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.

Earth matters
  • Nature preservation and net zero are two sides of the same coin: in our view, 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 civilization.
  • 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.[1]

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.  

Financial Risk

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 civilization.[2] 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,[3] 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.[4] 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 crystalize 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 in our view 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.

Nature-Positive Target

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.


[1] m/news/articles/2022-05-15/fund-managers-jump-into-esg-niche-with-potential-to-grow-2-000?leadSource=uverify%20wall 15 May 2022

[2] https://www.wwf.eu/?7780966/WWF-Living-Planet-Report-Devastating-69-drop-in-wildlife-populations-since-1970  13 October 2022

[3] https://www.swissre.com/media/press-release/nr-20200923-biodiversity-and-ecosystems-services.html

[4] https://www.businesswire.com/news/home/20221025005126/en/RepRisk-Launches-First-of-its-kind-Biodiversity-Risk-Tool-Finds-73-of-Oil-and-Gas-Projects-Are-Near-Environmentally-Sensitive-Sites

Authors

Therese Niklasson

Therese Niklasson

Global head of Sustainable Investment

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. For additional Important Information, click on the link below. [Regulatory disclosure – Important Information] For Institutional Clients Only. Issued by Newton Investment Management North America LLC (“NIMNA” or the “Firm”). NIMNA is a registered investment adviser with the US Securities and Exchange Commission (“SEC”) and subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand “Newton” or “Newton Investment Management”. Newton currently includes NIMNA and Newton Investment Management Ltd (“NIM”) and Newton Investment Management Japan Limited (“NIMJ”). Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. Statements are current as of the date of the material only. Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance. Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison. This material (or any portion thereof) may not be copied or distributed without Newton’s prior written approval. In Canada, NIMNA is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Manitoba and Ontario and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Important information

For Institutional Clients Only. Issued by Newton Investment Management North America LLC ("NIMNA" or the "Firm"). NIMNA is a registered investment adviser with the US Securities and Exchange Commission ("SEC") and subsidiary of The Bank of New York Mellon Corporation ("BNY Mellon"). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand "Newton" or "Newton Investment Management". Newton currently includes NIMNA and Newton Investment Management Ltd ("NIM") and Newton Investment Management Japan Limited ("NIMJ").

Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed.

Statements are current as of the date of the material only. Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance.

Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison.

This material (or any portion thereof) may not be copied or distributed without Newton’s prior written approval.

In Canada, NIMNA is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Manitoba and Ontario and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Explore topics