Politicians are struggling to meet the biodiversity challenge: can investors really help?

New market products and solutions suggest they can, but scale will be key

The World Economic Forum gives us a frightening catalogue of the damage we are doing to our own planet. Since 1970, we have destroyed 32% of the world’s forest area and 85% of its wetlands. Some 50% of the world’s coral reef systems have disappeared and there has been, on average, a 60% decline in vertebrate species. This is corroborated by research by WWF, the NGO, which shows that the global population of mammals, birds, fish, amphibians, and reptiles has fallen by an average of 68 per cent since 1970. 

If we carry on like this there’s not going to be much left of this ‘wonderful world.’

Responsible investors are often well aware of some of the companies that are doing the damage. The ‘usual suspects’ are cited as driving habitat loss via the industrialised use of palm, soy, and beef. Covid has also alerted us to the emergence of new infectious diseases as animal species are pushed into closer proximity with humans.

But Moody’s ESG solutions recently published a detailed study which suggested much wider corporate damage. It looked at some 2.1 million facilities worldwide using “high resolution remote sensing data” and found that some 2000 publicly traded companies “operate at least one facility causing loss of habitat and a risk to biodiversity.”

Am I the only one to be disappointed that the UN Convention on Biological Diversity is scheduled to take place in October in Kunming, China, which is doing more than any other nation on the planet to destroy biodiversity?

The report shows just how often there are unexpected interactions between rapacious human development and animal and environmental damage. In the States a lot of the damage is in fact being done by uncontrolled urban sprawl, with the so called “big box retailers” like Dollar General “developing low-density, single-story buildings on the outskirts of town, in vegetated, undeveloped land.”

Often, what’s happening is being hidden from us. Moody’s also exposes plenty of evidence of “greenwashing” on an alarming scale that obscures the damage being done. So, while 61% of heavy construction companies have fine-sounding biodiversity commitments, a mere 10% received a high score for actual delivery.

Thankfully, there are a number of initiatives by governments and international bodies to address this crisis of biodiversity loss; I’m just not convinced how far they will get.

Take the European Central Bank’s (ECB) 13-point checklist of supervisory expectations released last year that tells “how it expects institutions to consider climate-related and environmental risks — as drivers of established categories of prudential risks — when formulating and implementing their business strategy and governance and risk management frameworks.” All very well, if quite a mouthful. And, since it is completely non-binding, rather toothless.

Things are no better in the States. The SEC’s much vaunted moves to improve disclosure are very welcome, and SEC Chair Gary Gensler has pledged to “move expeditiously.” But it will be against strong opposition from Republicans such as Steve Womack, an Arkansas Congressman, who made his views clear: “I don’t believe the SEC should be using its authority over public companies to require costly and ideologically based disclosures.”

For its part, the UN is seeking to establish “a global biodiversity framework that will provide the basis for the next 10 years of action to protect nature and reverse nature loss”. 

But am I the only one to be disappointed that the UN Convention on Biological Diversity is scheduled to take place in October in Kunming, China, which is doing more than any other nation on the planet to destroy biodiversity?

Still, the UN initiative will help in two ways. No doubt it will help the collection of data, not least since the co-Chair of its Taskforce on Nature-related Financial Disclosures (TNFD) is David Craig, Founder of financial-data company Refinitiv. As he says: “There’s a big gap in data.”

Secondly, the UN initiative may help to broaden out the discussion on climate change. As Craig says – “We all proudly talk about our ESG data sets, but the honest truth is that there’s very little ‘E,’ although there’s quite a bit on climate. There’s almost no ‘S,’ and there’s quite a lot of ‘G’. So it’s almost CG at the moment, and we need to definitely put the environment back into ESG.”

This is a much-needed change that responsible investors must welcome. As Adam Kanzer, Head of Stewardship, Americas at BNP Paribas Asset Management, says: “There are a variety of paths to get to 1.5 degrees, but those that rely on carbon capture decades from now will have devastating impacts on ecosystems.” The fund manager has partnered with CDP to seek to accelerate the development of biodiversity reporting metrics, and recently launched an Ecosystem Restoration Fund. Very necessary, as the fund’s manager, Edward Lees, observes: “Half the world’s GDP is dependent on natural capital and our consumption of it is taking place 1.75 times as fast as the earth can regenerate it.”

Where governments are slow to act, private capital is stepping in. A recent launch of a fund for sustainable investing in food and farming from Cibus is an example. Cibus observes “biodiversity loss is having a huge impact on pollination potential, vital for approximately 70 of the top 100 food crops we eat today.” Action must be taken.

Fortunately, biodiversity is also moving more centrally into ESG assessments. Aviva Investors is now using CDP’s Forests and Water assessments, along with the WBA’s Sustainable Seafood Index and ‘As You Sow’s’ Plastics rankings to identify a company’s impact.

Private sector innovation is also leading to a plethora of unusual financial initiatives, as demonstrated by William Ginn in his invaluable book ‘Valuing Nature.’ Ginn worked at The Nature Conservancy and is the founder of NatureVest a partnership with private investors that he tells us: “Has mobilised more than $600m of private capital in its work.”

Amongst the innovations Ginn outlines are ‘The Forest Resilience Bonds’ developed by Blue Forest Conservation, and TNC’s ‘Conservation Notes’ (which have an AA- rating and a general unsecured obligation from TNC). When discussing the many small islands swamped by debt and yet responsible for ocean conservation, Ginn suggests a solution: ‘Debt-for-Nature swaps’ (where a country’s external hard currency debt is converted to a local currency debt held by a conservation trust). Ginn points out that “a debt for nature swap can be used for many potential projects.”

Bond frameworks can offer the kind of long-term approach that biodiversity needs. 

If we don’t do anything, as activist and documentary maker, Alanis Obomsawin, warns: “When the last tree has been cut down, the last fish caught, the last river poisoned, only then will we realize that one cannot eat money.”

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.