Biodiversity loss - the next big challenge for investors

Nature loss across Asia will profoundly damage economic activities that rely on natural capital, according to several recent studies. Investors need to act.
Biodiversity loss - the next big challenge for investors

Several recent reports from global agencies have confirmed that investors’ focus on minimising the effects of climate change has come at the expense of ignoring perhaps an even greater risk – the loss of biological diversity.

A report from the asset consultant Mercer late last year, for example, said that investors have dedicated relatively limited time to biodiversity risk, compared to the attention they have given to climate-change risk. A UNPRI [Principles for Responsible Investment] discussion paper on biodiversity, also warned that few investors have focused on minimising biodiversity impacts.

Biodiversity-related risks have risen globally due to the rapid expansion of infrastructure and the built environment. The problem is most acute in Asia, with the population of cities in the region expected to grow by more than 550 million in the next decade.

In its 2020 Global Risks Report, the World Economic Forum (WEF) predicted that more than half of the world’s gross domestic product ($44 trillion), such as the provision of food, fibre and fuel, is moderately or highly dependent on nature.

The loss of biodiversity places this value at risk. The populations of mammals, birds, fish, reptiles and amphibians, for example, declined by 60% between 1970 and 2014, according to the World Wildlife Fund (WWF).

"This is driven by unsustainable consumption, pollution, climate change and habitat conversion," said the WWF.

Most wildlife is destroyed by land being cleared for cattle, soy, palm oil, timber and leather. Not surprisingly, according to Moody's, biodiversity-related controversies have the most impact on three sectors: mining and metals, food and energy.

A study of the MSCI All-Country World Index, by Pictet Asset Management, found that the world's biggest corporations are killing off animal and plant species at a rate that is 22 times greater than the threshold level; that is, the level at which species would not become extinct. One million species are at imminent risk of extinction, endangering ecosystems that are critical to sustaining human life.

The Dasgupta review last year from the UK Treasury highlighted that economic and financial decisions have not traditionally priced in the value of nature, and defines this as “an institutional failure”.

“Financial services cannot continue to behave as if it is isolated from nature,” said Hanne Thornam, head of EY's head of sustainability services. “Financial institutions can play a part by strongly including biodiversity and nature-positive outcomes in sustainable finance strategies,” she added.

The PRI states that some investors are indirectly addressing biodiversity-related risk through the adoption of sector-specific policies on palm oil and deforestation, but added, “despite these early actions, investors have limited awareness of, and few commitments to investment policies on biodiversity.”

Asia Pacific asset owners with a well-developed and sophisticated environmental policy, like for example GPIF, GIC and NZ Super, base their approach to environmental activities on managing the carbon intensity of their portfolios. However, few major asset owners in Asia mention biodiversity in their public reporting.

“I’d broadly concur with the assessment that biodiversity has been less prominent than climate, whether we talk about investors or corporates, particularly in Asia,” Paul Milon, Hong Kong-based head of stewardship at BNP Paribas Asset Management, told AsianInvestor.

Steve Howard, Temasek

Singapore state investor Temasek is taking a more vigorous approach than most peers to biodiversity issues, working with the WEF and AlphaBeta, a Singapore-based strategic economics consultancy.

It estimates that investing individually or collectively in just 59 specific nature-positive business opportunities in the region could generate $4.3 trillion and 232 million jobs annually by 2030, equivalent to 14% of Asia Pacific’s GDP.

“The accelerating rate of nature loss will have an unimaginable impact,” according to Steve Howard, chief sustainability officer at Temasek.

“Nature loss in the region will profoundly damage economic activities that rely on natural capital, with as much as 63% ($19 trillion) of Asia Pacific’s GDP at risk – a higher share than the global average.”

The Temasek study notes that minimising the impact on forest and agricultural land, for example, will require subsidies and incentive programmes to promote low-impact energy deployment, as well as mitigation obligations for projects with higher land impact.

Dharisha Mirando, investor engagement lead at Hong Kong-based China Water Risk, a non-profit initiative that works to highlight and address the business and environmental risks of that country's water crisis, told AsianInvestor that investors are discussing “chronic long-term risks”, such as biodiversity, “but there is still less focus on them. These slow-brewing risks will be devastating if we don’t act. The question is how do we value them, as it can be quite complex.”

The UN believes the challenge for the investment industry is to create suitable investment vehicles to begin closing what it estimates is a $4 trillion funding gap in engagement, divestment and direction of capital towards nature protection by 2050. Biodiversity bonds are likely to be among the first assets that institutions can access to help make an impact. Listed and unlisted companies are facing more scrutiny, too.

Ratings agencies and index providers are helping investors pinpoint those companies working to limit the loss of biodiversity. A study by Moody’s in 2021 found that 38% of 5,300 large publicly-traded companies they assessed had at least one facility associated with habitat loss.

Biodiversity risk does not get as much attention partly because regions, companies and sectors treat the available data in different ways. Work in this area is ramping up, however.

Fund managers including Axa, BNP Paribas and Pictet, all signatories to the Taskforce on Nature-related Financial Disclosures (TNFD) are developing biodiversity measures. For example, BNP Paribas AM has piloted an approach to assess the biodiversity impact of a portfolio of 10 listed companies in the agri-food industry.

Milon said that using data on turnover by region and industry from Bloomberg and company annual reports, the value of BNP Paribas AM’s investments and the share of each company owned, the organisation could calculate the footprint of the portfolio and the five highest-impact companies.

Much like the Task Force on Climate-Related Financial Disclosures (TCFD), the TNFD aims to develop a risk management and disclosure framework for companies and investors to report and act on nature-related risks. Its 250 members include the Japanese business federation Keidanren, Norway’s sovereign wealth fund manager, the Swedish AP3 and AP7 pension funds and the Singapore Exchange.

The TNFD's aim is to support "a shift in global financial flows toward nature-positive outcomes"; to stem the destruction of the planet's biodiversity.

¬ Haymarket Media Limited. All rights reserved.