Investment Institute

Four critical elements for asset managers to meet the biodiversity challenge

  • 11 August 2023 (7 min read)

Key points:

  • Biodiversity is a growing priority alongside climate change and asset managers may consider implement specific engagement strategies
  • Collecting, analyzing, and reporting environmental data is key
  • Dedicated strategies backing biodiversity-related solutions, such as in agriculture and water solutions, can be a driving force for potential investment decisions

Our biodiversity system is deteriorating at an alarming rate and its loss is causing damage not only to the natural world but to the wider planet, society, and the global economy.

The World Economic Forum estimates that more than half of global GDP – around $44trn1  – depends on high-functioning biodiversity. As such, biodiversity loss is now increasingly recognized as a systemic risk. For investors, understanding how biodiversity risks might impact long-term portfolio returns and how best to manage them is an essential part of the equation.

Asset managers cannot address the environmental crisis alone, but they do have a role to play in protecting lives and livelihoods through the way they engage with companies or issuers and direct clients' capital.

Taken together, we believe there are four critical elements  required for asset managers to meet the biodiversity challenge.

1: Biodiversity and climate change, climate change and biodiversity

We already know the destruction of habitats and our food systems causes about 25% of climate emissions. In turn, climate change is becoming an increasingly significant driver of biodiversity loss – land and marine ecosystems absorb more than half of man-made carbon emissions.2

This interdependence and interconnectedness mean climate change and biodiversity loss must be tackled together.

However, whereas climate change focuses on a single metric – carbon emissions – biodiversity is multifaceted. Damaging a complex system like the natural world has innumerable economic consequences.

For instance, intensively farming land with pesticides and fertilizers limits its ability to continue producing food by reducing crop yields – and agricultural expansion has reached the point where over a third of terrestrial land surface is being used for crops and livestock.3

Polluting water supplies has terrible consequences for those affected, but it also puts the company responsible at risk of reputational and regulatory backlash, which could result in fines and/or higher taxes. Consumers may also boycott their products.

These are economic risks that asset managers cannot afford to ignore. As such, biodiversity must have equal billing with climate change when asset managers consider and make long-term investment decisions for their clients.

2: Biodiversity-focused engagement strategies

It is only in recent years that biodiversity has become a mainstream concern for investment managers. As a result, a comprehensive risk and disclosure framework – akin to the landmark Task Force on Climate-related Financial Disclosures (TCFD) – has hitherto been lacking.

A major step forward will be made in September with the launch of TCFD’s sister framework, the Taskforce for Nature-related Financial Disclosures (TNFD).

With higher-quality reporting from companies on their environmental footprints, asset managers will be better equipped to identify those businesses most exposed and how they individually impact the environment.

This will be crucial to navigating a world lacking a single point of focus – and will also facilitate more detailed engagement around those companies’ long-term plans to improve their business models and behaviors.

Nevertheless, asset managers should consider implementing their own specific biodiversity engagement strategies or risk squandering this opportunity to drive consequential environmental change.

3: A data-led approach

Given preserving biodiversity and ecosystems are now urgent priorities, it is crucial that we have the metrics and tools to measure the impact of investments on the environment. Collecting, analyzing, and reporting environmental data is accordingly key.

Today, companies like Iceberg Data Lab offer assessment tools and data solutions that demonstrate the environmental impact of issuers and assets throughout their value chain.4

Moreover, advances in “big data” mean it is now much easier to monitor factors such as water quality and soil erosion, with satellite imagery and other technologies providing a reliable picture of exactly how and where the environment is changing.

This should enable investors to make detailed assessments of biodiversity-related risks and opportunities – and therefore make more informed investment decisions.

However, having the right tools does not automatically mean that asset managers will use them. This will require a genuine commitment to tackling biodiversity loss, which is not yet wholly evident across the sector.

4: Biodiversity solutions and innovations

As with carbon emissions, the investment approach to biodiversity is twofold. We can seek to mitigate risks by allocating capital to companies reducing their biodiversity footprints. But we can also allocate to biodiversity-friendly solutions. The latter, we believe, will most excite investors seeking to have a real impact on the environment.

Companies in the solutions space develop products and services which can have a positive benefit on biodiversity preservation beyond their own footprints. Key areas here include agriculture and aquaculture, water treatment, and sustainable materials.

A myriad of potential investment opportunities and innovations in these areas already exists, which will improve the way we farm, breed fish for food, package food and drink, and much more. The more investment strategies there are to back the companies developing these solutions, the likelier we are to see progress.

Policy in this space will ultimately be key. Government interventions such as banning plastic packaging for food, which we see as an inevitability, will be gamechangers5 for providers on the right side of future legislation. But to help these companies scale and innovate, we need dedicated biodiversity strategies able to channel capital to them.

Around $133bn is invested annually in nature-based solutions – including $18bn from private sector finance – but this needs to at least triple by 2030 if the world is to meet its climate targets. To support a sustainable global economy, we need increasing numbers of single-focus strategies to help meet the risk that biodiversity loss poses to us all.

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Risk Warning

Investment involves risk including the loss of capital.

Companies shown are for illustrative purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments.

The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.

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