Biodiversity loss isn’t just an environmental issue, it’s a financial risk that investors should integrate into their decision-making, writes Robert-Alexandre Poujade,ESG Analyst and Biodiversity Lead.
Investors should think about their investments in the context of the Earth system as awareness among governments and businesses of the potential economic implications of biodiversity loss grows. The issues include forest dieback – with the Amazon as a textbook example – savanna and dryland degradation, lake eutrophication, die-off of coral reefs, mangroves and seagrass meadows, and fishery collapse.
As a point in case, a recent World Bank study found that, in a worst-case scenario of partial ecosystem collapse, Malaysia could experience a 6% annual loss on economic growth by 2030 compared to a baseline scenario. Indeed, the effects on climate change are likely to be widespread: we know, for example, that changing rain patterns affect the availability of water for humans, agriculture and hydroelectricity.
Incorporating biodiversity loss scenarios into investment portfolios
Investors will be exposed to all the economic consequences of the changing dynamics of the planet.
Accordingly, there is a need for investors to better understand the investment trade-offs when considering dimensions beyond just targeting lower carbon (net zero) emissions. As an example, a large-scale hydro-electricity plant can be an effective way to produce low-carbon power, but it has impacts on terrestrial and aquatic biodiversity such as habitat loss and alterations to water flow and quality.
We would caution against avoiding analyses of the impact of biodiversity loss on portfolios and businesses.
While there is greater awareness of biodiversity loss in the private sector, the reality is that current macroeconomic scenario and corporate disclosure is still tilted heavily in one direction – that is, towards the economy reaching net zero by 2050.
A challenge – Data availability
In our approach1, we value these risks at a sector level, but unfortunately, location and supply chain data is usually only partially available. This limits the understanding of our potential exposure to biodiversity loss. To overcome this, we use proxies from our data providers and estimates from our own research, so that we can assess transition risks related to biodiversity loss.
We combine the best available biodiversity data to meet client needs. We also consider the specific needs in terms of reporting and decision-making related to asset classes (listed corporates, private assets, and sovereign bonds).
Addressing biodiversity loss as an investor requires both modesty and ambition. Our strategy for analysing biodiversity loss leverages on resources ranging from company screening and sector deep-dives to stewardship efforts. To implement this approach, we cooperate with both partners – to give it a scientific and empirical foundation – and clients as we work on the transition to an economy that is less harmful for biodiversity.
[1] Also see Sustainable by nature: our biodiversity roadmap 3-year update
