Biodiversity loss poses a significant and under-appreciated threat to financial stability. This is due to the economic activities and financial assets that are contingent on healthy ecosystems. In fact, more than half of the world’s economic output is moderately or highly dependent on nature.
As with climate change, biodiversity loss is a systemic risk to the economy.
The interrelationship of biodiversity loss and climate change is a magnifying positive feedback loop. A changing climate can make some environments uninhabitable, and ecosystems play a vital role in regulating greenhouse gases. Human pressures such a habitat degradation and over-exploitation aggravate the crisis further. For example, in the UK over half of the nation’s land cover is enclosed farmland.
The UK is one of the most nature-depleted countries in the world, according to the WWF. Since 1970, there’s been on average an almost 70% decline in the populations of mammals, birds, fish, reptiles, and amphibians. This decline is a concern across the nation, as a recent YouGov survey found that 81% that UK adults believe nature is under threat and more needs to be done urgently to protect and restore it.
Last month, proposals from the UK government signal further steps back for UK biodiversity. Nature-friendly farming payments, also known as the ‘Brexit bonus’, pay farmers for their stewardship of nature and are seen by some as one of the few positive Brexit dividends. However, the Department for Environment, Food and Rural Affairs (Defra) are hinting at a return to payments per acre of land owned. This subsidy will pay farmers a set payment no matter how well they care for the land, therefore removing any incentivisation for championing biodiversity.
This potential policy change amongst a sea of government U-turns validates the need for investors to step up. Not only to save the biodiversity we have left, but to mitigate the potential financial risk at stake.
Many companies are recognising the importance of protecting biodiversity, with ‘nature positive’ becoming the new trending target. Yet arguably biodiversity is even harder than climate change to quantify and measure. How can companies really understand the impact their operations and supply chain have on nature, and where should they begin in preserving their natural capital?
This is a key problem the Taskforce on Nature-related Financial Disclosures (TNFD) aims to solve. Their framework helps financial institutions and companies understand how nature impacts the organisation’s immediate financial performance, or the longer-term financial risks that may arise from how the organisation, positively or negatively, impacts nature. Due to be rolled out in September 2023, TNFD will allow financial institutions and companies to incorporate nature-related risks and opportunities into their strategic planning, risk management and asset allocation decisions. The framework will also provide a tool for investors looking to assess biodiversity risk and opportunities.
In the meanwhile, investors can use third party data providers such as Sustainalytics who offer their headline ESG ratings for free. Companies’ rating scores comprise of a range of ESG metrics, including biodiversity.
On a more top-down level, the UN Biodiversity Conference (COP15) in December will galvanise national commitment and action. The summit brings governments from around the world together to agree on a new set of goals to guide global actions to protect and restore nature. Earlier this year, the UK pledged support to COP15 by calling on the international community to halt and reverse biodiversity loss globally and adopt the ‘30by30’ target – to protect at least 30% of land and ocean by 2030. However, nature activists are calling this target into question with Truss’ government’s new priorities.
Whilst data availability and credibility improve and global commitments formalise, many asset managers are seeing the opportunity in addressing the biodiversity crisis. According to Morningstar, 40% of biodiversity themed open-ended funds launched in 2022 were from managers such as Fidelity, BNP, AXA, and Federated Hermes.
As biodiversity builds to be the next big ESG wave, investors wanting to be at the forefront should start considering how to make their portfolio nature positive, as well as net zero.
