Why Fund Managers Started Worrying About Biodiversity

(Bloomberg) -- The natural world is in crisis: Global wildlife populations have declined by an estimated two-thirds on average in the past 50 years, up to 1 million species are thought to face extinction and many of the earth’s ecosystems are badly damaged. The destruction of the planet’s biodiversity, the result of human activity from deforestation to pollution, isn’t only troubling for conservationists and wildlife lovers. It also poses huge economic risks. That realization is beginning to bring biodiversity the same kind of attention that has been building around climate change among so-called sustainable investors. It’s an effort, in the words of one fund manager, to “mainstream natural capital as an asset class.”

1. What’s biodiversity?

Biodiversity is the breadth and variety of life and ecosystems on earth, covering polar bears to plankton. And though humans rely on the natural world for crops for food, materials for building and medicine, as well as protection from extreme weather, homo sapiens have caused significant damage to it through deforestation, resource extraction, intensive agriculture, pollution and climate change.

2. How bad is the damage?

Three-quarters of the land on earth has been “severely altered” by human actions, as has two-thirds of marine environments, according to a report last year from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services. In addition, more animal and plant species are now threatened with extinction than at any prior point in history.

3. Why does it matter?

Destroying the balance and richness of nature poses significant risks for societies and economies. More than half of the world’s total gross domestic product, or $44 trillion, involves activities that are moderately or highly dependent on nature, according to the World Economic Forum. Around 50% of drugs are developed from natural products, with an estimated 50,000 to 70,000 plant species harvested for medicines, while food production is reliant on healthy soils and pollination and faces challenges from pests, pathogens and climate change as biodiversity declines.

4. Where does finance come in?

The decline of biodiversity first and foremost is a risk to be managed. While collapsing fish stocks or the rapidly declining bee population may seem like far-removed concerns for financiers in hubs like New York or London, finance firms are exposed to declining biodiversity. Destruction of the natural world could result in defaults, lower returns and increasing insurance liabilities due to environmental catastrophes, according to the UN Environment Programme. The Organisation for Economic Cooperation and Development (OECD) says that businesses, banks and investors may also face insurance risks, higher costs of capital or lending requirements, and a loss of investment opportunities. The financial world also contributes to the damage through investments, as well as their lending and underwriting activities.

5. How much is at stake?

The full financial cost of a loss of biodiversity is unknown and hard to calculate. In one of the first studies of its kind, De Nederlandsche Bank NV, the Dutch central bank, said in June that the country’s financial institutions held 510 billion euros ($604 billion) of investments that were highly or very highly dependent on one or more “ecosystem services,” a term that refers to the benefits that nature provides to society and the economy such as food and water. The loss of these services “would lead to substantial disruption of business processes and financial losses,” DNB said.

6. What have investors done so far?

Very little. While finance industry awareness of the risks posed by climate change have increased dramatically in the past five years, conservation group WWF said earlier this year that biodiversity-related financial risks have been “completely ignored,” while the Principles for Responsible Investment (PRI), the world’s biggest industry body for sustainable investing, said investors have “limited awareness” of the topic and few commitments or policies to address it.

7. What’s changing?

The PRI noted there are now a small but growing number of funds and bonds with specific biodiversity objectives. Axa Investment Managers, launched a 200 million-euro impact fund last year to invest in projects that protect natural habitats, while HSBC Global Asset Management Ltd. said in September that it’s teaming up with a specialist climate change advisory firm to create a new fund manager -- this was the announcement that spoke about mainstreaming “natural capital as an asset class.”

8. How about for existing investments?

A small number of fund managers, including Robeco, have made biodiversity a priority topic for their engagements with companies, as private lobbying on behalf of social goals is known. Meanwhile, a group of 26 asset managers, insurers and banks in September launched the Finance for Biodiversity Pledge, committing to “protect and restore biodiversity through their finance activities and investments.” And a group of finance firms including Axa, BNP Paribas SA and Standard Chartered Plc, together with WWF, the United Nations and a number of governments such as the U.K. and France, began work on a Taskforce on Nature-related Financial Disclosure in July with a plan to create a framework to guide nature-related financial disclosure by the end of 2022.

9. How would that measuring work?

As with much of sustainable finance, data and measurement are key challenges. And where investors focused on the climate impact of their portfolios now have ample data for measuring carbon footprints, similar tools for capturing biodiversity impacts are nascent at best, reflecting the complexity of the subject. Economists have calculated the value of global crop output at risk due to declining populations of pollinators such as bees and butterflies (at as much as $577 billion annually) and the potential cost of flood damage from storm events without functioning coral reefs ($272 billion). But totaling the biodiversity impact or exposure of a single company is incredibly difficult. And doing the same for a portfolio of investments is harder still, though not impossible.

10. What would that look like?

In 2014, Dutch lender ASN Bank was the first bank globally to measure the biodiversity footprint across the full spectrum of its portfolio: It calculated that the impact of its loans and investments was equivalent to an area roughly the size of Tokyo, or 7,000 square kilometers, being completely devoid of biodiversity. In April, Natixis said the “interest in quantitative indicators capturing biodiversity metrics is growing rapidly among regulators and investors.” Earlier this year, four French fund managers — Axa Investment Managers, BNP Paribas Asset Management, Mirova and Sycomore Asset Management — launched an initiative to develop tools for measuring investment impact on biodiversity, while a group of fellow Dutch financial institutions led by ASN Bank have established the Partnership Biodiversity Accounting Financials to measure the positive impact of investments in biodiversity.

11. How about financial regulators?

The upcoming 15th UN Convention on Biological Diversity, scheduled for next year, is anticipated as a landmark moment in which countries will set ambitious targets to support the natural world. It’s likely there will be a pledge toward reaching a state of no net loss of biodiversity by 2030 -- a highly ambitious goal -- with a call for all actors across society, including businesses and financial institutions, to contribute through their interactions with nature, UNEP said in June. And much as the Paris accord of 2015 galvanized financial interest in climate change, the expectation is this will do the same for biodiversity.

The Reference Shelf

• Report from Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services on biodiversity loss.
• World Economic Forum report on dependency of global GDP on nature.
• The Dutch central bank’s assessment of its financial sector’s indebtedness to nature.
• Details of the agenda for a UN-sponsored task force on nature-related financial disclosures.

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