We explain why biodiversity matters.
- Despite human existence depending on biodiversity, it is in rapid decline.
- The corporate world’s understanding of biodiversity is at a much earlier stage relative to other environmental issues.
- The collapse in biodiversity poses a material risk to companies across a range of industries.
What is biodiversity?
Biodiversity is defined as the abundance of plants, animals and micro-organisms in a given ecosystem; it is the living component of natural capital that our economy and businesses rely on.
Biodiversity is vital to sustaining human life – it is thought that biodiverse lands are more effective carbon sinks, and also provide better natural protections from physical climate risks. The invisible, natural services, such as pollination and carbon sequestration, enabled by biodiversity are worth an estimated US$125-140 trillion per year – more than one and a half times the size of global GDP.1 It is impossible to address biodiversity without mentioning David Attenborough, who put it succinctly when he said “The truth is: the natural world is changing. And we are totally dependent on that world. It provides our food, water and air. It is the most precious thing we have and we need to defend it.”
Despite human existence depending on natural capital and biodiversity, it is in rapid decline, and it seems reasonable to assume that this will continue, unless there is decisive action. In 1937, when Attenborough’s 2020 documentary A Life on Our Planet begins, the global population was 2.3 billion, carbon in the atmosphere was 280 parts per million (ppm), and two thirds of global wilderness was untouched. Fast forward to 2020, and the global population had swelled to 7.8 billion, atmospheric carbon had almost doubled to 415 ppm, and just over one third of the wilderness remained.
At present, biodiversity is largely omitted from natural capital assessments and decision-making processes for businesses. Compared to environmental issues such as climate change, where greenhouse-gas emissions can be measured, tracked and more easily defined, biodiversity can feel intangible and is far more complex and challenging to quantify. Businesses seldom measure their impact on, or reliance upon, biodiversity.
Why is biodiversity collapsing?
There are five drivers of biodiversity loss on land: land-use change, land exploitation, climate change, pollution, and alien species. Of course, ocean biodiversity is also at risk, but there is generally less understanding of this given that only around 5% of our ocean has even been explored.
Changes to how humans use land have been significant, as evidenced by the rapid decline of the remaining wilderness. There has been a mass-scale conversion of wildlife habitats to agricultural use, resulting in rapid deforestation. According to JP Morgan’s deforestation toolkit,2 agricultural expansion represents 73% of deforestation worldwide. Commodities, including palm oil and soy, are under particular scrutiny, as is land clearing for cattle raising. To put this into context, palm oil, soy and cattle ranching were estimated to account for 40% of deforestation between 2000 and 2010, versus 10% owing to urban expansion. As the planet’s population expands, and demand for calories, protein and consumer products increases, demand for commodities and land to produce them on is likely to increase. Cotton production has a substantial negative impact on biodiversity. While it requires only 2.4% of the world’s arable land, cotton is the most water-intensive crop and accounts for 24% of global demand for insecticides.3
Why biodiversity matters to investors
While the strains on biodiversity are widely understood, the investment implications are less clear, although they have the potential for material ramifications across sectors and geographies.
First, there are physical risks. Biodiversity loss is linked to deforestation, which exacerbates climate change by reducing the planet’s carbon sequestration abilities, as well as its ability to provide humans with protection against extreme weather events. It is also interconnected with soil degradation, which negatively affects agricultural yields and therefore our ability to efficiently produce foods. The Food and Agriculture Organization of the United Nations notes that pollinators affect 35% of global land use for agriculture, which covers the production of 87% of leading global food crops.4
In May 2020, the European Union adopted a Biodiversity Strategy for 2030, which aims to protect nature and restore ecosystems. This will increase the number of protected sites, include binding nature restoration targets, and create funding to improve understanding of biodiversity, to monitor impacts, and ensure these are integrated into business and investment decision-making.5 So there are clearly transition risks as regulation and international coordinated efforts to promote biodiversity increase.
Finally, there are systemic risks as a result of human reliance on biodiversity. For example, 50,000-70,000 plant species are harvested for traditional or modern medicine, comprising key raw materials in professional medicines and consumer products.6 It is likely that the medicinal benefits of many natural resources have yet to be discovered, as often plants are crucial to our understanding of medicines and biology, from peppermint as a natural antispasmodic to ginger as a treatment for nausea. Many ecosystems have been underexplored (e.g. the ocean) and new species of plants and animals are regularly being identified – suggesting that there are many species and therefore benefits yet to be discovered. Furthermore, research also suggests that infectious diseases can thrive where biodiversity has been depleted. As the Dasgupta Review: The Economics of Biodiversity highlights, if nature is undisturbed, it will generate life, and continue to provide services that we do not pay for, but are of great benefit to humankind.
In early 2021, we identified biodiversity as an engagement policy objective. While the corporate world’s understanding of biodiversity is at a much earlier stage relative to other environmental issues, it is clear that the collapse in biodiversity poses a material risk to companies across a range of industries, as well as at a systemic level. As investors, we have a duty to understand a company’s impact on biodiversity. Given limited corporate disclosures on this subject, we believe engagement with investee companies is likely to play a central role. This can encourage a greater understanding of biodiversity as an investment risk, as well as the collection of data to inform business decision-making, alongside the monitoring of progress.
- OECD (2019), Biodiversity: Finance and the Economic and Business Case for Action, report prepared for the G7 Environment Ministers’ Meeting, 5-6 May 2019.
- Grow, Forest, Grow, J.P.Morgan Cazenove, 22 January 2021
- Living Waters – Conserving the source of life, World Wildlife Fund, January 15, 2003
- Why bees matter: The importance of bees and other pollinators for food and agriculture, Food and Agriculture Organization of the United Nations, 20 May 2018
- Biodiversity strategy for 2030, European Commission
- CITES and Medicinal Plants, CITES
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.