Biodiversity is becoming an investment issue

No sooner are institutional investors getting accustomed to the idea of building climate-related analysis into their processes than broader questions of environmental impact have started to force their way into the conversation. Biodiversity is becoming an ever more important investment issue.

Biodiversity can feel a little bit remote – concerning things like how many species of insect can be counted in the Amazon rainforest – fileable away as a nice-to-have not immediately related to our day-to-day lives and businesses. Really, though, it’s about the broad health of the natural world, the planet on which we are entirely dependent. We need crops to be pollinated, we need fresh water, we need rainforests, breathable air, clean oceans – and a long list of other things that fall into the category of you-don’t-know-what-you’ve-got-‘til-it’s-gone.

For building an understanding of the current issues around biodiversity, the Dasgupta Review is probably the place to start. Commissioned by the UK Treasury in 2019, Professor Sir Partha Dasgupta’s report was published in 2021 and comes in three sizes (the full report runs to 600 pages; there’s a shortened non-mathematical version that’s a more digestible 103 pages; and, so there’s no excuse, there’s a 10-page “headline” version.)

He argues that nature’s health has been taken as a given: “Not so long ago, when the world was very different from what it is now, the economic questions that needed urgent response could be studied most productively by excluding Nature from economic models.”

The days when that made sense are gone.

One harmful side-effect of excluding nature from the models is that we cannot tell how much of what we think of as economic growth and development is in reality no more than the conversion of natural capital into financial capital. So while produced capital and GDP per person globally have steadily climbed for most of human history, natural capital has fallen – and the modern economy has accelerated that process. Hence the review finds that “Estimates of our total impact on Nature suggest that we would require 1.6 Earths to maintain the world’s current living standards”. Something has to give.

His conclusion: “The solution starts with understanding and accepting a simple truth: our economies are embedded within Nature, not external to it. … we must change how we think, act and measure success.”

For investors, the “think” part of that solution is what I have previously called “the ‘aha’ moment where you realize that everything is connected”. It’s not that we have to stop doing our jobs, or to stop trying to make money, it’s that we have to see and accept the bigger picture within which finance is operating.

The changes in how we act and how we measure success follow from that. For climate, the implications of this change of perspective are already manifesting themselves in a variety of ways: better data; greater transparency; reporting standards; risk factor assessment. The trend to more focus on biodiversity will most likely build on much of that work, borrowing structures and frameworks to ease adoption and speed up the process. TNFD, for example, is consciously adopting much of the structure of TCFD.

There are differences, though. Without better measurement of the impact of activities on nature, materiality will be difficult to judge. With so many aspects to measure, that’s a many-dimensional problem. Even knowing what to measure is not necessarily straightforward.

At least with climate, the connection from GHG emissions to higher temperatures to physical disruption is clear. 420 parts per million is not the whole story, but it is meaningful, measurable, and easy to grasp. Biodiversity – the health of the natural world – is not captured so neatly in a single number. The natural world is complex and rife with interdependencies. Accepting that we need to be conscious of our impact on nature is a good start, but managing that impact is a wicked problem.

Next up: COP 15

Looking ahead, December’s Conference of the Parties to the UN Convention on Biological Diversity (COP 15) in Montreal, Canada is key to the pace and direction of how this unfolds. Originally scheduled to take place last year in Kunming, China, this conference is expected to see the adoption of a new post-2020 global biodiversity framework. Hopes are high that a substantive deal can be struck. But as we’ve learned from various climate COPs there are no guarantees: with more than 190 participating parties, the negotiation process will be fraught, especially around funding and accountability. COP15 could prove to be a launchpad – or a bust.

Either way, biodiversity is now becoming an investment issue.