Biodiversity: Why investors should take note

Earth’s diverse, abundant ecosystems have long been a source of “natural capital” for economic growth and development. Today, scientists broadly agree that human activity is rapidly degrading ecosystems and causing biodiversity loss that may have grave consequences for human health, economic stability, and financial asset values. Given scientific consensus, our Climate Research Team and broader Sustainable Investment (SI) Team believe that the investment community needs to understand the potential impacts of biodiversity loss and explore ways to mitigate the associated financial risks. 

To this end, we are deepening our research on biodiversity, with the long-term objective of helping our investors better assess the financial materiality of biodiversity loss on regions, asset classes, and sectors. Our team is also evolving our stewardship practices with a view to identifying the areas where we believe we can add the greatest value for our clients.

Understanding biodiversity loss

One of the key challenges with understanding biodiversity is its exceptional complexity and range. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) defines biodiversity as “the variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are a part.”¹ This variability not only covers differences in attributes, but also “changes in abundance and distribution over time and space within and among species, biological communities and ecosystems.”  

The factors that cause biodiversity loss are myriad, but, according to IPBES,² the direct drivers can be grouped under:

• Land-use change 
• Climate change 
• Pollution
• Natural resource use and exploitation 
• Invasive species 

The resulting impacts of biodiversity loss are wide-ranging. They include environmental degradation and destruction of critical ecosystems, risks to human health, damage to social fabric and the potential for conflict, and economic losses over the long term.

A potential roadmap

As a fiduciary of our clients’ assets, our SI Team sees it as our responsibility to better understand biodiversity loss and help assess its financial materiality across asset classes, securities, and geographies. While the asset management industry currently lacks the appropriate datasets and frameworks to fully integrate biodiversity into the investment process, regulators, financial institutions, and other stakeholders are starting to focus on the relevance of nature, which may accelerate data availability. 

As with climate change, we expect awareness of biodiversity to eventually permeate capital markets. We see four main stages in the journey toward the integration of biodiversity considerations into investment decisions:

1. Scientists produce evidence for concern. A large and growing body of scientific research illustrates the vital importance of addressing biodiversity loss. 
2. Global policymakers align regulation. Armed with growing scientific evidence, governments are looking to develop policies to address biodiversity concerns. The COP15 gathering in Montreal may provide further impetus for regulatory action.
3. Asset managers evolve stewardship practices. Changing regulations will likely spur active managers to broaden their stewardship, including through engagement and proxy voting, to promote awareness and help companies and issuers integrate biodiversity concerns into their policies and practices. 
4. Industry improves disclosure, with converging standards. Better understanding of biodiversity risks and growing availability of relevant data are likely to lead to disclosure standardization, helping investors further evaluate the risks and companies progress toward remedial action.

What steps can investors take? 

Deepen biodiversity knowledge
While the industry is still in the early stages of translating biodiversity data and risks into standardized metrics, investors can begin by developing their knowledge of biodiversity. A few good information sources include:

• Living Planet Report 2022 | WWF
  
• Global Assessment Report on Biodiversity and Ecosystem Services | IPBES
•  WEF New_Nature_Economy_Report_2020 | World Economic Forum

Wellington’s SI Team will also share insights as we deepen our knowledge and hone our approach to biodiversity research. 

Enhance stewardship
In parallel to knowledge building, we suggest investors start to evolve their stewardship practices through corporate engagements and proxy voting. 

Join industry collaborative initiatives
We advocate for participation in industry frameworks and initiatives. These include the Taskforce on Nature-related Financial Disclosure (TNFD), CERES, the Platform for Biodiversity Accounting for Financials (PBAF), the Global Impact Investing Network (GIIN), the Investors Policy Dialogue on Deforestation (IPDD), and several others.

Invest in research; explore new ideas
Our research collaborations with Woodwell Climate Research Center and the Joint Program on the Science and Policy of Global Change at the Massachusetts Institute of Technology have resulted in a rich dialogue and invaluable insights on the physical and transition risks of climate change. These partnerships are aimed at bridging the gap between climate science and finance. We have begun to explore connections between finance and biodiversity as well.

In summary

Based on scientific consensus, our SI Team has concluded that, as with climate change, biodiversity loss can be a material financial risk to many companies and investors. Unfortunately, the lack of appropriate data and disclosure standards means that the asset management industry has a long journey ahead to integrate biodiversity considerations into investment decisions at scale. At this stage, our team believes investors should focus on building biodiversity knowledge, prioritizing those areas where biodiversity risk is most pronounced, and developing stewardship practices. We aim to help our clients and portfolio companies navigate the rapidly changing market and regulatory backdrop and look forward to sharing our insights on the investment risks of biodiversity loss.

¹IPBES glossary; Source: IPBES secretariat. | ²Models of drivers of biodiversity and ecosystem change;  Source: IPBES secretariat. | ³Source: WWF (2022). Living Planet Report 2022 - Building a nature-positive society. Almond, R.E.A., Grooten, M., Juffe Bignoli, D. & Petersen, T. (Eds). WWF, Gland, Switzerland. | ⁴Source: IPBES (2019). Global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (Version 1). | ⁵WEF New_Nature_Economy_Report_2020 ; Source: World Economic Forum.