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More than half of the world’s gross domestic product (US$44 trillion) is moderately or highly dependent on nature and its services – such as the provision of food, fiber, and fuel – and the unprecedented loss of biodiversity places this value at risk.
For investors without awareness and nature loss risk management, exposure to some sectors may lead to those assets becoming stranded. According to PRI Association, the natural loss, risk, and implications have the highest impact on sectors in forest products and fisheries, food, beverage and tobacco, mining, oil & gas, and transportation. And the highest dependence sectors on nature are forest products and fisheries, textiles, apparel & luxury goods, food, beverage and tobacco, electric utilities, and independent power producers. The direct drivers of biodiversity loss described by IPBES are land/sea use change, direct exploitation of natural resources, climate change, pollution, and alien invasive species (often occurs during cross-regional trading activities).
As a landmark UN Biodiversity Agreement reached at this year’s 15th Conference of the Parties to the United Nations Convention on Biological Diversity (COP15), parties and nations agreed by 2030: Protect 30% of Earth’s lands, oceans, coastal areas, inland waters; Reduce by $500 billion annual harmful government subsidies; Cut food waste in half; and more.
Investors are tasked to understand and manage their nature loss risks, including biodiversity, natural resources preservation, and the protection of ecological resources through their investments, while mobilizing capital flows and their portfolio companies moving to manage their nature loss risks through value chains.
Landmark UN Biodiversity Agreement
By 2030: Protect 30% of Earth’s lands, oceans, coastal areas, and inland waters; Reduce by $500 billion annual harmful government subsidies; Cut food waste in half’; and more Convened under UN auspices, chaired by China, and hosted by Canada, the 15th Conference of Parties to the UN Convention on Biological Diversity adopted the “Kunming-Montreal Global Biodiversity Framework” (GBF), including four goals and 23 targets for achievement by 2030. Among the global targets for 2030:
Effective conservation and management of at least 30% of the world’s lands, inland waters, coastal areas, and oceans, with emphasis on areas of particular importance for biodiversity and ecosystem functioning and services. The GBF prioritizes ecologically-representative, well-connected, and equitably-governed systems of protected areas and other effective area-based conservation, recognizing indigenous and traditional territories and practices. Currently, 17% and 10% of the world’s terrestrial and marine areas respectively are under protection.
Have restoration completed or underway on at least 30% of degraded terrestrial, inland waters, and coastal and marine ecosystems
Reduce to near zero the loss of areas of high biodiversity importance, including ecosystems of high ecological integrity
Cut global food waste in half and significantly reduce overconsumption and waste generation
Reduce by half both excess nutrients and the overall risk posed by pesticides and highly hazardous chemicals
Progressively phase out or reform by 2030 subsidies that harm biodiversity by at least $500 billion per year, while scaling up positive incentives for biodiversity’s conservation and sustainable use
Mobilize by 2030 at least $200 billion per year in domestic and international biodiversity-related funding from all sources – public and private
Raise international financial flows from developed to developing countries, in particular, least developed countries, small island developing States, and countries with economies in transition, to at least US$ 20 billion per year by 2025, and to at least US$ 30 billion per year by 2030
Prevent the introduction of priority invasive alien species, reduce by at least half the introduction and establishment of other known or potential invasive alien species, and eradicate or control invasive alien species on islands and other priority sites
Require large and transnational companies and financial institutions to monitor, assess, and transparently disclose their risks, dependencies, and impacts on biodiversity through their operations, supply and value chains, and portfolios
More specific policy actions are expected to apply among regions and parties, for example, the EU Council and Parliament strike a provisional deal to cut down deforestation worldwide. The provisional agreement sets mandatory due diligence rules for all operators and traders who place, make available, or export the following commodities from the EU market: palm oil, beef, timber, coffee, cocoa, rubber, and soy. The rules also apply to a number of derived products such as chocolate, furniture, printed paper, and selected palm oil-based derivates (used for example as components in personal care products). A review will be carried out in two years to see if other products need to be covered.
Investors’ Nature Action
During COP15 Part 2, investors announce Nature Action 100 to tackle nature loss and biodiversity decline: Participating investors will focus on mobilizing companies deemed to be systemically important to the goal of reversing nature and biodiversity loss by 2030; the initiative is encouraging investor signatories to participate ahead of its spring 2023 formal launch.
