Biodiversity loss - The next great challenge for markets

LGT Crestone

LGT Crestone

Over the next 30 years, it is estimated that more than $8 trillion of investment will be needed to fund nature-based solutions to tackle climate change, biodiversity loss and land degradation.[1] That’s four times the amount that is invested today. As the world begins to come to terms with the magnitude of the biodiversity challenge and how inextricably linked biodiversity is to climate change, this will create risks for investors, as well as opportunities.

Earlier this month, Crestone Wealth Management hosted a panel discussion with Edward Lees, Co-Head of the Environmental Strategies Group at BNP Paribas Asset Management and Kenneth Robertson, Client Portfolio Manager, Sustainable Investing at Robeco. Our panellists provided their insights on biodiversity loss and the associated challenges and opportunities this is likely to have on investors. The session was facilitated by Anshula Venkataraman, Senior Investment Analyst at Crestone Wealth Management.

The problem in numbers

Lees explained that approximately half of global GDP is threatened by nature loss, and that we are now consuming natural capital around 1.75 times faster than nature can regenerate itself. With around one third of the world’s topsoils already degraded, this figure could reach 90% by 2050 if our commercial farming practices remain unchanged. He explained the importance of insect pollinator populations, upon which 75% of the world’s crops depend at least to some degree, and how the decline in populations has important implications for the way we feed ourselves. Around 32% of the world’s forests have also been destroyed, and within oceanic ecosystems, there has been a population decline of roughly 80% in freshwater species since 1970.

But investor awareness is growing

With awareness of these issues growing, Lees explained that this has translated into increasing regulatory requirements and an acknowledgement that greater capital flows are needed into these areas. Since publicly-listed biodiversity companies are few and far between, these issues frequently need to be addressed by investors indirectly. Companies that support sustainable forestry and sustainable packaging are one way investors can address this issue, but Lees explained that it’s also important we support companies that are providing deeper and more disruptive solutions to the biodiversity challenge.

While climate change currently receives more attention than biodiversity loss, Robertson agreed that awareness of biodiversity loss is building among both policymakers and investors. “This is important as climate change and biodiversity loss are two sides of the same coin”. He explained that climate change is one of the key drivers of biodiversity loss, and that biodiversity is essential for mitigating climate change. “We have to bring in this idea that if we preserve nature better and focus more on biodiversity, then we’ll also have an effect on climate change and vice versa.”

Lees elaborated on some of the ways that biodiversity is important for climate. He explained that soil is extremely helpful in absorbing carbon from the atmosphere, and that improved soil can be achieved through better farming practices. In addition to this, restoring habitats can also help to remove carbon dioxide from the air.

Investing in biodiversity

Lees explained that there are two different approaches that can be taken to access investment opportunities within biodiversity. Both are important. The first approach is to ensure that, as an investor, you are not doing significant harm and that you are looking to invest in companies that do things in a more responsible manner—for example, companies that may have better disclosure than their peers. The second approach is to look at solution providers. With this approach, which is his preferred way, you look to invest in companies that are providing solutions to the biodiversity challenge, such as those playing a role in the circular economy or in agriculture. One example might be tech-enabled greenhouses that grow food with low water usage and no pesticides or incremental fertiliser. This approach opens the way for land to be returned to nature. Other examples include companies that use intelligent biologics, like providing targeted prophylactics for bees to protect them against parasites, or the targeted elimination of various pests that is harmless in contrast to traditional chemical pesticides. These approaches have been huge wins for biodiversity.

Integrating biodiversity into environmental, social and governance analysis

Robertson discussed the importance of robust biodiversity data. He explained that, as investors, we need to encourage companies to disclose more, and this should not be limited to publicly-listed companies—but that we also need to engage with sovereigns.

Investors can take a top-down approach when looking at the issue of biodiversity. As an example, this might involve introducing a reduction target for deforestation. But perhaps the more impactful thing to do is to engage with companies, as this is ultimately how investors can generate some real-world impact, particularly in the listed equity space. Robertson explained that Robeco aims to invest in companies that are ‘slightly negative’. “By only investing in positive names, those companies on their own are not enough to solve the biodiversity challenge. In light of this, it’s important to bring more companies along with us.”

Tech, reputation and regulation—the transition risks investors should be aware of

With the introduction of the Taskforce for Nature-related Financial Disclosure, and the United Nations declaring the 2020s as the decade of ecosystem restoration, Lees said that this brings the risk of greater reporting requirements. He added that companies may be exposed to reputational risk where it is regarded as a ‘bad actor’, as well as transition risks associated with technology changes.

Don’t underestimate the role of investors

Robertson emphasised the importance of not underestimating the role that investors can play in combatting biodiversity loss. He also drew attention to the role that the Sustainable Finance Disclosure Regulation can play in this, which mandates investors to be much more transparent about the adverse impact our portfolios have. Lees agreed, adding that there have been many cases where regulators have played ‘catch-up’ to investors: “Individual awareness and grassroots activity can help to move us in the right direction.”

Active management is key

While biodiversity represents a very important need that must be met, our panellists acknowledged that, from an investment perspective, it can create challenges. Lees explained that, previously, a lot of well-meaning money has been invested in a small amount of opportunities, which has created large valuation spikes and, in some cases, substantial collapses in valuations. However, we are now seeing stronger versions of these companies emerging as the industry matures. While this has led to a great many more investment opportunities, it does require care and active management.

[1] United Nations Environment Programme.

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LGT Crestone
LGT Crestone

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