Investors grapple with the complexities of biodiversity

Dead zone: a Peruvian beach hit by an oil spill in January 2022, with disastrous consequences for local fishermen © AFP via Getty Images

“Irreversible consequences for the environment, humanity and economic activity, and permanent destruction of natural capital.” This is how the World Economic Forum characterizes biodiversity loss in its 2022 Global Risks Report. No wonder investors are concerned: not only is it their planet, but they also have portfolios to manage.

And, given the complexity of measuring the nature and impact of its loss, the financial industry can be forgiven for feeling intimidated.

The figures are alarming. About 1 million animal and plant species are threatened with extinction, according to the UN. “This [risk] exposure quickly becomes more apparent as we degrade the natural system because we grow more crops, use more water, and cut down forests,” says David Craig, co-chair of the Nature-Related Financial Disclosures Task Force ( TNFD), which is developing a reporting framework to help companies and investors include biodiversity in their decision-making.

But, if the extent of the problem becomes clearer, the financial impact remains difficult to quantify. “Many of the business implications of biodiversity loss are still unclear,” says Greg Waters, associate director of research at the Value Reporting Foundation, which helps companies and investors improve their sustainability reporting. “For financial institutions, this means there could be significant risks in their portfolios that they are not fixing appropriately.”

The race is now on to correct this blind spot. In addition to the TNFD framework, other initiatives are underway to set targets and provide guidance to companies and investors. Among them is a Global Biodiversity Framework (GBF) that the UN is developing for adoption at the delayed COP15 summit of the Convention on Biological Diversity, due to take place in Montreal in December.

While many of the GBF’s goals – which some call a “Paris Accord for Nature” – require government action, the framework itself will also help investors integrate biodiversity into their portfolios, as it calls on companies to measure and to disclose their impact and dependence on ecosystems and natural resources.

Meanwhile, nearly 100 investors with collective assets totaling €14 billion have signed the Finance for Biodiversity Pledge, which was launched in 2020. Signatories commit to five steps: sharing knowledge; engage with business; assess impact; define aims; and report publicly on the impact of their investments on biodiversity.

“We’re working on goals and pathways to make it more tangible and easier to understand,” says Anita de Horde, co-founder and engagement coordinator.

Because of the magnitude of the challenge, guidance from the financial sector will be critical. “Everything you do as an investor causes biodiversity loss because economic activity causes biodiversity loss,” says Hans Stegeman, chief investment strategist at Triodos Investment Management, which signed the pledge. But, while it has been difficult to agree on methods for measuring and disclosing carbon emissions reductions in investment portfolios, tracking the industry’s impact on everything from oceans and from forests to insect populations, seems much more difficult.

“At least climate change comes down to one measure,” says Catherine Ogden of the stewardship team at Legal & General Investment Management, another Finance for Biodiversity signatory. “The loss of natural capital and biodiversity is really multi-faceted. This can be location, geography, industry, and company specific. »

Natural resources also have complex interrelationships. If industrial activity wipes out a species, for example, the effect on other ecosystems could be significant but difficult to predict.

This complexity makes it difficult for companies – and, therefore, investors – to identify biodiversity-related risks and opportunities. “Given that financial institutions depend on the quality of information provided by their portfolio companies, it seems that we are a long way from the financial industry itself providing meaningful information in this area,” says Waters.

For Craig, developing accounting definitions and taxonomies is less urgent than providing the kinds of toolkits and guidance that TNFD develops. “A lot of people talk about putting a price on nature,” he says. “But a methodology, training and understanding is really important.”

Waters argues that existing tools, such as the investor-focused standards developed by the Sustainability Accounting Standards Board (now part of the Value Reporting Foundation), can be used to identify the most relevant risks and opportunities for different sectors. .

For example, in the oil and gas industry, investors can assess risks such as the impact of oil spills and similar events on environmentally sensitive areas while, for apparel companies, investors should focus on the impact of procurement and supply chain management practices.

And, if the measurement of biodiversity is complex, argues De Horde, this should not prevent investors from acting. “We often hear that there are no tools or data,” she says. “But there is enough data to identify the sectors and places of risk you are exposed to, and to begin to understand your portfolio in terms of biodiversity.”

Stegeman agrees. “We should always work for better data, but we shouldn’t use this as an excuse to wait to do something,” he says. “At the end of the day, it’s common sense – if you burn the rainforest or use a lot of soil or water, it’s not sustainable for the ecosystem.”


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