Meet biodiversity: the next big thing?

Last week, on the 30^th of May, the global conference on Biological Diversity (known as “COP15”) concluded in Kunming, China, with the aspiration to set global targets that would have become the “Net Zero for Nature”. Despite the postponement of the conference due to COVID, the urgency regarding the need to halt and reverse biodiversity loss is growing more acute.

We’ll be exploring this topic, and more, at our upcoming digital event ESG@Invesco. Register here.

The destruction of natural habitats, shrinking animal populations and even species extinctions are now widely regarded as part of a global crisis. The World Economic Forum’s Global Risks Report 2021 placed the loss of biodiversity in its top five existential risks, alongside global pandemics, climate change and weapons of mass destruction.

Inevitably, and rightly, the issue of biodiversity is set to play an important role in finance and investment, as regulation and public awareness require investment funds to take account of this vital issue in investment decisions.

Statistics on biodiversity tell their own story. The World Wildlife Fund’s (WWF) Living Planet Report 2020 catalogued the scale of the issue. Between 1970 and 2016 the planet experienced:

• A 68% average decline in global vertebrate species populations.
• An 84% decline in freshwater wildlife populations.
• 17% of the Amazon rainforest has been lost to deforestation.

Biodiversity is vital for the stability of the environment. Agricultural production and food security depend upon the wider ecology of plant and animal life. Biodiversity also plays a role in resisting disease and 25% of medicines are derived from rainforest plants.

Loss of biodiversity may force animals to live in closer proximity to both each other and humans, enabling the emergence and spread of disease. Water supplies, soil fertility and countless livelihoods depend upon biodiversity – there is a lot riding on its protection.

The clock is ticking on disclosure

While biodiversity is an issue across all business and industry, certain sectors and activities are on the front line. The United Nations’ 2019 Global Resources Outlook concluded the extraction and processing of natural resources – largely mining and farming – are responsible for 90% of global biodiversity loss. The deforestation of the Amazon to make way for beef farming is the most notorious example.

Within the broad issue of environmental protection, biodiversity is increasingly recognised as a key issue alongside climate change. For that reason, the role of the financial services sector  in protecting and financing biodiversity is coming under the spotlight. Regulators are increasingly including biodiversity as a topic for financial firms to disclose on. For example, the European Union’s Sustainable Finance Directive Regulations (SFDR) specifically identifies biodiversity as one of the Principle Adverse Impacts (PAIs) the financial sector must address. Beyond disclosure, the issue increasingly being raised by regulators as a potential financial stability risk, with the Network for Greening the Financial System, comprised of global central banks and financial regulators, recently announced a work programme to study the financial stability risks arising from biodiversity.

How can investment be measured for biodiversity?

The effect of business activities on biodiversity is a complex matter to assess and hard data is in short supply.  Numerous initiatives are currently underway to try to bridge this gap, by identifying appropriate metrics for measure biodiversity and natural capital. This includes the Taskforce on Nature-related Disclosures (TNFD), which, it is hoped will do for biodiversity what the Taskforce on Climate-related Disclosures (TCFD) did for climate change.

One pioneering organisation has been the FAIRR (Farm Animal Investment Risk & Return) Initiative that carries out research into environmental impacts and provides best practice tools for investors. The initiative is backed by a network of investment groups including Invesco.

FAIRR’s Protein Producer Index assesses the effect of industrial scale farming on the environment and biodiversity. Its latest report, in November last year, assessed 60 of the world’s largest food producers and found that more than 80% of land-based food producers posed a high risk of deforestation and loss of biodiversity¹.

Its report also identified the links between major food producers and those companies closer to the consumer, such as McDonald’s and a range of supermarkets including Tesco, Sainsbury and Walmart.

As formal regulations and disclosures become part of the investment landscape over the coming years, assessments on biodiversity, such as those by FAIRR, TNFD, CDP (formerly the Carbon Disclosure Project) and others, are likely to become crucial in shaping investment strategies. Consumer awareness is also likely to rise, particularly as the links between production and consumer brands are made more transparent.

As governments and industry increasingly agree, the loss of biodiversity poses a grave risk to the global ecology and to the global economy. Consumer concern and rigorous regulation on impacts and disclosures are set to make biodiversity an important factor in sustainability and in company valuations. They will also become an essential theme for the investment strategies of the future.

The interconnectedness of existential threats means that the ripple effects can encompass concerns including deforestation, biodiversity loss, waste pollution, climate change and our own health.