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Why investors are better placed than they think to address biodiversity

The financial sector excels at measuring diversity, so how do we combine financial modelling with the science of biodiversity?

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In recent years, biodiversity loss has been consistently identified as one of the top risks to global business. The World Economic Forum’s 2020 Global Risks Report warns that biodiversity loss has come to “threaten the foundations of our economy.” The investment community grasps the scale of the problem, yet a knowledge gap exists about how to manage the risks and opportunities associated with biodiversity. This leaves investors vulnerable to a multitude of risks as they wrestle with factoring biodiversity into their business decisions and financial risk assessments. But we do have a variety of powerful tools at our disposal that can help us mobilise the capital markets in support of biodiversity goals. 

The truth is, the financial sector excels at measuring diversity; we do it all the time in quantitative analysis when we measure volatility and credit spreads. We are learning how to combine climate data with financial modeling, so how do we combine the science of biodiversity—including measurements of mean species abundance, water quality, and soil carbon—with the financial expertise we already possess?  

“We can consider the concept of ‘use value’, which computes how the tangible features of a commodity satisfy a useful purpose, and the exchange value of natural capital.”  

A number of international initiatives are already dedicated to measuring the impact of various forms of economic activity on biodiversity and creating qualitative assessments to analyse and address this activity. These initiatives cover a variety of different characteristics and application areas, ranging from how daily activities are carried out in specific sectors, such as mining, to work that assesses the biodiversity footprint of entire countries.

The question is, how do we harness large data sets and analytical tools to invest in companies, projects, and assets that can mitigate biodiversity-related risks? How can investors actively seek to bolster the ecosystems that we all depend on?

The tools at our disposal

We know that the socioeconomic value of goods from nature isn’t reflected in market prices. For example, the Food and Agriculture Organization has estimated that, on an annual basis, food is wasted or lost equivalent to 28% of the global agricultural area available to produce food. This tells us that we’re undervaluing the natural capital that food production relies on. 

However, helpful tools already exist. For example, we can consider the concept of ‘use value’, which computes how the tangible features of a commodity satisfy a useful purpose, and the exchange value of natural capital. In fact, natural capital accounting helps companies track stocks and flows of different forms of capital in the same way that traditional accounting does. 

Companies can calculate a biodiversity footprint just as they calculate a carbon footprint, and there are a host of ways—qualitative and quantitative—to do this. At Manulife Investment Management we consider biodiversity in the lifecycle of our research, operations, and ongoing risk management where we own and operate assets. 

Tools are also being developed for investors to better understand the connection between their portfolio and nature. For example, the University of Cambridge’s Institute for Sustainability Leadership recently published a handbook for understanding and identifying nature-related financial risks, drawn from industry collaboration and deep research. This helps participants across the capital markets name the different types of nature-related risks, and their causes, their impact on companies, and their resulting financial risks.

There are also financial instruments that can help investors support biodiversity, such as green bonds. At the sovereign level, they capture the economic benefits, or incentivise the pricing of environmental externalities, in a way that a green bond framework for corporates cannot. They provide investors with a meaningful way to support biodiversity by viewing the use of proceeds and applying their criteria for ruling investments in, or out, of their portfolios. (RI note: For example, Germany’s 2020 Green Bond Allocation report highlights allocations to forestry and the protection of ecosystems, and France’s allocation report highlights a biodiversity programme and investments in sustainable forest management) The transparency of green bonds may be a game changer for biodiversity. Being able to track environmental information on how monies are used has fundamentally changed how people think about the debt market.

Nature-related disclosure at the issuer level 

 Industries that are particularly dependent on nature must begin to disclose their nature-related business opportunities and risks.. Currently, investors can express a value for biodiversity by taking action through corporate engagement and by addressing  visible nature-related issues such as deforestation. However, investors are working with incomplete data. Once limits are placed on the use of nature, it will acquire a scarcity value that can be priced.  

Some companies are incorporating both climate and biodiversity into their sustainability strategies, but although sustainable production practices exist, our food systems are currently the single biggest underlying source of decline in nature. At the same time, food systems themselves are dependent on biodiversity and therefore undermined by its loss, threatening food security—just as the impacts of climate change on biodiversity become more pronounced. On the farmlands we manage, we focus on the use of food systems that promote biodiversity by, for example, maintaining extensive honeybee health and pollinator habitats. And we were proud to help develop new standards for measuring food producers’ adherence to sustainable farming practices

TNFD steering finance towards nature-positive outcomes

As we learn more about the interaction between climate and nature, we’re understanding that we need to treat these two issues together. Just as for the effects of climate change, investors need to understand nature-related dependencies, risks, and impacts. For this, they need robust, reliable information at the issuer level and disclosures that are standardised and comparable. 

Regulators, governments, ESG-rating agencies and data providers, nongovernmental organisations, and academics continue to ramp up investor action on biodiversity. We were among the signatories of the recent Investor Letter on Biodiversity Metrics, calling for increased transparency and data collection of biodiversity metrics. 

Now, the Taskforce on Nature-related Financial Disclosures (TNFD) aims to create reporting standards for biodiversity and natural capital that “steer finance towards outcomes that are nature-positive”. We’re proud to be one of the members of the Informal Working Group bringing together the TNFD. The Taskforce itself will launch this year, and we’re excited to see an effective response to much-needed guidance in this space. We believe that nature-related disclosures will help financial institutions shift finance away from destructive activities and redirect flows, at scale, toward nature-positive activities. 

Brian Kernohan is Chief Sustainability Officer for Private Markets at Manulife Investment Management 

Peter Mennie is Global Head of ESG Integration and Research for Public Markets at Manulife Investment Management