Biodiversity loss – Why should investors care?

Biodiversity and Sustainable Development Goals

Introduction

Human-driven pollution, climate change, and population growth are all proven causes of the ongoing loss of biodiversity. The variety and diversity of living species on Earth is a backbone of human existence. Global gross domestic product is estimated to total around USD 44 trillion. Of this, more than half is reckoned to rely, to some extent, on biodiversity (Source: World Economic Forum).

On Earth Day 2024, we present our paper “Is Your Client Asking about Biodiversity?” – below you’ll find an abbreviated version.

Biodiversity and its Importance

Biodiversity refers to the variety of living species on Earth, all of which work together in ecosystems, like an intricate web, to maintain balance and support life. Human life is fundamentally linked to biodiversity: it provides necessities such as food, air, and shelter and plays a prominent role in economies, society, and culture.

However, pollution, climate change, and population growth, among other factors, are rapidly depleting biodiversity. Governments and other parties have started to respond. The European Union’s Sustainable Finance Disclosure Regulation, the Global Biodiversity Framework, and the US Inflation Reduction Act are all examples of collaborative efforts to preserve nature.

Why should investors care?

History has shown that when society faces large structural problems, companies that help to solve these problems can do well.

Underscoring the value of investments in nature, the World Bank has found that every dollar invested in water supply could generate seven dollars in return from related beneficiaries.

For investors, the key will be to identify those companies that are closely related to solving nature-related problems, avoiding increasing taxation risks and potentially receiving capital flows directed at solutions.

The current biodiversity finance gap is valued at about USD 700 billion per year, so we believe it is a priority to scale up and effectively allocate biodiversity-positive finance. There are multiple approaches to this, such as excluding investment in practices and industries that harm biodiversity and implementing investment criteria that favor nature-positive solutions.

Challenges of investing in biodiversity

Concerns over greenwashing are rising within biodiversity listed equity funds. The challenges of investing in biodiversity in the public space are:

• The limited universe of listed biodiversity-focused companies

Listed equity biodiversity funds face a unique challenge. Unlike areas such as renewable energy that have clear links to decarbonization, listed companies rarely have core business activities that directly conserve or restore biodiversity.

Many public companies claiming to be nature-positive achieve this through how they run their operations, not through their business activities.

While some firms integrate biodiversity into their corporate sustainability initiatives or have projects that loosely address biodiversity goals, these are commendable but often secondary efforts.

However, there are also public companies whose main activities have a meaningful link to biodiversity. They could include innovative solution-providers specializing in desalination, forest management, smart agriculture, and recycling technologies, for example.

Keeping this two-way split in mind is helpful when evaluating biodiversity-related investment strategies in the public space carefully and transparently.

• Measuring biodiversity impact

Measuring a fund’s positive contribution to biodiversity is inherently challenging. The most common tool, Mean Species Abundance (MSA), has limitations. Most companies do not report on biodiversity meaningfully and, as there is little consistency across companies, making comparisons hard. Finally, biodiversity holds intrinsic value, which is difficult to realize and quantify through traditional metrics.

Aiming for ecosystem restoration

A BNP Paribas Asset Management strategy focused on ecosystem restoration seeks to align with the United Nations (UN) goal to return ecological functionality to degraded ecosystems. We believe that pausing and reversing the effects of the biodiversity crisis contributes to achieving this goal. This can be done through three key elements:

• Focus on solution providers

Firstly, by investing only in companies whose products and/or services enable environmental solutions which can drive impact as well as achieve sustainable, above-market returns over the longer term.

• Targeting reform in industries with a high biodiversity impact

Secondly, we target areas which have the largest, negative biodiversity impact: consumer staples, materials, energy, industrials, consumer discretionary, and utilities.

• Engagement

Finally, through individual engagement & proxy voting, collaborative engagement, and public policy and advocacy, we support and collaborate with the companies we invest in to maximize biodiversity-positive solutions and operations. We work with the BNPP AM Sustainability Centre to drive and guide biodiversity-related engagement.

SDGs, Targets, and Indicators

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 14: Life Below Water – The article discusses the importance of biodiversity in maintaining balance and supporting life on Earth, which is directly related to the goal of conserving and sustainably using the oceans, seas, and marine resources.
• SDG 15: Life on Land – The article highlights the ongoing loss of biodiversity and the need to preserve nature. This aligns with the goal of protecting, restoring, and promoting sustainable use of terrestrial ecosystems, sustainably managing forests, combating desertification, and halting biodiversity loss.

2. What specific targets under those SDGs can be identified based on the article’s content?

• Target 14.2: By 2020, sustainably manage and protect marine and coastal ecosystems to avoid significant adverse impacts, including by strengthening their resilience, and take action for their restoration in order to achieve healthy and productive oceans.
• Target 15.5: Take urgent and significant action to reduce the degradation of natural habitats, halt the loss of biodiversity, and protect and prevent the extinction of threatened species.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator 14.2.1: Proportion of national exclusive economic zones managed using ecosystem-based approaches.
• Indicator 15.5.1: Red List Index.

The article does not explicitly mention these indicators, but they are relevant to measuring progress towards the identified targets. The indicators provide specific metrics to assess the management and protection of marine and coastal ecosystems (Indicator 14.2.1) and the conservation of biodiversity and prevention of species extinction (Indicator 15.5.1).

Table: SDGs, Targets, and Indicators

Behold! This splendid article springs forth from the wellspring of knowledge, shaped by a wondrous proprietary AI technology that delved into a vast ocean of data, illuminating the path towards the Sustainable Development Goals. Remember that all rights are reserved by SDG Investors LLC, empowering us to champion progress together.

Source: viewpoint.bnpparibas-am.com

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