Investment Funds Targeting Biodiversity
According to Morningstar’s recent research, investment funds specifically targeting biodiversity as a theme are currently rare compared with those targeting climate. There are 14 such funds, representing USD 1.6 billion of assets (compare to USD 350 billion in climate funds globally). AXA and Lombard Odier account for over 70% of these assets.
For example, the AXA WF ACT Biodiversity fund (launched on 11/04/2022) applies ESG exclusions (white phosphorus, weapons producers, tobacco, defense, UNGC principles, low ESG quality, severe controversies, and human rights violations) and sectoral exclusions (controversial weapons, ecosystem protection, and deforestation, soft commodities and climate risks). The fund also uses AXA IM’s proprietary ‘Impact Framework’ to analyze companies, focusing principally on their products and services. The strategy has been specifically designed to have a direct and positive impact on the following United Nations Sustainable Development Goals (UN SDGs): Clean water & sanitation (SDG 6), responsible consumption & production (SDG 12), life below water (SDG 14), and life on land (SDG 15).
While Lombard Odier’s LO Funds - Natural Capital strategy seeks to invest in two distinct growth paths of natural capital: harnessing the power of nature through the circular bio-economy and protecting natural capital via leaner industry.
As of November 3, 2022, water, agriculture, forestry, natural resources & land use, and biodiversity are the most of ecosystem services-related themes according to S&P Global Sustainable1's surveys with 582 companies in banks, diversified financial services and capital markets and insurance industries.
The Gap to “30 by 30” Biodiversity Target
The State of Finance Nature report from UNEP concluded that finance to natural-based solutions (NbS) is currently US$154 billion per year, less than half of the US$384 billion per year investment in NbS needed by 2025 and only a third of the investment needed by 2030 (US$484 billion per year) to limit climate change to below 1.5°C, halt biodiversity loss and achieve land degradation neutrality. Private sector investment in NbS must increase dramatically and quickly from the current US$26 billion per year – only 17 percent of total NbS investment.
While investment funds targeting biodiversity or nature themes are still in the early stages, funding is drawn from climate funds, ESG investments, impact funds, SDG alignments, etc. As impact investment grows, investors are actively seeking opportunities to invest in climate tech, agritech, new or alternative materials, new circular systems, and technologies that could improve the efficient use of natural resources use and ways to manage risks from biodiversity and nature loss.
UNEP further recommends among others, that investment in nature in urban areas (green infrastructure, e.g. sustainable urban drainage, green roofs) can keep cities liveable while tackling challenges associated with urbanization. Scale up investments to make agricultural commodity supply chains sustainable and transparent to ensure supply chains are sustainable with no associated deforestation, land degradation, pollution, social costs, etc. Integrate nature- and climate-related risks and opportunities into business and financial decision-making frameworks.
There are many tools that could help investors increase their management of biodiversity and natural resources. For instance, the Taskforce on Nature-related Financial Disclosures (TNFD) is on its way to bring Taskforce recommendations by September 2023. One of its proposed metrics and magnitude indicators for measuring potential nature-related business performance opportunities under the resource efficiency category are illuminated as follows:
More frameworks and quantitative metrics for assessing different natural impact drivers can be found in our previous research: “Biodiversity: Emerging Trends & Measurements”
According to one of the most recent Inevitable Policy Response (IPR) policy scenario forcast, NBS-based carbon credits and emerging nature markets will merge with the following trends:
The “quality” of NBS could improve with more focus on nature increasing the potential to support positive biodiversity outcomes, compared to a scenario where NBS focuses primarily on climate outcomes
Total revenue potential of NBS could reach USD 204 billion in 2050, with cumulative investment of more than USD 1.1 trillion by 2050
Generation of biodiversity credits could represent USD 8-18 billion in annual revenue in 2050, based on preliminary assumptions and subject to uncertainty
New technologies to reduce nature and climate impacts could present opportunities for investment, including sustainable crop production technology, food waste reduction technology, and technology for supply chain traceability, etc.
Below is a list of databases and tools recommended by PRI (2020) for understanding biodiversity risks:
Source from PRI’s INVESTOR ACTION ON BIODIVERSITY: DISCUSSION PAPER (2020), link