How to consider biodiversity in your portfolio
Anastasia GuhaGlobal Head of Sustainable InvestmentFind me on LinkedIn
Sustainable investing, it’s the word on every investor’s lips. So, to ensure you’re well-versed with the latest happenings in this space, we’ll be speaking to a member of our Sustainable Investment team each quarter and sharing their responses via Investment Edge.
This quarter, we spoke to Anastasia Guha, our Global Head of Sustainable Investment, about natural capital and how wealth managers consider biodiversity in their portfolios.
What is natural capital?Natural capital is the stock of renewable and non-renewable natural resources (plants, animals, air, water, soils, minerals) that combine to yield benefits to people.
Our natural capital is depleting at an alarming rate. In 2019, a report from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (‘IPBES’)1 stated that one million species were facing extinction. This is primarily because, to keep eight billion humans fed, clothed, housed, and addicted to Instagram, we’ve had to transform most of the Earth’s surface.
Deforestation, land degradation, and biodiversity loss are the primary nature-related risks facing the global economy; and given that more than half the world’s GDP is moderately or highly dependent on nature, these risks aren’t something long-term capital allocators can afford to ignore.
Why has biodiversity become such a popular investing topic all of a sudden?Biodiversity has quickly become one of the topics I’m asked about most in 2023. I think there are three drivers of this:
1. Nature loss feels tangible and personalWitnessing substantial tree loss, animal decline, new plant diseases, and increased pollution before our very eyes makes this rapidly deteriorating situation very personal. This has been magnified by the increasingly alarming scientific evidence around species loss, helpfully packaged into wildly popular nature programmes, resulting in savers and investors wanting to know what actions are being taken to help mitigate these risks.
2. Riding on the coattails of net zeroThis buzzword, label, and battle cry has become a phenomenal success in bringing global awareness to the goals of the Paris Agreement (achieving net neutrality of greenhouse gas emissions by 2050), with everyone from regulators and civil society to fund managers and pension funds committing to reduce their emissions.
Climate change is one of the main drivers of biodiversity loss, as environmental changes disrupt natural habitats and species in the biosphere. In return, the fall in our stock of natural capital greatly limits the role that nature can play in helping to mitigate the climate crisis.2
3. Climate risk frameworks have done the pathfinding on standards, disclosures, and regulationsThe climate movement took over a decade to get its ducks in a row, with taskforces, engagement groups, and committees taking years to establish.
Conversly, the nature movement has managed to create near-identical institutions and groupings for collective action in record time.3 These new bodies are set to deliver final frameworks or kick-off their engagement programmes in 2023.
How can wealth managers consider biodiversity in their portfolios?Wealth managers already have plenty to think about when designing portfolios, from asset allocation and fund performance to fund manager reviews and compliance. So, rather than viewing biodiversity as a standalone consideration, we think it makes sense to broaden the lens of existing net zero discussions to include the concept of planetary boundaries.4 This encourages asset owners to tackle climate risk and biodiversity together – looking for environmental solutions rather than purely climate-related ones. Through this lens, water risk, the circular economy, plastics, and nature-based solutions form part of the same continuum as climate change.
Measuring and managing climate risk is a way to halt the flow of emissions into the four realms of nature (air, freshwater, oceans, and land), while investing in boosting afforestation, reforestation, and restoration (‘ARR’), and, eventually, carbon dioxide removals (‘CDR’), helps maintain the Earth’s stock of carbon. Investors are beginning to understand that action is needed on both sides of the net-zero equation.
Our research team have spent the past 18 months sourcing the best nature-positive investment opportunities for our clients, which is due to be reviewed by our Investment Strategy Committee this month – we’ll share the findings in our next Q&A!
3 This includes the Kunming-Montreal agreement (protecting 30% of the globe by 2030), Partnership for Biodiversity Accounting Financials (‘PBAF’), Taskforce on Nature-related Financial Disclosures (‘TNFD’), Science Based Targets for Nature (‘SBTN’), and Nature Action 100.