Week of 31 August 2020
Biodiversity loss is a systemic risk, and the unprecedented loss of biodiversity places more than half of the world’s gross domestic product (US$44 trillion) at risk. Institutional investors are urged to take action, including by (1) promoting investor awareness, commitments and initiatives; (2) investing in companies that protect biodiversity; (3) engaging with companies to promote biodiversity objectives; (4) advocating for strong biodiversity regulation; and (5) requesting meaningful data on biodiversity risks and impacts (Principles for Responsible Investment)
The Principles for Responsible Investment (PRI)—a UN responsible investment initiative signed by over 2,000 public and private investors in 60 countries representing over US$80 trillion of assets under management—has developed a discussion paper on the relevance of biodiversity for investors. The paper outlines the risks of biodiversity loss and opportunities of biodiversity protection, trends and actions that investors and governments are taking, and recommended next steps for institutional investors. The paper was developed using the findings from a literature review and interviews with 11 PRI signatory investors as well as environmental organisations with finance expertise.
Why biodiversity matters for investors
PRI outlines the business case for preserving biodiversity:
- “Globally, between 1997 and 2011, an estimated US$4 trillion – US$20 trillion was lost annually in ecosystem services due to land-use change, and an estimated US$6 trillion – US$11 trillion annually from land degradation.”
- Biodiversity “underpins human health, wellbeing and livelihoods – nearly half of the Earth’s population depend directly on natural resources for their livelihoods. Thus, biodiversity loss will have significant societal impacts. For example, a decline in pollinators will significantly impact agricultural production which, in turn, will impact food production and security. The societal risks caused by biodiversity loss can impact global trade, gender equity, economic development, global health and global peace.”
- Investors are exposed to four different types of risks from biodiversity loss through their portfolios:
- Physical risk: The “physical impacts of biodiversity,” e.g. scarcity or unavailability of key raw materials and degraded ecosystem services leading to loss of company value.
- Litigation and regulatory risk: “Litigation and breach of underlying legal frameworks, and changes to regulations,” e.g. increasing regulatory requirements around due diligence and transparency (for example, the recent UK proposal requiring companies to eliminate deforestation from their supply chains, and growing global momentum for mandatory human rights due diligence).
- Transition risk: The “transition to an economy that conserves and restores biodiversity,” e.g. the increased likelihood of stranded assets like fossil fuels, shifting consumer preferences, damage to company reputations for failing to adequately address biodiversity impacts.
- Systemic risk: “Systemic impacts of biodiversity loss,” e.g. sector-wide or country-wide impacts of biodiversity loss that undermine markets and investment values over the long term.
Source: Principles for Responsible Investment, Investor Action On Biodiversity: Discussion Paper (August 2020)
Recommendations for investors
The discussion paper outlines several actions that investors are taking now to protect biodiversity and provides recommendations for institutional investors:
- Awareness, Commitments and Initiatives: Investors are working within the finance sector to “better understand how they can include biodiversity in their investment strategies and collaborate with others to enhance the biodiversity.” The paper lists several recent investor initiatives on biodiversity.
- Investment Allocation: Investors are building data to assess biodiversity risks and inform investment decisions by using “a combination of in-house ESG methodologies and information from third-party data providers on companies and breaches.” Investors are also using this data to exclude investments with poor biodiversity performance and to proactively invest in funds with ESG or biodiversity objectives. The paper lists several tools and standards that investors are using.
- Stewardship: Some investors are engaging directly with companies on their approach to protecting biodiversity, for example biodiversity risk management and governance strategies, transparency, and metrics and targets. Investors are also raising biodiversity issues through investor resolutions and proxy voting. At the same time, “[e]xisting guidance on biodiversity management good practice needs to be interpreted and consolidated into clear investment criteria or engagement requirements.” There is a role for NGOs, in particular, to play in helping investors and companies understand what good practice on biodiversity protection looks like.
- Policy: Regulation is key to ensuring responsible investment practices, but PRI reports that there are still limited examples of robust and enforceable regulation in practice. The Convention on Biological Diversity has released a “zero draft” of its Post-2020 Global Biodiversity Framework, to be finalized by 2021; the EU has introduced its 2030 Biodiversity Strategy, which “will be translated into legislation, such as the Habitats Directive, which protects threatened or endemic animal and plant species and certain habitat types”; and the EU Wildlife Trade Regulations reflect the requirements set out in the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES).
- Meaningful Data: The paper highlights three factors needed to facilitate consideration of biodiversity in investment: “appropriate targets and standards, metrics by which performance can be measured and data to populate those metrics.” However, there are several barriers that have challenged the development of these factors, including a lack of incentivizing regulation and global targets on biodiversity, a lack of clarity on what good practice in managing biodiversity looks like and a lack of understanding of biodiversity as a systemic risk.
Immediate actions
The paper concludes with the following recommendations for institutional investors:
“Investors should:
- allocate capital to sectors or business models which are avoiding and reducing biodiversity loss and increase opportunities for positive outcomes on the ground, including restoration;
- engage investees on reducing negative biodiversity outcomes and design stewardship approaches to deliver positive biodiversity outcomes;
- engage policy makers on reforming incentives, including subsidies, to activities that drive biodiversity loss.”
“Investors should also address some of the underlying issues that prevent action on biodiversity, by:
- building internal capacity to ensure awareness of biodiversity’s importance;
- testing new tools and measurement approaches to understand how investments shape biodiversity outcomes;
- engaging with companies and data service providers to provide meaningful, consistent data;
- engaging with green funds, bonds, commodities and certification schemes to integrate biodiversity into existing standards;
- collaborating with peers and stakeholders to enhance nature-related financial disclosures.”
“Biodiversity loss is a systemic risk. The COVID-19 pandemic had its origins in illegal wildlife trade and habitat destruction, which brought animal disease into contact with humans. The likelihood of this occurring will only increase as the loss of biodiversity continues, reflecting the significance and urgent need for action by investors. More than half of the world’s gross domestic product (US$44 trillion) is moderately or highly dependent on nature and its services – such as the provision of food, fibre and fuel – and the unprecedented loss of biodiversity places this value at risk. It is critical that institutional investors take action to halt the loss of biodiversity.”
Principles for Responsible Investment, Investor Action On Biodiversity: Discussion Paper (August 2020)