Biodiversity is being jeopardised by human activities such as industrial production, logging, agriculture and mining. These have destabilising effects on air and water quality, land use and climate change, to name just a few areas. Investors should, in our view, take note of the resulting imbalances affecting specific business sectors and entire economies.
Biodiversity refers to the incredibly rich variety of life on Earth. A contraction of ‘biological diversity’, the word encompasses every living thing on the planet: bacteria, insects, plants, animals, humans and more.
The concept of biodiversity is usually discussed on three levels: genetic diversity covers the different genes found in all individual plants, animals and living organisms; species diversity denotes the differences found within and between populations of species, and between the different species on Earth; last but certainly not least, ecosystem diversity takes in the processes, habitats, communities and variations within any geographical area.
According to the Royal Society, biodiversity is essential for the processes that support all life on Earth, including humans. A wide range of animals, plants and microorganisms helps optimise the healthy ecosystems that provide us with the air we breathe and the food we eat.
As an example, the Royal Society says that ‘pollinators such as birds, bees and other insects are estimated to be responsible for a third of the world’s crop production’, while ‘agriculture is also reliant upon invertebrates – they help to maintain the health of the soil crops grow in’. The Society adds that ‘life from the oceans provides the main source of animal protein for many people’.
The threat to biodiversity
Human activity is jeopardising the rich biodiversity of the planet. Between 1970 and 2019, the population sizes of mammals, birds, amphibians, reptiles and fish fell by an average 68% – a faster decline than at any other time in human history. The Intergovernmental Platform on Biodiversity and Ecosystem Services, an intergovernmental organisation, has said the main drivers of biodiversity loss include habitat loss, pollution and climate change. Today, nearly a million species are at risk of extinction, many within decades.
Why biodiversity loss matters to investors
Clearly, the loss of biodiversity is a tragedy on many levels. It is also an important consideration for investors because it presents businesses with potential transition and physical risks, as well as litigation and regulatory risks. These risks can affect the value of investments.
That is why it is important to understand the potential impact on an investment portfolio, particularly as some sectors have a higher risk associated with them than others. For example, among the most exposed industries are energy, mining & metals, utilities, and food & beverages.
Another area affected by biodiversity loss is pharmaceutical research into new active ingredients and molecules in plant and ocean organisms. This field holds the promise of new treatments for human pathologies or ways to combat antibiotic-resistant bacteria. Biodiversity loss limits our ability to explore these areas.
According to a World Economic Forum (WEF) report, 25% of the drugs used in modern medicine are derived from rainforest plants, while 70% of cancer drugs are natural or synthetic products inspired by nature. This means that every time a species goes extinct, we miss out on a potential new medicine.
And the implications are even more far-reaching. The loss of biodiversity could jeopardise all economies and our prosperity. In the same report, the WEF estimated that USD 44 trillion of economic value generation – more than half the world’s total GDP – depends moderately or highly on nature and its services and is exposed to nature loss.
How investors can make a difference
Since the Earth Summit in Rio de Janeiro in 1992, world leaders have acknowledged the importance of putting sustainability at the centre of economic development. While economic activity cannot be stopped, efforts could be made to reduce its footprint on biodiversity.
There is also growing recognition that protecting and restoring natural ecosystems can lead to economic growth and create new business opportunities, according to the WEF. The WEF emphasised that businesses rely on natural resources and ecosystem services, and therefore have a responsibility to ensure their sustainability.
As a result, the private sector played an important role before and during the UN Biodiversity Conference (COP15) in December 2022 in helping establish the landmark Global Biodiversity Framework. One of the targets for 2030 agreed at COP15 is the requirement for large and transnational companies and financial institutions to monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity through their operations, supply chains and portfolios.
The newly formed Taskforce on Nature-related Financial Disclosures will play a key role by delivering a risk management and disclosure framework for organisations to report and act on evolving nature-related risks.
Meanwhile, Nature Action 100, an investor-led initiative to engage corporations and governments, aims to fill a critical gap in asset management by establishing a science-based platform through which investors can articulate a clear vision for corporate and government action on biodiversity. The corporate engagements will be designed to ensure that key companies take robust and timely actions to address their biodiversity impacts and dependencies. These engagements will be complemented by policy engagement with relevant policymakers and supported by a technical advisory group.
Protecting the environment and biodiversity is at the heart of BNP Paribas Asset Management’s investment strategy and philosophy.
BNP Paribas Asset Management provides a range of solutions targeting biodiversity-related challenges, including an exchange-traded fund (ETF) strategy.
For more articles on exchange-traded funds, go to the ETFs category.
