Biodiversity: the next ESG frontier

by | Oct 27, 2022

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Daniele Cat Berro of Main Street Partners argues that species decline and habitat protection are starting to register on the ESG investment radar – and are set to move centre stage.

The decline in global biodiversity makes regular headline news as climate change and extreme weather events threaten natural habitats from the Arctic to the Brazilian rainforest and Australia’s Great Barrier Reef.

But it percolates our everyday lives too, due to human activities such as intensive agriculture, land clearance and climate change. Research indicates that a quarter of native mammals are at risk of extinction in Britain, while numbers of flying insects – the staple diet of so many birds, reptiles and small mammals – have fallen by almost 60% in the past 18 years.

Worldwide, there has been a decline of more than two-thirds in the populations of mammals, birds, amphibians, reptiles and fish over the past 50 years. And that decline in biodiversity has massive implications for life as we know it.

The human and economic costs

Complex ecosystems are naturally responsible for processes from crop pollination and water purification to carbon sequestration. The OECD estimates that globally these natural “services” are worth between $125 and $140 trillion a year – more than 1.5 times global GDP.

Our failure to protect biodiversity over recent decades is also costing us dearly in economic terms. Between 1997 and 2011, land-cover change and land degradation cost between $10 trillion and $31 trillion a year in lost ‘ecosystem services’, the OECD report found.

Measures to try and tackle the decline are being introduced in the EU and UK, with the publication in 2020 of the EU Biodiversity Strategy for 2030. It aims to put Europe’s biodiversity on a path to recovery by 2030, including the transformation of at least 30% of Europe’s lands and seas into well-managed protected areas. The previous Conservative government also launched reforms to agricultural funding in England with the aim of returning land to nature.

There are potentially huge knock-on implications for the business world too, though corporate engagement with biodiversity for the most part is still at a relatively early stage – roughly where it was with climate change around 20 years ago.

Corporate responsibility for biodiversity

We see two aspects to this engagement, both of which have relevance for investors. Arguably the more straightforward is the opportunity for a range of specialist businesses to create solutions that foster greater biodiversity, whether directly or indirectly.

These could include companies responsible for reducing pollution; those involved in clean energy provision; transportation businesses aiding the transition to cleaner alternatives; and those working in the field of sustainable fishing and farming.

Among these subsectors we can find numerous success stories in the shape, for example, of waste management companies such as Republic Services, sharing economy as Brambles and clean energy solution providers such as photovoltaic panels manufacturer First Solar.

A second, more complex engagement is for businesses in any sector to actively embed biodiversity considerations as an integral part of their risk management and ESG policies. Currently, there are very few enterprises that report on the issue or have strategies in place to protect or improve it as part of their operations.

One problem is that while it’s not difficult to show how damage to natural habitats has economic costs for numerous sectors – the food and tourism industries being standout examples – these costs are currently external to the businesses that cause them. It’s also much harder to show that the financial markets are currently taking any account of them.

The path to progress

New regulations may help to change that by obliging companies to measure and take responsibility for the costs they create through biodiversity loss. In the pipeline is a Taskforce for Nature-Related Financial Disclosures modeled on the TCFD which oversees climate-related risks, with the aim of delivering a disclosure framework for organisations to report and act on risks to the natural world. In addition, one of the mandatory Principal Adverse Impact indicators (a set of indicators which aim to show financial market participants how certain investments negatively affect the environment and the society), part of the Sustainable Financial Disclosure Regulation, is focused on assessing the share of investments in companies with sites/operations located in or near to biodiversity-sensitive areas where activities of those companies negatively affect those areas.

It’s also encouraging to see that leading asset managers are starting to pick up on the realities of biodiversity as a key element of responsible investing.

But the fact is that while measuring carbon emissions is relatively straightforward once a system is in place, measuring corporate impact on something as multifaceted as the natural world is a great deal more nuanced and challenging.

These are early days, though. There is a growing recognition that biodiversity, like climate change mitigation, needs to be at the heart of responsible investing – and we can expect to hear a lot more about it in the months and years ahead.


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