natural habitats, water use and quality of water.”
Risks and resolutions
For investors who want to mitigate their footprint on biodiversity, exclusionary screens may be the way to achieve the highest impact on a portfolio selection. At the same time, strategies and products are starting to emerge that can help investors actively achieve positive biodiversity impacts rather than simply avoid negative ones.
“When it comes to investing in direct solutions to the biodiversity problem, we are seeing solutions in both listed and unlisted markets,” Nick explains. “In listed markets, we are seeing some quite specialist funds that are using metrics around areas such as water use and deforestation policies and other factors like whether a company uses sustainable packaging or traceable products in their processes. And a lot of similar factors are coming through in some of the broader sustainability-themed equity funds.”
The opportunity to invest in areas that aim to benefit or regenerate specific ecosystems, or to reduce negative impacts in potentially troublesome sectors such as forestry or agriculture, could appeal to investors seeking a clearer link between their investments and their impacts.
In Australia, investors have begun to transform a focus on biodiversity risks into new solutions, says Simon O’Connor, Chief Executive of the Responsible Investment Association Australasia.
“It has been fascinating to see the number of people who are now heads of natural capital at fund management firms – there is clearly a sense that the industry is gearing up for biodiversity,” he adds. “A lot of asset managers are thinking about what they are investing in and how they can articulate the value-add and exposures from particular assets.”
“We are seeing the early stages of nature markets, nature credit markets and biodiversity markets. The legislation in Australia around this topic is building opportunities and additional layers of revenue for businesses, whether in carbon credits or biodiversity credits.”
Australia has been one of those leading the charge for biodiversity among its international peers, and has been one of the most engaged on initiatives such as TNFD. Australia’s unique ecosystem and rich natural heritage have encouraged regulators and the government to take a firm stance on preserving biodiversity, which has, in turn, found strong support from the asset management industry.
“Research indicates that about 50% of Australia’s GDP is moderately or highly dependent on nature in one way or another,” says Simon. “It goes well beyond agriculture and includes metals and mining, energy production, and infrastructure. It affects many sectors across our economy.”
“We need to keep in mind that biodiversity can interplay with our portfolio at multiple different points, at different levels and in different ways. It is complex, but it is not a complexity that we can hide from, because it is coming at us very fast.”