- Director of Climate Research
United States, Institutional
Change
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Wellington’s Sustainable Investment (SI) Team believes investors should take note of the financial materiality of accelerating environmental degradation and biodiversity loss. Deteriorating biodiversity is also closely intertwined with climate change, amplifying the risks both pose to economies and companies.
Growing momentum for action
Encouragingly, governments and regulators are now starting to act. We see a growing regulatory momentum at the national and regional level — notably, the US administration’s pledge to conserve 30% of its land and water by 2030 under the “America the Beautiful” initiative — but also the European Union’s (EU’s) Green Deal. Close to 200 governments also committed to the landmark Kunming-Montreal Global Biodiversity Framework (GBF), which seeks to conserve 30% of the planet’s land and water areas and meet 23 biodiversity-related targets by 2030. In parallel, industry initiatives such as the Taskforce on Nature-related Financial Disclosures — in which we participate — are seeking to foster the development of frameworks and datasets to help investors integrate biodiversity into their investment process.
In the meantime, we believe the risks to economic stability and financial asset values are such that investors need to deepen their knowledge of this complex topic and explore initial investment opportunities in key sectors.
With that in mind, we are sharing recent insights from our joint work with Woodwell Climate Research Center on the pivotal relationship between food systems and biodiversity. We also identify key themes and potential investment opportunities we see emerging in biodiversity innovation.
The central role of food systems in biodiversity loss
The collection, production, distribution, and consumption of food has extensive impacts. According to the World Wildlife Foundation (WWF),1 the industrial systems used to feed humanity cause:
- 80% of deforestation loss and habitat degradation
- 70% of terrestrial biodiversity loss
- 50% of freshwater biodiversity loss
- 30% of greenhouse gas (GHG) emissions
Supporting more sustainable food systems and increasing the long-term resilience of food supply are an integral part of the Kunming-Montreal GBF but also various national or regional regulatory efforts such as the US Inflation Reduction Act, the 2023 US Farm Bill, and the EU’s Green Deal.
Potential areas for investment
Over time, we expect the combined momentum of these regulatory initiatives and growing consumer demand to translate into a wide range of investable approaches, but, at present, many of these opportunities are still nascent. However, we are starting to see attractive private-market options emerging for investors with the required specialist expertise. In addition, working with our global industry analysts, we have identified listed players with an innovative edge in the following four areas:
1. Sustainable agriculture
There is a close link between biodiversity loss and climate change. The earth’s soils store three times more carbon than the atmosphere and four times the carbon in all living plants and animals. Since about 50% of the land that can support plant life on earth has been converted to agriculture, soil has lost between 50% – 70% of the carbon it once held. Soil carbon loss has contributed to approximately 25% of all man-made global emissions.2
Moreover, the increased frequency and intensity of extreme weather events caused by climate change is starting to affect the productivity of key agricultural regions. Using our proprietary Climate Exposure Risk Application tool, we have identified increased risk of yield failure in both the South Asian (rice crops) and US breadbaskets (wheat crops).
Both developments point to the urgent need for technological innovation within agriculture.
- “Smart farming”, in our opinion, is key to restoring lost biodiversity and carbon in the soil, which in turn helps to mitigate climate change. Practices such as no tilling, crop rotation, rotational grazing, and cover crops are tools to restore soil carbon. We are already seeing some agricultural providers develop innovative soil management tools to support smarter farming.
- “Precision agriculture” uses technology to enable more efficient planting and reduce the use of water, fertilizers, and pesticides. Many of the companies pioneering new approaches in this field are micro-caps (below US$100 mil market capitalization) or still at the venture capital stage, but large players in the broader agriculture sectors are also making important contributions in this field. This includes the development of more efficient harvesting tools equipment that can help mitigate the increased risk of yield failures.
2. Crop chemicals
Crop protection chemicals are vital to global food production systems. However, the widespread overuse of these chemicals to protect yields has resulted in decreased soil biodiversity. For example, excessive use can accelerate soil acidification and the creation of soil crust, which, among other things, reduces the content of organic matter and subsequently releases GHGs. Decreased soil biodiversity in turn results in decreased yield and higher plant vulnerability to pests, requiring more crop chemicals. This adverse cycle has been a contributor to an increase of pesticide usage of around 80% since 1990.3 In order for investors to understand the potential for solutions, we think it is helpful to consider how and what protects crops.
- “Precision spraying,” in conjunction with plant and soil health monitoring, can help improve how we look after crops by curbing excess usage of pesticides and fertilizers. Several mainstream companies are making noteworthy advances in this field.
- “Organic fertilizer substitutes” can reduce the significant drawbacks of mainstream crop protection chemicals, which have not substantially evolved since the 1990s. We anticipate significant long-term growth for companies with strong biomolecule pipelines.
3. Food loss and waste
Reducing food loss and waste is imperative to lessen the impact of climate change on biodiversity, meet the nutrition needs of a global population — which the United Nations projects to reach nearly 10 billion by 2050 — and address the increased risk of crop failures across the world’s major global breadbaskets. Food loss refers to the decrease in quantity or quality of food intended for human consumption during the production and distribution stages, while waste relates to the discarding of food appropriate for human consumption “downstream” in the food value chain. There is an inverse relationship, related to economic development, between food loss (due to availability of refrigeration systems) and food waste (disposed of by consumers). Developed markets tend to have a lower loss rate due to better refrigeration systems, but they also have more wasteful consumption patterns. However, the share of total food available lost or wasted through the entire production and supply chain is relatively consistent globally and is estimated to be between 30% – 35%.4
- Waste management offers significant scope for specialist providers to innovate collection and processing of waste across the entire food chain. We are especially focused on new developments within the consumer and distribution sectors given their outsized impact on food loss and waste generation.
- Waste-to-energy is another area where we see a significant runway for growth as waste-to-energy transformers start scaling up their operations.
- Food storage and refrigeration may see significant breakthroughs over time as providers and operators adapt to changing climate conditions and increased demand in most fast-developing emerging economies.
4. Adaptation to water scarcity
Water is the lifeblood of agriculture, but climate change and deteriorating water ecosystems are causing growing water scarcity. Our research suggests that companies involved in developing solutions to help food producers manage both water quality and increased volatility in the availability of water resources are likely to benefit from growing demand. Importantly, our work also suggests that the price of water (typically quantified per liter or gallon) in many regions is far too low given the possible future negative impacts from climate change. Indeed, it is fair to say that in some areas the price is largely unknown to the average consumer, and rarely if ever disclosed by companies as part of their raw input costs. Both observations imply that in those markets accurately pricing water usage remains somewhat “an afterthought,” with water assumed to be virtually “free.” Given the potentially adverse impact of climate change, we expect an increased urgency to emerge on biodiversity practices around water stewardship.
Key role for engagement
As a team, we see engagement as a valuable tool for investors in assessing the resilience of companies and issuers to the growing impact of biodiversity loss and environmental degradation. We think that businesses involved in food systems, particularly in the four areas above, offer a good starting point for a dialogue on how corporates and issuers respond to the major risks and opportunities associated with biodiversity loss.
1 “Food for thriving biodiversity” | WWF (panda.org).| 2 “Soil Microbiomes Under Climate Change and Implications for Carbon Cycling,” Annual Review of Environment and Resources. Vol. 45. Naylor et al. 2020.| 3“Pesticide Atlas 2022,” Heinrich-Böll-Stiftung and others.| 4 “Addressing Food Loss and Waste: A Global Problem with Local Solutions,” p.8, World Bank Group.
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