Healthy, functioning ecosystems underpin society: they produce the oxygen we breathe, help mitigate climate change and support at least 55% of the global economy. Hence the need to reverse the destruction of ecosystems and biodiversity loss. Here, Robert-Alexandre Poujade discusses the outcomes of the recent COP15 meeting and some of the steps investors can take to address biodiversity loss.
Given that climate change and biodiversity loss are intricately linked, we believe environmental investment strategies can help address climate change and biodiversity loss. It will require trillions of dollars in the decades ahead to restore, protect and preserve Earth’s resources and achieve the transition to a sustainable, net-zero economy.
Studies have shown that funding biodiversity is an investment, not a cost. The funding maintains critical ecosystem services that underpin the world economy and yields financial, economic and ecological returns. One study found that destruction of nature results in an estimated USD 1.4 trillion of economic losses each year, or 1.6% ofglobal GDP. An estimated USD 44 trillion of economic value generation – over half the world’s GDP – depends moderately or highly on nature and its services.
While the number of biodiversity-focused asset management products is increasing, these are outnumbered by funds focusing on climate. There are 14 funds managing around USD 1.6 billion that have biodiversity-focused strategies. By contrast, there are about 1 100 funds with USD 350 billion in global assets that focus on climate, according to Morningstar.
Actions to protect nature
At COP15, around 200 countries agreed on the new Kunming-Montreal Global Biodiversity Framework (GBF). Its centrepiece is a ‘30×30’ target to protect 30% of nature by 2030. This makes financial sense. A University of Cambridge report has found that the financial benefits of protecting 30% of world’s land and oceans outweigh the costs involved by a ratio of 5 to 1.
Governments also committed to phasing out subsidies that are harmful to nature. Subsidies linked to biodiversity loss are estimated to cost around USD 2 trillion annually.
The agreement set a target of spending USD 200 billion annually for conservation. Apart from public sector money, funds could come from leveraging private finance, promoting blended finance, and encouraging the private sector to invest in biodiversity via impact funds and other instruments.
In addition, pollution is to be cut by working towards eliminating plastic pollution and reducing the overall risk from pesticides by 50% through integrated pest management.
Key to understanding risk: disclosure
Investors require companies to disclose environmental data to help them assess a firm’s impact on biodiversity. However, data from the CDP (Carbon Disclosure Project), the not-for-profit organisation that runs the world’s largest environmental disclosure system, has shown that most companies are not translating commitment on biodiversity into action.
While 31% of 8 850 companies CDP surveyed have publicly committed and/or endorsed biodiversity-related initiatives and a further 25% aim to do so in the next two years, more than 50% of firms have taken no action to advance their biodiversity-related commitments. The CDP has also recently said that around 29 500 firms received an ‘F’ score for not responding to disclosure requests.
The Global Biodiversity Framework (GBF) calls on governments to take measures to encourage companies and financial institutions to disclose their risks, dependencies and impacts related to biodiversity.
Pressure for greater transparency is likely to drive more action from companies to reduce biodiversity loss. It should help investors understand the biodiversity-related risks and opportunities in their portfolios.
What can investors/asset managers do?
Negotiators at COP15 agreed that the finance sector must invest in ways to halt and reverse nature loss by the end of 2030. There is currently an annual USD 700 billion financing gap for the protection of natural systems, according to the Paulson Institute. It outlined two ways to reduce this gap:
- Reducing subsidies harmful to biodiversity
- Increasing financial resources for biodiversity.
These resources include carbon markets, biodiversity credits and green financial products.
Alongside endorsing the disclosure section of the GBF, BNPP AM has endorsed the following:
- Agree on an ambitious and transformational post-2020 global framework that requires the alignment of financial flows with global biodiversity goals
- Strengthen national biodiversity strategy and action plans to ensure successful implementation of the framework and enforce domestic policies to deliver biodiversity targets
- Establish a regulatory environment that enables financial institutions to address biodiversity-related risks and opportunities, including by introducing consistent and decision-useful corporate disclosure requirements
BNPP AM published a biodiversity roadmap in 2021 that sets the direction of travel to reduce nature loss. We believe addressing this systemic risk to the financial system requires a collaborative response. Accordingly, at COP15, we announced along with other investors the formation of Nature Action 100. This initiative aims to encourage investors to drive urgent action on nature-related risks and dependencies in the companies they invest in. It will formally launch in the spring of 2023.
Adam Kanzer, head of stewardship Americas, said: “Over the years, there have been many important investor engagements with corporations that touched on aspects of the biodiversity crisis, but none that placed biodiversity front and centre, focusing on reversing nature loss by 2030. Nature Action 100 intends to fill that gap, engaging a broad range of companies on their most significant impacts to help place them on nature-positive pathways. We have no time to lose.”
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, fund performance may at times be better or worse than the performance of relatable funds that do not apply such standards.
 Listen to this Talking heads podcast in which Adam Kanzer discusses the COP15 goals including a roadmap for reversing man-made nature loss from activities such as deforestation and securing ecosystem services such as air and water purification by 2030.