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Industry Voice: Biodiversity loss – The other systemic crisis

Biodiversity loss is a subject that rarely captures the public’s attention, bar the occasional nature documentary or headline. Yet, the unprecedented rate of species loss is a systemic crisis that will impact every area of ​​our lives.

Why is biodiversity so important?

Biodiversity is now declining faster than at any time in historyone with up to a million species facing extinction within decadestwo. Indeed, population sizes of mammals, birds, fish, amphibians and reptiles have already fallen almost 70% since 19703.

Nature’s services underpin our very survival and global economic activity, thus directly influencing wealth creation and preservation. The value of biodiversity and ecosystems to our physical and mental wellbeing is inestimable. Yet, natural capital also provides critical ‘ecosystem services’ that provide us with huge economic benefits.

nature’s services

Source: Janus Henderson Investors, 2022.

The total economic value that nature provides is estimated to be between a staggering US$125 and $140 trillion per year4which is more than 1.5 times global GDP5. More than half of the world’s total GDP, or US$44 trillion, involves activities that are moderately or highly dependent on nature, according to the World Economic Forum6.

Biodiversity loss along with deforestation also exacerbate the systemic threat of climate change. Climate change, in turn, is acting to worsen biodiversity loss. Diverse ecosystems with healthy biodiversity are essential for climate change adaptation and mitigation, increasing resilience to future climate impacts. Biodiversity loss also increases the likelihood of the emergence of diseases that can pass from animals to humans, like COVID-19.

Global action to tackle the biodiversity crisis has been slow but will be given added impetus at the UN Biodiversity Conference (COP15) expected to take place in August 2022. COP15 will bring nations together with the aim of galvanizing efforts to protect critical habitats, improve water quality, control invasive species and safeguard connectivity. Alongside the publication of the beta Taskforce for Nature-related Financial Disclosures (TNFD) framework in March 2022, which aims to align corporate reporting and investment to address nature-related risks, the next few months could be critical in efforts to reduce biodiversity loss.

Investor implications

We believe that investors must accept that biodiversity loss and ecosystem damage represent significant and financially material risks to their portfolios.

The University of Cambridge Institute for Sustainability Leadership (CISL, 2021) has divided nature-related financial risks into three categories, which investors should evaluate:

  • Physical risks resulting from the degradation of ecosystem services by economic activity, for example, air quality, water security and food provision.
  • Transition risks arising from shifting policy, legal, technology and consumer/market dynamics.
  • Liability risks associated with emerging legal cases related to loss or damage from environmental change, including pay-outs, fines, insurance costs and reputational costs.

The focus should be on institutions and sectors whose operations have the greatest detrimental impact on natural capital. The World Economic Forum (2020) finds that three systems are responsible for endangering 80% of threatened or near threatened species.7:

  • Food, land and ocean use
  • Infrastructure and the built environment
  • Energy and extractives

Investors should identify those companies that acknowledge their impact and dependence on nature, particularly agriculture and food. Investors can also use engagement to pressure companies to align with commonly agreed nature-based goals and disclose nature-related risks where possible.

Depending on an investor’s desired approach, biodiversity considerations can be integrated into an overall portfolio approach. Some approaches may focus on maximizing risk-adjusted returns and assessing biodiversity from a risk management and opportunities perspective, while others may invest with the aim of achieving a positive impact alongside returns.

Implicit in all approaches is that investors should be guided by a systems-thinking mindset. The climate and biodiversity crises show that nature – on which our survival depends – works as an interconnected, dynamic system with feedback loops. The economic and societal impacts of investors’ decisions are not narrow, short term and linear, but wide-ranging, long term and highly unpredictable. We believe investors must accept this paradigm if they are to contribute to solutions around biodiversity loss and ecosystem damage.

Find out more as we explore the scale of biodiversity loss and the emerging global response to it.

References:

1 The Economics of Biodiversity: The Dasgupta Review (UK Government, 2021)

2 The Global Assessment Report on Biodiversity and Ecosystem Services (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 2019)

3 Living Planet Report’ (WWF, 2020)

4, 5 Nature4Climate.org (2020)

6 Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy (WEF, 2020)

7 The Future of Nature and Business (World Economic Forum, 2020)

This post is funded by Janus Henderson Investors

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