Why the financial industry has a key role to play in supporting and enhancing biodiversity
- Therese Niklasson reports on her conversation with Dr Vian Sharif, founder of NatureAlpha.
- Nature preservation and net zero are two sides of the same coin: protecting biodiversity in tandem with climate change is imperative, given that healthy ecosystems can help reduce the extent of climate change and better cope with its impacts.
- The Global Living Planet Index (WWF/ZSL) claims that there has been a reduction of 69% in terms of the average change in relative abundance of populations, with around one million species now at risk of extinction, largely owing to the economic acceleration of human civilisation.
- A leading insurer estimates that one in five companies already face operational risks from the loss of ecosystems, while 73% of oil and gas projects are near to environmentally sensitive areas.
- COP 15 is focusing the attention of the world on setting global biodiversity targets, including the apex target of achieving ‘nature positive’ – termed as nature’s equivalent of climate change’s ‘net-zero’ carbon emissions.
Biodiversity is “now the fastest developing ESG theme in global capital markets,” according to Catherine Howarth, chief executive at ShareAction. Aiming to generate opportunity from this newly visible corner of green finance, some of the world’s largest investors have turned to focus on an area which Bloomberg recently predicted could be set to grow by around 2000% over the coming years.
COP 15 – the Biodiversity Conference of Parties – took place last December in Montreal, with an unprecedented focus on the inclusion of the finance industry. In this piece, we explore why asset managers have such a key role to play in protecting and enhancing biodiversity on our planet.
First, as the financial world increasingly attunes itself to capturing the effects of climate-related risk on investments, ratings agency Moody’s recently issued a warning about biodiversity, noting that nature-related financial risk for nine sectors heavily dependent on land, air and water resources is growing at an alarming pace and could cost up to $1.9 trillion.
The loss of biodiversity has indeed been accelerating over the last few decades. The Global Living Planet Index (WWF/ZSL) claims that there has been a reduction of 69% in terms of the average change in relative abundance of populations, with around one million species now at risk of extinction, largely owing to the economic acceleration of our civilisation. Given the news that the Earth’s population hit eight billion people last month, the race is on to ensure we can better protect our remaining natural capital and move to a greener economy.
Critically, nature preservation and net zero are two sides of the same coin: protecting biodiversity in tandem with climate change is imperative, given that healthy ecosystems can help reduce the extent of climate change and better cope with its impacts.
According to Swiss Re, one in five companies already face operational risks from the loss of ecosystems, while 73% of oil and gas projects are near to environmentally sensitive areas. Understanding biodiversity risks is a multidimensional challenge often translated through two main lenses: ‘dependencies’, such as the water and land needed for business to operate; and ‘impacts’, the consequences of those business operations on surrounding nature which can crystallise into reputational or financial repercussions.
Fuller picture needed
Secondly, as with tackling climate change, attention has turned to the role that investment and finance can play in helping to solve the crisis. Investors that integrate ESG issues into their fundamental analysis have, in some cases, already applied a biodiversity lens, but assessments so far have been relatively high-level, and primarily focused on whether companies are exposed to material biodiversity risks and how they manage such risks. Given the challenge of valuing the full extent of biodiversity risk, this has failed to provide a comprehensive picture of how biodiversity risks affect the wider economic system.
This lack of detailed historical analysis is a key driver behind the growing pace of regulation and commitments in this area – such as the Taskforce on Nature-related Financial Disclosures (TNFD), the European Union’s Sustainable Finance Disclosure Regulation (SFDR) for investment products, and the Finance for Biodiversity Pledge. These are all examples of how the imperative to bring nature considerations into mainstream investment decision-making is accelerating.
Role of technology
We know that finding structured ways for the financial industry to address nature loss and climate change collectively and individually is difficult, but it is critical. One driver of catalytic change in this area is technology, which has the potential to provide the data necessary for underpinning change. Evidence-based frameworks uniting science and sustainable finance, combined with systematic data collection, technology and transparency from business, are likely to be key.
The rise of geospatial data, remote sensing and multiple growing data lakes to capture quantitative data points and aggregate them with more power than ever before means that connecting activities and their impacts can finally be achieved. Transparency of impact, supported by innovations like artificial intelligence and spatial data, can close the data gap on biodiversity factors. Benchmarks can also offer insight; for example, the World Benchmarking Alliance’s Nature Benchmark already focuses on governance and strategy, ecosystems and biodiversity, and social inclusion. The TNFD’s Data Catalyst also brings together emerging providers in a range of areas, and we expect to see other tools and datasets launched by mainstream ESG service providers over the coming months and years.
In summary, we believe investors will need to understand not only the interplay of nature and biodiversity with their investment processes, but also how companies can move to demonstrate nature-positive strategies underpinned by science-based targets. This approach from financial firms will need to be closely linked to company engagement and wider advocacy and policy efforts. Done well, it has the potential to be transformational.
COP 15 focused the attention of the world on setting global biodiversity targets, including the apex target of achieving ‘nature positive’ – termed as nature’s equivalent of climate change’s ‘net-zero’ carbon emissions. It seems clear to us that the role of finance in supporting and enhancing biodiversity is now more important than ever.
 https://www.bloomberg.com/news/articles/2022-05-15/fund-managers-jump-into-esg-niche-with-potential-to-grow-2-000?leadSource=uverify%20wall 15 May 2022
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.
Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.