Biodiversity: a strategic challenge
After the fight against climate change, finance discovers a new and significant challenge in preserving biodiversity.
With endangered or extinct species, endangered terrestrial ecosystems, and oceans weakened by pollution, the worldwide degradation of biodiversity represents a significant challenge for humanity. Known as the sixth mass extinction, the alarming decline in biodiversity represents one of the main threats that the world must face, according to the World Economic Forum (WEF).
The latest edition of the "Living Planet" report published in October 2022 by WWF1indicates that since 1970, the population of wild vertebrates has decreased by almost 70%. Similar to the IPCC2's reports on climate, the intergovernmental IPBES3 platform on biodiversity also sounds the alarm. The main factors responsible for the degradation of our ecosystems include changes in land and sea use, direct exploitation of species, climate change, pollution, and invasive species.
A multidimensional issue with health, social and economic consequences
The biodiversity crisis and the climate crisis are what we can call joint-crisis. Beyond the interest for species and ecosystems, it is a matter of ecosystem services, integrating a climate regulation prism. Our ecosystems play a central role in the absorption of carbon. Indeed, oceans and terrestrial ecosystems absorb nearly half of the CO2 emitted globally. By removing this CO2, they contribute directly to mitigating global warming. They also protect us from the impact of storms, floods, etc.
The degradation of nature has health and social repercussions. The sustainability of economic models and the financial system is also under threat. There are direct consequences on companies’ activities and, inevitably, on their revenues. It is estimated that 5 to 8% of current world agricultural production, representing an annual market value of 235 to 577 billion US dollars, is directly attributable to animal pollination4.
Biodiversity version of the Paris Agreements
The COP 15 on biodiversity, held from December 7th to 19th, 2022 in Montreal, was highly anticipated after successive cancellations due to Covid. The political ambition was to replicate for biodiversity the mobilising effect of COP 21 that led to the Paris Agreements.
196 countries gathered around this common goal and, after several months of intense negotiations, adopted an agreement that can be considered historic. This agreement defines a clear course and sets quantified and measurable targets to significantly reduce the loss of biodiversity. One of the key targets adopted is to protect up to 30% of the land and 30% of the sea by 2030. Other strong commitments include halving pesticides and excess nitrates, restoring 30% of degraded terrestrial and marine ecosystems by 2030, reducing by half the introduction of invasive alien species, halting the extinction of protected species due to human activities by 2050 and eliminating harmful subsidies to biodiversity to the tune of $500 billion per year by 2030 to stop supporting activities that impact nature. To ensure that all countries can implement these goals, the framework also sets a target of transferring $30 billion from the richest countries to developing countries by 2030.
The regulatory framework is making progress and encouraging investors to act
CSRD5, which is scheduled to come into force on January 1st, 2024, will represent a major step forward, thanks to the harmonisation of extra-financial data published by European companies. To improve their understanding of the issues, investors are also encouraged to turn to different information providers, often more experienced and more specialised in biodiversity issues than traditional extra-financial rating agencies. NGOs6 are among these potential new partners.
While there are still difficulties in harmonising the available data and defining coherent objectives at the international level, investors' interest in the biodiversity issue is encouraged at the European level by SFDR7. The challenge is to make the information more legible for clients so that they are encouraged to finance issuers that are more respectful of the climate and biodiversity.
In France, the preservation of biodiversity has not been forgotten in the Energy-Climate Law. Article 29 of this Law, which sets out new extra-financial reporting requirements for investors, stipulates that biodiversity-related risks must be considered and that investment strategies must be aligned with long-term biodiversity objectives.
The European Commission should be able to provide investors with rules to follow regarding the "technical criteria for alignment" of four environmental objectives: sustainable use and protection of water and marine resources, transition to a circular economy, prevention and control of pollution and finally protection and restoration of biodiversity and ecosystems. This progress will allow all stakeholders (companies and investors) to have the same references and to speak the same language on biodiversity.
This regulatory progress, whether at domestic or European level, combined with greater public and investor awareness of these issues, must now be translated into concrete investment actions.
A pool of opportunities
From our investor point of view, our role is to assess how these criteria for respecting biodiversity are actually integrated by companies. First, this means excluding companies with negative impact, whose activities directly contribute to the degradation of marine and/or terrestrial ecosystems. Then, investing to preserve biodiversity means choosing companies that offer solutions that contribute to reducing pollution, improving water quality or decreasing waste production, particularly through prevention and recycling. We now have a fairly good map of the impacts and dependencies of activities and sectors. This is why it remains essential to understand the fundamentals of companies’ activities and their sensitivities regarding biodiversity.
The fight against biodiversity loss represents a pool of opportunities, within which new solutions and technologies are emerging. According to the WEF, biodiversity-related investments represent a potential market valued at 10 trillion dollars per year, and nearly 395 million jobs by 2030.
Companies positioned in this field represent real investment opportunities, even if the potential may seem more limited than for the climate. These companies can be found in all geographical areas. Japan, for example, has several ocean-focused companies specialising in the protection of the marine ecosystem. With its exceptional but threatened fauna and flora, Australia also stands out with its companies dedicated to the circular economy. In Europe and the United States, companies are more focussed on the fight against pollution through, for example, the preservation of terrestrial or freshwater ecosystems. In practical terms, some companies are using nature-based solutions to improve their bottom line while others are focussing on natural assets and ecosystem services to guide their own business decisions.
In this regard, we are convinced that biodiversity preservation can become the new priority theme for sustainable investors.
Emmanuelle Sée, Head Equity Management, Swiss Life Asset Managers France
1World Wildlife Fund
2Intergovernmental Panel on Climate Change
3Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services
5 Corporate Sustainability Reporting Directive
7Sustainable Finance Disclosure Regulation