When it comes to global policy, rarely is speed a factor in enacting change. However, as I wrote about in May, when it comes to tackling the enormous and vital challenge of climate change mitigation and adaptation, namely reaching the temperature objective of the Paris Agreement, we are seeing meaningful and rapid convergence in the global policy response.
The speed of this policy change should not be underestimated by investors as the impact may be meaningful, reducing the carbon-related aspects of our ecological footprint would move Earth Overshoot Day – the point in time at which we run into an annual ecological deficit – back by more than three months.
The Convention on Biological Diversity (COP15) is set to be held in Montreal later this year. Many investors have already started to consider the impacts of addressing climate change on client portfolios, but investors need to start thinking about the impact of biodiversity loss now. As part of COP15, there is a proposed 21-point agreement that has the potential to become legally binding.
This framework could potentially be to nature what the Paris Agreement was for climate. The framework sets out key targets to be achieved by 2030, including protection of land and sea globally, prevention or reduction of the introduction and establishment of alien species and utilisation of ecosystem-based approaches to contribute to mitigation and adaptation to climate change.
The framework also has far-reaching ecological as well as financial implications, aiming to reduce, reform or eliminate incentives harmful for biodiversity by at least $500bn per year. The outcome from COP15 is a similar pathway to Paris, but the speed of implementation will likely be much faster than its climate counterpart.
What does this mean for investors?
The well-discussed implementation of the Taskforce for Climate-related Financial Disclosures has sought to standardise climate-related reporting standards; similarly, the Taskforce on Nature-related Financial Disclosures aims to provide a framework for companies’ use of nature from 2023.
For investors, both reporting standards lead to greater comparability, which means investors like us can start to more effectively incorporate climate and nature-related risks into our valuation of assets.
Like carbon emissions, using nature’s resources is going to become a cost of business. Unlike carbon, where current and prospective pricing schemes now cover 23% of global emissions, addressing biodiversity is likely to require mechanisms for a wide range of ecosystem services, which naturally introduces additional complexity.
While this greater clarity and comparability is important in the context of externalities becoming internalised costs of doing business, it will also help investors assess, address and incorporate biodiversity impacts into valuations without pricing needing to be widespread across its many facets.
The alignment of reporting approaches should also help investors to understand some of the often highly complex intersections between responses to climate change and reversing biodiversity, as well as addressing other key sustainability priorities. Planting a new forest to remove carbon from the atmosphere needs to be considered in the context of the ecosystem that the forest would be replacing and the value that it already provides.
The convergence of legislative targets, regulatory frameworks and reporting standards underlines the importance of investing in high-quality companies that are leading the transition to a more sustainable world.
