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Investors need to consider how they can mitigate biodiversity loss through their portfolios and conserve it for the sake of the planet’s future

“Humanity is waging a war on nature,” stated UN secretary-general António Guterres in a landmark speech to students at Columbia University last December. “This is suicidal. Making peace with nature is the defining task of the 21st century. It must be the top priority of everyone, everywhere.”

High-profile figures such as Guterres are increasing awareness of biodiversity loss – though, sadly, awareness is not enough. Threats to land and marine ecosystems as well as species populations are increasing exponentially. Since 1970, 32% of the world’s forest area has been destroyed, 85% of wetlands have been lost, 50% of the world’s coral reef systems have disappeared and there has been, on average, a 60% decline in vertebrate species, according to the World Economic Forum.

“We are losing our life-support system,” says Eugenie Mathieu, senior impact analyst at Aviva Investors. “Scientists are calling this the ‘sixth great extinction’ – the last one being when the dinosaurs died out.” For these reasons, biodiversity experts are urging the investment industry to step up its commitment to natural capital through measurement of corporate impact and mitigation of biodiversity loss – and so benefit from the upside opportunities associated with this ‘natural asset class’.

According to Annelisa Grigg, a director at biodiversity consultancy Global Balance and contributor to the Aligning Biodiversity Measures for Business initiative, there are two ways to look at biodiversity – how companies are impacting it and how they are depending on it. “Lots of companies are looking at the first but not so much the second,” she says. “This has left them open to risks but also lots of overlooked opportunities, as it is only one part of the picture.”

It can be extremely challenging to assess a company’s biodiversity dependency and impact but then also invest in a pure play that is mitigating biodiversity loss. There is a huge awareness problem.

“People are unaware of the negative implications for the environment and society – and therefore for their investment portfolios, too,” comments Federated Hermes’ head of impact investing Ingrid Kukuljan. “Covid has pushed biodiversity forward as we now have this increased awareness of human contact with wild animals due to deforestation, for example. Pandemics are one of the resulting problems we are facing.”

Still, though, we come back to the problem of not having anything really tangible to measure and record – not to mention investors often being far removed from the biodiversity any company in their portfolio has an effect on. “If you asked a company how much it has relied on cows and land to make a product, it would not really know,” says Henry Boucher, deputy chief investment officer at Sarasin & Partners. “It just knows that it bought 50 tonnes of palm oil or soybeans, say.”

While fund selectors maintain they are trying to measure their portfolios’ biodiversity exposure and impact, a lack of common frameworks makes this challenging. “We have been trying to get data on biodiversity but it is not uniform enough for us to use,” explains EQ Investors senior sustainability specialist Louisiana Salge. “Governments would like to see companies reporting on biodiversity net gain (see boxout on page 30) but not many are. We need everybody to be measuring their biodiversity impact but it feels like it is still very early days.”

Despite the many deterrents, such as a lack of data and disclosure, investors are finding ways to invest in nature and make a return. On top of its own research, for example, Aviva Investors uses NGO rankings such as Forest 500, ChemScore, the World Benchmarking Alliance’s Sustainable Seafood Index and As You Sow Plastics to help gauge a company’s biodiversity impact.

For his part, Sarasin & Partners’ Boucher flags NGOs’ estimates on raw material usage, while HSBC Global Asset Management fund manager Angus Parker says he has identified three ways to incorporate biodiversity exposure into his Global Equity Climate Change portfolio: companies dedicated to plant-based protein and ingredient companies supporting these; companies offering meal kits so the right amount of food is used and little is wasted; and companies investing in ‘precision agriculture’, which involves sophisticated software to reduce the amount of fertilisers and pesticides used and achieve greater yields.

“We are most excited about companies that can help both to reduce the need for further land use change to feed human diets and to improve farming practices to ensure a more harmonious relationship between agriculture and nature,” Parker adds.

