05 Jun 2023
“We have a finite environment – the planet. Anyone who thinks that you can have infinite growth in a finite environment is either a madman or an economist” - Sir David Attenborough
Since Attenborough made this statement in 2013, the conversation around biodiversity has matured considerably. Particularly in the investment landscape in Europe it has risen to the top of the agenda for many investors and their clients. The industry is waking up, realising that natural capital is our most important asset underpinning not only human well-being, but our economic growth and prosperity. We can no longer sustain infinite growth from a planet with finite resources.
In late 2022, the Kunming-Montreal Global Biodiversity Framework (GBF) was signed – a landmark agreement aimed at guiding global action on nature through to 2030. It includes solid commitments that should begin to halt and reverse nature loss: restoring 30% of degraded ecosystems, protecting 30% of land and aquatic ecosystems by 2030 (currently only 17% is protected), mobilising $200b annually in support of global biodiversity, and recognising the rights of Indigenous Peoples.
The GBF also calls for all large businesses and financial institutions to “regularly monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity”. We hope that incoming policy, coupled with investor pressure, will help to push biodiversity to the top of the agenda for the companies we invest in too.
Conceptually, many of us understand the threats posed by climate change and the scale of the challenge ahead – to mitigate further warming, and to adapt to that which is already locked in. Our favourite slogan in ESG is “you can’t manage what you don’t measure”, and climate change has always had the benefit of a clear unit of measurement – carbon dioxide.
Biodiversity risks are more difficult to calculate and manage, ecosystem degradation and the extinction of species cannot be measured by a single number or metric. Measuring nature-related risks will require both a complex array of metrics, and global consensus on those metrics if it is to really have an impact.
The Taskforce on Nature-related Financial Disclosures (TNFD) should provide more clarity for business this year. Its mission is to provide a framework for how businesses can address environmental risks and opportunities, with the ultimate goal of supporting a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. The TNFD will not be mandatory from the outset, but we urge regulators to make nature-related disclosures mandatory for companies – just as we have seen with the TCFD mandated for listed companies and asset managers.
The impact on investments
According to the World Economic Forum, biodiversity loss is one of the top five risks in terms of likelihood and impact in the next 10 years. It reports that $44 trillion of economic value generation – more than half of the world’s total GDP – is moderately or highly dependent on nature and its services, and therefore highly exposed to nature loss:
“Nature loss is a fat-tail risk like the 2008 asset-price bubble: It cannot be seen with a linear world view, but once triggered can have far greater than average implications.” - World Economic Forum
This has the potential to have serious ramifications for businesses, both short and long-term. Companies that act now to understand their biodiversity risks and opportunities will be better placed to manage associated risks in the future, retain their social license to operate, and avoid potential legal action and financial losses.
Nature-related disclosures will help investors to understand which companies and sectors are financially reliant on natural capital. We already engage with companies on biodiversity, and we are beginning to see some leaders in this space in terms of corporate disclosures. We can now analyse those disclosures and begin to identify best-in-class companies in managing nature-related risks. As we move forward and more companies begin to disclose, the laggards will have nowhere to hide.
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