• Interest in biodiversity funds is increasing, but only a few products are available
• No fixed key figures, a lot of research required
According to the World Economic Forum (WEF), companies are more dependent on nature than previously thought. According to the WEF website, more than half of the global gross domestic product, namely 44 trillion US dollars in economic value added, depends moderately or heavily on nature. At the same time, however, diversity in nature is rapidly declining worldwide, writes Nick Studer, CEO of the global management consultancy Oliver Wyman Group, in a guest article for “Fortune”. For example, according to a report by the World Wide Fund for Nature, the world has lost 69 percent of its wildlife populations over the past half century. However, the loss of biodiversity entails risks for the global economy. “The threat of natural disasters [ist] important for all sectors of the economy […]as well as an urgent and non-linear risk to our collective future economic security,” says Dominic Waughray, Managing Director of the World Economic Forum. The WEF expects a disruption from the decline in biodiversity, especially for the construction, agriculture and food sectors.
“A decline in ecosystem services provided by nature initially poses a direct physical risk to businesses as crops become less reliable, weather patterns change and pollinators no longer support agriculture,” writes the Union Bancaire Privée (UBP) on its website. According to the “Financial Times”, other physical risks for companies include the loss of access to raw materials or an increasing likelihood of storm surges and floods, as ecosystems such as coral reefs or mangrove forests, which offer protection against them, are increasingly disappearing. “The loss of ecosystem services that have value entails costs, such as investing in artificial pollination or in combating soil degradation or eutrophication, increasing the nutrient content of soil to water bodies,” said BNP analyst Robert -Alexandre Poujade to finews.ch. This makes a strong business and investment case for reversing biodiversity loss – and investors seem to be realizing this as well.
When it comes to biodiversity, investors are rethinking it
According to the Financial Times, Catherine Howarth said that biodiversity is currently the “fastest developing ESG topic in global capital markets”. She is CEO of ShareAction, a group dedicated to responsible investing. In three years, the issue of biodiversity, which used to be virtually ignored by all mainstream institutional investors, has evolved and is now recognized as important by all, Howarth continued. Nick Studer from the Oliver Wyman Group also stated on “Fortune” that interest in biodiversity funds had increased significantly in the recent past. In 2022, an estimated at least twelve billion US dollars flowed into corresponding products. According to the US investment company BlackRock, however, there are not yet many financial products that deal explicitly with biodiversity – possibly also because practices on how to do this have not yet been fully developed. However, BNP analyst Robert-Alexandre Poujade spoke in “Das Investment” of a growing number of funds that would focus on biodiversity.
Nonetheless, BlackRock sees a “potentially fascinating new investment universe” when it comes to biodiversity – and it’s not alone. In addition to risks, numerous experts also see opportunities for companies and investors. “There is a potential for a win-win-win situation for nature, climate, people and business if companies and economic actors can act forcefully to protect and restore nature, and start identifying nature-related risks on a regular basis, too assess, mitigate and disclose to avoid potentially serious consequences,” says the World Economic Forum website. Specifically, according to investment advisor Lazard Asset Management, the WEF believes that companies developing nature-friendly solutions to protect biodiversity have the potential to create $10 trillion in business opportunities and 395 million new jobs by 2030. “As awareness rises, so do policy making, regulation and capital spending. For those helping to solve the problem, this potentially creates a decade-long opportunity for superior growth and success as capital flows to the ‘fixers’ of the biodiversity crisis,” the union also writes Bancaire Privée. However, according to the WEF, the costs for companies that have not yet started to put nature at the center of their business activities would likely increase and ultimately these companies may even be left behind.
A corresponding rethinking is also taking place at some large asset managers. In addition to BlackRock, Schroders also wants to focus more on the topic of “biodiversity” in the future. “I’ve made natural capital one of our big priorities,” Schroders CEO Peter Harrison said, according to the Financial Times. “I think you’re going to see a very big flow of money into natural capital when people realize that nature is a very big part of the answer to decarbonization. Without biodiversity, there is no path to net zero.”
There is no set of rules for investing in biodiversity
But even as Wall Street and investors begin to assign financial ratings to natural assets, identifying high-potential companies and investment opportunities is not easy, as a solid framework has so far been lacking. “Capturing the potential economic impact of biodiversity loss is a challenge. We need better data and tools to measure impact and manage risk,” said Nick Studer in his Fortune article. He suggests, for example, better measurements by drones, satellite imaging and ground sensors. BlackRock, meanwhile, is trying to “identify companies that are adopting good biodiversity practices, given potential environmental and societal benefits and our belief that the value of these companies’ impacts has yet to be priced in.” The focus is on the areas of forestry, marine and agriculture. According to the Welthungerhilfe website, there are already some funds that would exclude bonds from countries that have not ratified the UN Convention on Biological Diversity or are violating it. Some public and special funds also have investment criteria for species protection, such as negative assessments of the endangerment of animal and plant species.
According to the Financial Times, however, by and large it is still up to investors themselves to analyze how investee companies or those already in their portfolio contribute to or are vulnerable to biodiversity loss. Not only the physical risks already mentioned should be considered, but also the risk of reputational damage if attention is not paid to the conservation of biodiversity, or of legal disputes if damage is even caused – or as part of the supply chain. Welthungerhilfe also recommends that investors do their own research. Issuers of shares and corporate bonds should also record and disclose their biodiversity risks in the future.
Editorial office finanzen.net
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