Biodiversity loss threatens our very existence on this planet. But because measuring its value is not easy, investors, policymakers and wider society have been slow to react.
In fact, the United Nations estimates that a financing gap exceeding USD4 trillion needs to be closed by 2050 to counter biodiversity loss, but current investment is just USD133 billion, or about 0.1 per cent of global GDP. More private-sector investment is needed; more than two-thirds of OECD countries’ biodiversity finance has come from public bodies.
Many private-sector finance instruments for promoting biodiversity conservation are outside the scope of most mainstream investment funds. Data reporting and biodiversity methodologies are required to fully assess the risks, but are at a nascent stage given the complexities. We thus believe that most progress will come from investors that focus on responsible investment processes such as engagement on key topics, plus asset allocation frameworks that incorporate natural-capital considerations.
At the simplest level, we expect biodiversity-related risks to become prominent in investment decisions. Asset-allocation decisions may revolve around supply-chain mapping for sectors that are particularly exposed to natural resources and ecosystems.
For example, the agriculture and textiles sectors may require more mapping of hotspots of water scarcity and temperature rises. And in sectors that contribute to biodiversity risks, there will likely be heightened pressure for companies to change. For example, poorly managed tourism contributes to high waste and emissions that threaten local ecosystems.
We thus believe that responsible investors should engage with companies on sourcing and supply chains, production and distribution networks. They should vote at general meetings to reflect biodiversity and ecosystem considerations, and disclose how it is integrated into the investment process.
The World Bank has proposed a Nature Action 100 project, similar to its Climate Action 100+ initiative, that would identify 100 companies for collective engagement on biodiversity issues.
Meanwhile we believe that investors should continue to develop, establish and roll out a robust methodology for measuring biodiversity loss, conservation and enhancement. This will be challenging, but more data and analysis will allow a clearer understanding of where financial capital could best be mobilised to enhance the world’s natural capital.
And, it is likely to be a more considered approach than establishing just one single metric for measuring biodiversity. For instance, the United Nations has launched a biodiversity methodology tool to help investors and banks understand the risks in the agriculture and mining sectors.
On a more macro level, the kicker for investors and companies will come from government policy. Biodiversity is gaining state support from Asia to Africa and through the European Union’s Green Deal.
Even trade policy has an important role in limiting biodiversity risks. The European Commission has announced a new methodology for assessing trade liberalisation’s impacts on ecosystems and several trade accords now include commitments to enhance environmental cooperation.
As the global population increases, demand for food and energy will increase, placing unprecedented strain on our natural capital. Avoiding this will require fundamental changes across technology, economies and society. Investors should thus be prepared for government policy change, increased pressure to engage with corporations, efforts to standardise and measure biodiversity-related risks, and heightened awareness of supply chain hotspots.
First published 1 June 2021.
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