Biodiversity has rapidly risen up corporate and investor agendas, with growing recognition of the economy’s far‑reaching dependency on ‘ecosystem services’, notes Impax Asset Management[1], a delegated manager of BNP Paribas Asset Management.
The World Economic Forum (WEF) estimates biodiversity underpins more than half of global GDP and the 2022 COP15 biodiversity summit agreed to mobilise USD 200 billion a year in finance for biodiversity by 2030.
There is, however, limited information on how companies address nature‑related risks and opportunities. Enhanced disclosures should ultimately enable investors such as us — and our clients — to make better informed investment decisions.
The scarcity of reporting is a function of the complexity of measuring both impacts and dependencies on biodiversity and natural capital. Unlike climate change, for which greenhouse gas emissions and avoided emissions are measurable indicators of a company’s impact, biodiversity has no simple global metric and is highly location specific. There is also limited understanding of where and how companies depend on nature in their operations.
We believe bridging the information gap is a crucial step towards addressing this issue and advocate firmly for enhanced disclosure requirements. After the publication of the final recommendations of the Taskforce on Nature‑related Financial Disclosures (TNFD) last September, we have seen a strong uptick in companies’ interest and reporting on the topic.
Improving nature‑related practices and reporting
There are three potential drivers towards widespread adoption of nature‑related reporting:
- Some companies are already beginning to voluntarily report in line with the TNFD framework, with others publicly committing to doing so. Norms and investor expectations should evolve as they have for climate‑related reporting.
- It looks likely that corporate reporting standards will help move TNFD into the mainstream. The International Sustainability Standards Board looks set to incorporate the TNFD framework, as it has the Taskforce on Climate‑related Financial Disclosures (TCFD).
- We expect the COP16 biodiversity summit — to be held in late 2024 — to focus on mechanisms for realising the ambitions of COP15, including mobilising private finance to protect and repair the natural environment.
To date, investors have focused on addressing commodity‑driven tropical deforestation, a highly visible and significant cause of global forest loss.
Capturing opportunities and addressing risks
TNFD primarily focuses on the risks facing companies given their myriad dependencies on nature. However, biodiversity‑related opportunities are also an important part of the framework.
The Intergovernmental Science‑Policy Platform on Biodiversity and Ecosystem Services (IPBES) identifies five overarching direct drivers of biodiversity loss:
- The changing use of land and sea (which includes deforestation)
- The direct exploitation of organisms (such as overfishing)
- Climate change
- Pollution
- Invasive species
There are measures that can address and alleviate the pressures on ecosystems from each of these drivers. In turn, we believe these can create long‑term opportunities for investors.
Three of these five areas present familiar territory for us, as we have invested in environmental solutions for over two decades:
- First is climate: most solutions that enable the transition to a low‑carbon economy will by extension help protect ecosystems that are vulnerable to the effects of climate change.
- Second, pollution: the state of biodiversity is intimately connected with air, soil, and water quality. For instance, companies involved in the testing and treatment of water can help control pollution and reduce or prevent harm to water‑borne life.
- Third, changing land use: global demand for timber and commodities is driving the conversion of natural forests into tree plantations, crops, and grazing land. Packaging companies whose products advance circularity can reduce the use of virgin materials, and so pressure on the land.
Solutions to the other two drivers of biodiversity loss are emerging.
- Sustainable aquaculture can help avoid overfishing, for example.
- Providers of water ballast treatment can help the shipping industry prevent the spread of invasive marine species — an issue that causes at least USD 23 billion in economic losses each year.
As with investing in climate solutions, there are times when addressing a driver of biodiversity loss may still contribute to the issue. Importantly, it does not restore the biodiversity we have already lost, which is another task ahead of us.
Better data and disclosure are critical steps in shining a light on the issues and enabling an accurate assessment — and valuation — of the risks and opportunities associated with biodiversity loss and its mitigation. Only then will capital flow to where it is needed.
1] This is an extract from Outlook 2024 – Why prospects for a more sustainable economy remain undimmed
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