Human-driven pollution, climate change, and population growth are all proven causes of the ongoing loss of biodiversity. The variety and diversity of living species on Earth is a backbone of human existence. Global gross domestic product is estimated to total around USD 44 trillion. Of this, more than half is reckoned to rely, to some extent, on biodiversity (Source: World Economic Forum).
<On Earth Day 2024, we present our paper Is Your Client Asking about Biodiversity? – below you’ll find an abbreviated version>
Biodiversity refers to the variety of living species on Earth, all of which work together in ecosystems, like an intricate web, to maintain balance and support life. Human life is fundamentally linked to biodiversity: it provides necessities such as food, air and shelter and plays a prominent role in economies, society and culture.
However, pollution, climate change, and population growth, among other factors, are rapidly depleting biodiversity. Governments and other parties have started to respond. The European Union’s Sustainable Finance Disclosure Regulation, the Global Biodiversity Framework and the US Inflation Reduction Act are all example of collaborative efforts to preserve nature.
Why should investors care?
History has shown that when society faces large structural problems, companies that help to solve these problems can do well.
Underscoring the value of investments in nature, the World Bank has found that every dollar invested in water supply could generate seven dollars in return from related beneficiaries.
For investors, the key will be to identify those companies that are closely related to solving nature-related problems, avoiding increasing taxation risks and potentially receiving capital flows directed at solutions.
The current biodiversity finance gap is valued at about USD 700 billion per year, so we believe it is a priority to scale up and effectively allocate biodiversity-positive finance. There are multiple approaches to this, such as excluding investment in practices and industries that harm biodiversity and implementing investment criteria that favour nature-positive solutions.
What are the challenges of investing in biodiversity?
Concerns over greenwashing are rising within biodiversity listed equity funds. The challenges of investing in biodiversity in the public space are:
- The limited universe of listed biodiversity-focused companies
Listed equity biodiversity funds face a unique challenge. Unlike areas such as renewable energy that have clear links to decarbonisation, listed companies rarely have core business activities that directly conserve or restore biodiversity.
Many public companies claiming to be nature-positive achieve this through how they run their operations, not through their business activities.
While some firms integrate biodiversity into their corporate sustainability initiatives or have projects that loosely address biodiversity goals, these are commendable, but often secondary efforts.
However, there are also public companies whose main activities have a meaningful link to biodiversity. They could include innovative solution-providers specialising in desalination, forest management, smart agriculture and recycling technologies, for example.
Keeping this two-way split in mind is helpful when evaluating biodiversity-related investment strategies in the public space carefully and transparently.
- Measuring biodiversity impact
Measuring a fund’s positive contribution to biodiversity is inherently challenging. The most common tool, Mean Species Abundance (MSA), has limitations. Most companies do not report on biodiversity meaningfully and, as there is little consistency across companies, making comparisons hard. Finally, biodiversity holds intrinsic value, which is difficult to realise and quantify through traditional metrics.
Aiming for ecosystem restoration
A BNP Paribas Asset Management strategy focused on ecosystem restoration seeks to align with the United Nations (UN) goal to return ecological functionality to degraded ecosystems. We believe that pausing and reversing the effects of the biodiversity crisis contributes to achieving this goal. This can be done through three key elements:
- Focus on solution providers
Firstly, by investing only in companies whose products and/or services enable environmental solutions which can drive impact as well as achieve sustainable, above-market returns over the longer term.
- Targeting reform in industries with a high biodiversity impact
Secondly, we target areas which have the largest, negative biodiversity impact: consumer staples, materials, energy, industrials, consumer discretionary, and utilities.
- Engagement
Finally, through individual engagement & proxy voting, collaborative engagement, and public policy and advocacy, we support and collaborate with the companies we invest in to maximise biodiversity-positive solutions and operations. We work with the BNPP AM Sustainability Centre to drive and guide biodiversity-related engagement.