Reinforcing the message that investing in nature does have upside potential, Federated Hermes’ Kukuljan says: “It is tricky but we can receive a return from nature. We do a lot of research on where companies need to reduce their impact on nature and restore and conserve biodiversity and then we find it is not difficult to make returns.”

Green bonds are another way for investors to access biodiversity. “There are opportunities in government bonds and development bank bonds because the projects are directly investing in building out natural capital in line with government policies,” says Jupiter head of environmental solutions Rhys Petheram.

Investments in biodiversity and sustainable land need the long-term backing bond frameworks can off er and they fit well with their multi-sector approach. Despite the record growth in the wider sustainable bond market, though, EQ Investors’ Salge says only 4% of green bond proceeds currently go towards biodiversity projects.

As more ways are found to access the natural asset class, so there are encouraging signs asset managers are stepping up. Federated Hermes and EQ Investors are, for example, among a number of firms that have earmarked biodiversity as an engagement priority. In terms of legislation, 74 financial institutions including regulators and companies have also partnered with various United Nations bodies and the World Wide Fund for Nature to form the Taskforce on Nature-related Financial Disclosures (TNFD).

Complementing the Taskforce for Climate-Related Disclosures (TCFD), the initiative is working to come up with a framework for companies to assess, manage and report on their dependencies and impacts on nature. With climate paving the way and the TCFD becoming mandatory in the UK, some commentators are hopeful we could see TNFD requirements sooner rather than later across Europe – indeed, France already requires financial institutions to disclose their strategy for reducing biodiversity impacts under its new Article 29.

“Climate change has woken us all up but it has also created that framework,” says Sarasin & Partners’ Boucher. “After we have been asleep at the wheel for decades, it could take just three years for us to wake up to biodiversity loss.” And Kukuljan adds: “Given the importance of biodiversity on the world, it should be made mandatory. We are hopeful October’s COP15 will result in a global accord that aligns with the Paris Agreement and pushes the biodiversity agenda forward.”

Until that happens, however, what can investors be doing? Certainly they need to understand that measures taken to reduce greenhouse gas emissions are unlikely to benefit biodiversity in the same way, so nature-based solutions should be given equal consideration.

Aviva’s Mathieu and Jupiter’s Petheram agree the UN’s COP15 Biodiversity Conference may prompt more companies to carry out fuller assessments of their impacts on nature and highlight industry collaboration as key. “Asset managers are scrambling around to keep up with the climate side and jumping at every opportunity to get involved, so we should see this move on biodiversity across the industry,” believes Petheram.

It feels like we are at a point where finance companies need to take that urgent next step in halting or reversing biodiversity loss by completely reassessing their interactions with nature and, maybe more importantly, setting targets to reduce their impact and become nature-positive. The alternative is unthinkable.

Natalie Kenway is editor of ESG Clarity and global head of ESG insight at Bonhill

‘Biodiversity net gain’ (BNG) is defined as ‘development that leaves biodiversity in a better state than before’. The National Planning Policy Framework states planning policy should identify and pursue opportunities for securing measurable gains for biodiversity – yet few companies are complying yet as there is little consensus on how best to measure their impact. “There have been a number of high-profile commitments but ways of measuring it are still evolving,” notes Annelisa Grigg at consultant Global Balance.

In the UK, the Environment Bill 2019/20 set out provisions for land developers relating to protections of habitats, nature and biodiversity, including a condition that a development cannot commence unless a BNG plan is submitted and approved by the relevant local planning authority. Furthermore, a 10% BNG is mandatory.

Similar to carbon off sets, ‘BNG credits’ have been created but law firm Lodders cautions: “Bearing in mind the purchase of credits is an option of last resort, developers will be required to demonstrate they would be unable to mitigate the development impact to the extent required onsite or locally. Developers can opt to purchase credits to meet the biodiversity net gain objective with the proceeds being used exclusively for enhancing existing biodiversity or purchasing land to create new habitat.”