Biodiversity investing: risks and opportunities

On International Day for Biological Diversity, Steve Freedman examines the emerging field of biodiversity finance.

About 250 million years ago, some 96% of animal and plant species perished in what is considered to be the largest of the five mass extinction events on Earth.

The catastrophe was caused by a series of natural disasters – among them, huge volcanic eruptions in Siberia that blasted billions of tonnes of carbon dioxide into the atmosphere and raised global temperatures by 10 degrees.

Scientists believe that we are now living through the sixth extinction wave. And unlike the previous five, this one is being caused almost exclusively by humans.

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A 2019 United Nations report highlighted the severity of the threats facing biodiversity. It warned that one million animal and plant species are at imminent risk of extinction.

Biodiversity, alongside climate change, is an environmental dimension crucial to the planet and human well-being, as defined by the Planetary Boundaries (PB) framework - a model developed a decade ago by an international group of leading scientists in a project organised by the Stockholm Resilience Centre.

What is alarming is that the PB model shows that the current loss rate for animals and plants is up to 100 times faster than what is considered sustainable.

Biodiversity, then, warrants increased attention from politicians, businesses and investors. Protecting the natural world is just as important as reducing carbon emissions.

Encouragingly, biodiversity has been climbing the priority ladder on the policy-making agenda. For example, G7 leaders chose biodiversity as one of the key topics at their summit in France last year. World leaders are expected to agree on a new set of quantifiable targets to halt biodiversity loss in the coming year.

Against this backdrop, we expect that in the not-too-distant future, biodiversity protection will become subject to broader regulatory enforcement and legal action, much like climate change and CO2 reduction targets.

The economic value of the ecosystem

Such growing pressure will ultimately leave businesses no choice but to take more decisive action to protect the ecosystem. As first steps, companies can, for example, include their biodiversity footprint or safeguarding targets in their quarterly reporting – which some French companies are already required by law to publish – or integrate species protection or habitat restoration into their growth and engagement policies.

Businesses should also look to recognise the economic value of the ecosystem, which provides goods and services vital to human beings – such as pollination, water purification, carbon capture, oxygen production and flood protection. Scientists have estimated that the economic contribution of the natural would can amount to $125 trillion (£102 trillion) a year.

The loss of biodiversity is increasingly impairing these functions. Take for example the alarming decline in the population of bees – this threatens to undermine the global agriculture and food industry. The loss of biodiversity and ecosystem services can generate huge costs in terms of forgone output or restoration or replacement expenditures, even if one is to rely on technology as a substitute. Even if such costs are not borne directly by companies, they are likely to have to pay indirectly through the channels of legislation, regulatory enforcement and litigation.

Investors, too, are important actors. First, they will need to be increasingly mindful of the biodiversity-related risks embedded in their investments. Second, they should play a more proactive role. Their choice of investments will be crucial in plugging the financial shortfall that is needed to restore the biosphere and may well find a growing set of attractive opportunities to do so. Biodiversity-related funding needs are estimated to be around $500 billion a year, whereas currently, such investment flows stand at just $39 billion, according to Organisation for Economic Cooperation and Development (OECD) estimates.

We think the sum is bound to increase, as the emerging field of biodiversity finance gives investors more attractive opportunities to safeguard the planet.

Steve Freedman is senior product specialist at Pictet Asset Management.