Climate change, as we know, has been a focal point for many investors over the last few years. But there’s another element which is coming more sharply into focus, and that’s nature, not least because climate change and nature loss are so closely interlinked.
In a landmark analysis in 2021, British economist Sir Partha Dasgupta argued that we need to stop viewing nature as an infinite resource to power our economies Instead, it should be seen as an economic asset, which needs to be carefully managed just like any other asset. The risk, says Dasgupta, is that nature will depreciate to the point where it can no longer be used.
See also: – JPMAM’s Wu: ‘Start thinking about adaptation now’
This goes some way to explain why it is important for investors to expand the discussion about nature.
Nature is essentially the foundation of our economy, with almost every sector reliant on nature to some extent. For some sectors like agriculture, forestry, food and beverages, this dependence is close to 100%.
Investors therefore will want to develop a better understanding of nature, of the resources and services it provides, and how one can start to integrate nature-related risks and opportunities into investment decision-making.
Part of the reason that nature has fallen under the radar of investors is because it is more challenging to invest in nature than it is to invest in mitigating climate change. Investors with decarbonisation objectives understand that greenhouse gas emissions are the one thing that needs to be reduced to slow global temperature rise.
In the case of nature, things are much more complex, as there is no single metric an investor can track to monitor progress. Nature challenges are location-specific, whereas climate change is a global phenomenon; and there is much about nature and biodiversity we just don’t know, with only a fraction of the species living on our planet currently known to science.
The complexity of nature, and the scale of the challenge, might make it seem more daunting than climate change – particularly for investors trying to understand the true impact of their investment activities on nature and the impact of nature on their investments. Analysis by McKinsey in 2022 found, for example, that only 5% of Fortune 500 companies had set quantified targets around nature, compared to 83% for climate.[2]
Active engagement around natural capital is also more challenging, since instead of monitoring a company’s decarbonisation trajectory, there could be multiple different indicators related to different types of nature’s resources and services that investors need to be aware of.
So, how does one overcome these challenges? There are three steps to consider, which should help transform the nature challenge into an actionable opportunity.
The first step would involve identifying sectors and industries that are most reliant on nature and have the biggest potential impact on nature. As noted earlier, agriculture, forestry, food, tourism and pharmaceutical are all examples of sectors that rely on nature and its resources.
A recommended second step would be to then develop sector or industry-specific analysis or tools based on the key risks each sector faces, as well as the opportunities they can take. Such as deforestation, water stress or chemical pollutants, drawing on specialist data sources for the best insights into these specific areas.
Finally, engaging and evaluating companies on their level of progress around public disclosure, including identifying leaders and laggards would be the third step to consider.
It’s this final step where investors can start pinpointing potential opportunities in nature investment, including identifying companies that are working to define and understand their relationship with the natural world and redesigning their operations to ensure their long-term viability.
Conversations about nature and investing should start from the recognition that certain companies and sectors are dependent on nature. It’s an integral part of the economic equation.
And recognising the progress that’s been made in policy, regulation and corporate actions to date, as well as the tailwind that nature investing gains from all the work on climate change that has gone before, should go some way towards bringing nature as a focal part of the economic equation.
