Breaking down biodiversity: An investor’s guide

The environmental factor of ESG is often taken to be fully covered by climate change, but that is a dangerous mistake. Risks from the biodiversity crisis unfolding around us should be prominent in investors’ thoughts.

Reduced capacity for carbon absorption, lower crop yields and reduced fish catches are just some of the natural risks that have largely been ignored by the investment community.

Ecosystems are complex and no single measure can capture all the effects of human activities. Nevertheless, there are various ways of auditing biodiversity and humanity’s impact on it.

A comprehensive global study by the Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services revealed up to one million species are at risk from extinction and that the rate of extinction is increasing.
Human activity has “severely altered” 75% of terrestrial environments and the recent Living Planet Index shows an average 68% fall in mammal, bird, amphibian, reptile and fish populations from 1970 to 2016.

These facts should alarm investors, given damage to ecosystems could drain close to $10trn (£7.1trn) from the global economy by 2050, according to the World Wild Fund for Nature, and we are a long way away from providing anywhere near the capital needed to fight this crisis.

We have a good sense that global biodiversity funding needs will amount to $722-967bn by 2030, split between dedicated conservation and more mainstream biodiversity needs. But for now, global biodiversity finance amounts
to a mere $143bn.

The scale, urgency and complexity of this challenge means collaboration is essential for success.

Eoin Murray, head of investment, Federated Hermes

Investing in the world’s eco-warriors

The private sector will play a critical role in delivering global goals on biodiversity, which are set to be agreed at the Convention on Biological Diversity COP 15 later this year. As investors, we can ensure that flow of capital is directed to companies that are answering this call for action.

For example, improving access to quality water supply and preservation of the resource are critical to the environment. Water is essential for agriculture and food security, and it is the lifeblood of our ecosystems.

One of our key holdings, Ecolab, helps to create positive impacts towards this theme by providing solutions across the water cycle. Ecolab is a global leader in water and sanitation solutions across food service, food processing, hospitality, healthcare, industrial and oil and gas markets.

Deforestation is another biodiversity issue we are tackling. Forests are the largest biodiversity basins globally, containing 60,000 tree species and 68% of the world’s mammals. Furthermore, 33% of humanity depends on forest and forest products, which directly provide 45m jobs and $580bn of annual commerce.

We invest in Brambles, a global pallet pooling network operating a fleet of around 300m wooden pallets, rivalling single-use pallets that retain approximately 50% of market share. Last year, Brambles displaced around 1.76m trees from being felled, preserving 2,600 hectares of forest, chiefly in Brazil. The firm is currently trialling recycled plastic pellets, which if commercialised could displace up to another 4,500 hectares per annum.

Ingrid Kukuljan, head of impact and sustainable investing, Federated Hermes

Engaging companies on biodiversity

There is an urgent need for companies and their investors to acknowledge their impact and dependence on nature. Protecting and restoring biodiversity is therefore a stewardship priority for us.

Companies should assess their dependency on biodiversity and the risks this poses, and should establish strong governance and oversight for biodiversity. Through voting and other forms of stewardship, board directors will be increasingly held accountable for ensuring sustainable land use throughout the supply chain, including eliminating links to deforestation.

As best practice, we expect companies to commit to a net-positive impact on biodiversity by 2030 at the latest.
Once a company has identified its material dependencies and impacts on biodiversity and ecosystem services, it will be able to design impactful interventions to enable it to have a net-positive impact on biodiversity. The goal should be to integrate nature considerations into risk management and strategic decisions taken throughout the company.

The most significant dependencies and impacts for many companies are likely to be found in the supply chain, so improving supply chain oversight and engagement should be a key aspect of the biodiversity strategy.

Sonya Likhtman, engager, EOS, Federated Hermes

Read the latest ESG Clarity digital magazine on biodiversity here.