The next big sustainable investment challenge: biodiversity

Most investors are now aware of climate change risks. But biodiversity preservation may be an even bigger and more immediate issue. EDWINA MATTHEW explains

Countries representing 90 per cent of global GDP are now covered by net-zero targets, highlighted at the recent COP26 climate change conference in Glasgow.

We will soon know if those targets are sufficiently ambitious to keep global warming to 1.5 degrees — meeting the Paris Agreement adopted at COP21 in 2015.

But net zero emissions by 2050 is not the whole story.

As Glasgow was ramping up for COP26, the southern Chinese city of Kunming was just winding down after another COP (or Conference of the Parties) which focused on conserving biological diversity.

At COP15, 195 countries pledged to reverse biodiversity loss by 2030 at the latest and agree on a framework to protect species and their habitats.

Biodiversity may not be as attention-grabbing as climate change. But it is a critical part of the overall solution and directly impacts many industries.

Agriculture. Medicine. Insurance. Real estate. Tourism. To name a few.

Half of the world’s total GDP — or some US$44 trillion of economic value generation — is moderately or wholly dependent on nature and its services, according to the World Economic Forum.

“Climate change is a very complicated issue, but biodiversity is on a whole other level,” says Pendal’s Head of Responsible Investments, Edwina Matthew.

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Twin crises

Climate change and biodiversity loss are inter-related, “twin crises”, says Matthew.

Climate adaptation strategies such as protecting and restoring natural habitats offer defence against the physical impacts of climate change.

Nature-based solutions are also part of the broader universe of carbon removal projects underlying the carbon credits or offsets that are part of net zero strategies.

But climate change itself is destroying our natural capital (soil, air, water and living organisms) and biodiversity ecosystems — as seen in Australia’s Black Summer bushfires.

“Encouragingly, governments, business and investors are starting to understand that nature and climate can’t be separated — and that nature-related impacts and dependencies need to be considered alongside climate-related exposures,” says Matthew.

“We need to invest in mutually reinforcing solutions. A 1.5-degree pathway cannot be achieved without major investments in natural capital.”

Industries threatened by biodiversity loss

Agriculture is the most obvious example of an industry threatened by loss of biodiversity.

The agriculture sector accounts for a quarter of Australia’s exports (and employs 60 per cent of the world’s working poor).

Scientists estimate $US577 billion of annual crop production is at risk from loss of pollinators like bees.

The Worldwide Fund for Nature says 60 per cent of the world’s coffee varieties are in danger of extinction due to climate change — a sector with more than US$80 billion in global sales.

Nearly half of all medicines are derived from natural sources.

“We’re also starting to see scientists linking the transmission of animal disease to humans because of a breakdown in biodiversity buffers,” says Matthew. “We had SARS, now we have COVID.”

The UK Treasury’s Dasgupta Review on the Economics of Biodiversity released earlier this year says the “devastating impacts of COVID-19 and other emerging infectious diseases — of which land-use change and species exploitation are major drivers — could prove to be just the tip of the iceberg if we continue on our current path”.

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Much of global tourism is linked to natural attractions. The Great Barrier Reef brings in $A1.5 billion a year in tourism and fishing.

The loss of wetland buffers for flood-prone areas can expose real estate and insurance companies to higher risk.

Nature also helps regulate the climate itself — as we acknowledge in the development of nature-based carbon offsets. 

What it means for investors

Just as investors now understand the risks posed by climate change, so too natural capital and biodiversity considerations are starting to creep into the investor engagement and corporate reporting agenda.

“It’s twofold,” says Matthew.

“It’s about understanding biodiversity loss as a top-down, systemic issue — as a threat to the global economy — as well as understanding and managing bottom-up, company-specific natural capital and biodiversity-related exposures.

“It’s also about holding companies to account for their impacts, as we do for climate. What role do they play in adverse outcomes for biodiversity and natural capital? How are companies embedding these considerations into their own governance structures and risk management frameworks?

“And to what extent are they dependent on natural capital for their own business? How do they think about biodiversity loss and related policy and regulatory trends and shifts in key stakeholder expectations?

“A lot of the learnings we’ve had from climate change are starting to play out in the natural capital space.”

The good news is, companies are starting to respond.

“We are seeing efforts in mining, property and finance to build understanding around dependencies and impacts in business models and supply chains.”

Biodiversity and land management reporting is already a feature in some company public disclosures.

“Just last month BHP acknowledged evolving stakeholder expectations about its efforts to achieve nature-positive outcomes during an ESG investor roundtable.”

The newly launched Taskforce on Nature-related Financial Disclosure — supported by the United Nations and endorsed by G7 ministers and financial institutions — is setting up a risk management and disclosure framework for organisations to report and act on nature-related risks.

The taskforce supports a shift in global financial flows away from “nature-negative” outcomes toward “nature-positive” outcomes.

Opportunities

Similar to the transition to a “low-carbon economy”, a transition to a “nature-positive economy” also offers economic opportunities.

There is potential for almost 400 million jobs and some $US10 trillion in annual business value by 2030 across three socioeconomic systems (food, land and ocean use; infrastructure and the built environment and energy and extractives) according to WEF.

Pendal clients are exploring how they can direct capital to support nature-positive outcomes, Matthew says.

“They have a fiduciary and financial interest in the wellbeing of the economy as a whole. They expect active managers like Pendal to exercise our ownership rights on behalf of our clients to encourage the protection of natural capital.

“They are also seeking opportunities for how they can allocate capital to support and scale nature-positive outcomes.”

Pendal will “continue to work with our clients and other stakeholders to build understanding around biodiversity loss and access to nature-positive investment solutions to help tackle the next sustainable investment challenge,” Matthew says.

About Edwina Matthew

Edwina Matthew is Pendal’s Head of Responsible Investments. Edwina is responsible for maintaining our leadership position in the provision of sustainable and ethical investment products.

Edwina is actively involved in the implementation of the UN-supported Principles for Responsible Investment. She also represents the company in working groups with a number of industry associations and initiatives relating to responsible investment.

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.

Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies.

Some of our responsible investing strategies

• Pendal Sustainable Australian Fixed Interest Fund
• Crispin Murray’s Pendal Horizon Fund
• Regnan Global Equity Impact Solutions Fund
• Regnan Credit Impact Trust

Contact a Pendal key account manager here