As a society, our dependence on biodiversity is clear, with population growth, urbanization, technological advancements and increasing standards of living continuously growing the demands on the world’s natural capital. The benefits of, and risks to, biodiversity inevitably show up within investment portfolios, with many companies relying on the natural world for production.
Moreover, as we have seen with the COVID-19 pandemic outbreak and the encroachment of wildlife habitats and boundaries, there are risks to global health and the health of financial markets should we fail to turn the tide and be more attentive to the consequences of biodiversity loss. As asset managers, it is imperative that we apply a sharper lens to the reliance of portfolios on biodiversity and understand how companies can better mitigate risks and help safeguard these critical natural assets as well as portfolio performance.
Global dependence on biodiversity & emerging regulatory efforts
Biodiversity loss remains a real, global risk with the potential for significant impacts to both the environment and to global gross domestic product. Despite this global economic reliance on natural assets, currently there is not enough being done to reverse biodiversity loss. Deforestation, loss of plant and animal diversity, as well as the spread of invasive species are all threats to our natural assets; assets critical in not only supporting global growth, but also ongoing environmental resilience.
There is growing acknowledgement that more must be done, with various governing and regulatory bodies seeking to build more transparency and mitigation efforts around those risks. For example, the 15th Conference of the Parties (“COP”) to the UN Convention on Biological Diversity is planned for the second quarter of 2021, with governments convening to consider new policies and regulations to prevent further biodiversity loss.[1] The Task Force on Nature-related Financial Disclosures (“TNFD”) has also emerged and is anticipated to have a similar impact as the Task Force on Climate-related Financial Disclosures (“TCFD”) – the most prominent framework impacting the way companies think through, manage and report on their climate risks. Following suit, the TNFD will set out a framework for companies to adhere to when measuring, mitigating and reporting on their reliance and impact on biodiversity.
Most significant industry reliance on biodiversity
Some industries are more dependent on the natural environment than others. The construction industry is highly reliant on building materials such as iron ore, limestone, gravel and timber; all of which support growing infrastructure such as buildings, bridges, dams and roads. However, extracting these materials has a significant impact on biodiversity as does the expansion of built environments, often increasing pollution and disrupting and fragmenting natural habitats.
For food and agriculture, the dependence lies on the animals, plants and micro-organisms that are essential in activities like food and fuel production. Micro-organisms are particularly important given their contributions to pollination, soil health, and preventing the spread of pests and disease amongst crops and livestock. Yet agriculture itself also has significant impacts to biodiversity, with agriculture now making up roughly 37% of total land area on the planet.[2] Growth in agriculture has led to land degradation, deforestation, loss of natural habitats, and growth in greenhouse gas emissions.
The protection of biodiversity is not only critical for continued sourcing of business operations, it is also important for company growth, innovation and evolution. Industries have put significant investment in research and development around bioprospecting activities, where the natural environment reveals previously untapped solutions that can build company value.
Bioprospecting can lead to natural solutions or spur ideas for novel synthetic developments. Bioprospecting and the discovery of natural remedies or natural revelations that catalyze business ideas have benefited several industries; with manufacturing, pharmaceuticals, personal care and cosmetics companies all beneficiaries. This has led to the discovery of new industrial materials, medicines, new crop varieties as well as solutions for ecological restoration.
Building resilient businesses and portfolios
Given a continued global need for natural assets and systems, an emerging regulatory landscape to protect them, and growing consumer awareness around corporate environmental behavior, it is in the best interest of companies to innovate to help maintain these assets. Green infrastructure, conservation efforts, and regenerative practices are all methods businesses can contribute to themselves to curb depreciation of our natural environment. These efforts are necessary to maintain local ecological balance and natural habitats. Moreover, given the various links of biodiversity loss to climate change, it is important for asset managers to understand how investee companies are managing their biodiversity risks – how these risks are identified, goals for mitigation and strategy towards progress and innovation. Through discussions with company management and active stewardship, we can push forward this conversation, encouraging heightened corporate disclosure and building greater transparency around corporate biodiversity risks and opportunities.
Sources:
[1] Secretariat of the Convention on Biological Diversity (2020). Global Biodiversity Outlook 5.
[2] Secretariat of the Convention on Biological Diversity (2020).