Why investors need to pay attention to biodiversity

Damian Payiatakis

All life on earth is sustained by its biodiversity, yet it is increasingly under threat from human activity. In every corner of the globe biodiversity is being altered – research shows that only around three percent of our land can be considered “faunally intact”, meaning it has healthy populations of all its original animals , and an estimated one million animal(1) and plant species are threatened with extinction(2).

Damian Payiatakis
Damian Payiatakis

For investors, this biodiversity loss poses significant financial risks for many sectors. More than half of the world’s economic output is estimated, in some way, to depend on nature to a significant extent(3). As such, investors should actively recognise and account for humanity’s dependencies and impacts on the environment.

Companies’ reliance on nature

Through a financial lens, nature provides a stock of environmental assets. These include renewable and non-renewable natural resources ranging from plants and animals to air, water, soil and minerals. Each has a financial value to companies that benefit from them.

When these natural assets are lost or damaged, it can hit the value of the businesses that rely on them. Risks are most obvious in primary industries that produce or obtain raw materials such as extractives, forestry, farming and fishing. But even industries such as cosmetics or pharmaceutical companies rely on raw materials derived from nature.

Moreover, environmental impacts and costs have historically been externalised for companies. Now, as consumer expectations, market dynamics and regulation shift, they are becoming tangible. Businesses no longer can expect to exploit the planet without potential damage to their bottom line, reputation or subsequent legal action. on the environment.

Protective commitment

Important progress has been made to protect biodiversity in the four decades since the first National Forum on Biodiversity took place in 1985(4). At the conclusion of the fifteenth UN Conference of the Parties (COP15) to the Convention on Biological Diversity in December 2022, four goals and 23 targets were agreed by more than 190 governments to be achieved by 2030(5).

Perhaps most notable is a pledge to conserve 30 percent of the world’s land and 30 percent of the ocean by the end of this decade. These commitments will lead to increased legislation, regulatory enforcement and public investment. Investors should think about how their capital might be affected by these promised changes. One emerging option is to invest in “nature-based solutions” which protect, sustainably manage and restore natural or modified ecosystems.

For example, investors have funded the planting of mangroves to reduce flooding, coastal erosion and storm-surge risks instead of building man-made infrastructure. In a study mapping flood risks along more than 700,000 kilometres of subtropical shoreline in 59 countries, mangroves were shown to reduce flood risk to more than 15 million people, and prevent more than $65 billion in property damages every year. Mangroves are not only a viable alternative to man-made structures, but they also provide a natural habitat for wildlife , which in turn can create recreational or tourism value or commercial value in fisheries or shrimp farming.

Taking action

The term biodiversity was first coined in 1985 as a contraction of “biological diversity” . It attempts to simplify the vastly complex web of interconnected ecosystems on earth into one single word. Preserving the remaining, and restoring the damaged, biodiversity is not nearly as simple. For the investment community, consideration of biodiversity is still nascent.

But it’s evident that investors face risks to their portfolios due to biodiversity loss, and opportunities to contribute to biodiversity gain. By taking positive action through investing in nature-based solutions, and managing your portfolio to minimise its environmental impact, human activity, rather than being a threat, can help to safeguard biodiversity – and all the life on Earth it sustains.

References:

(1)Where Might We Find Ecologically Intact Communities ? Frontiers in Forests and Global Change
(2)UN Report: Nature’s Dangerous Decline ‘Unprecedented’; Species Extinction Rates ‘Accelerating’ Objectifs de développement durable de l’ONU, 6 mai 2019
(3)Managing nature risks: From understanding to action, Pwc, 19 avril 2023
(4)Biodiversity, E.O.Wilson, National Academies Press, 1988
(5)La COP15 se termine par un accord historique sur la biodiversité, Programme pour l’environnement de l’ONU, juillet 2023
(6)Mangroves save us from billions of dollars of flood damage a year, Global Center on Adaption, 2020
(7)Mangroves for coastal defence: Guidelines for coastal managers and policy makers, The Nature Conservancy, 2014
(8)BioScience, Origin of the Term Biodiversity, Bioscience, 1er juillet 2021

Source: Monaco for Finance

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