Five policy recommendations for natural capital and net zero

Manmade pressures undermining biodiversity and the Sustainable Development Goals (SDGs)

Manmade pressures are undermining the biodiversity that supports life on land and below water. Ecosystem services delivered by nature, such as water purification, crop pollination, flood protection, and carbon sequestration are vital to human wellbeing and effective, functioning societies. Protecting terrestrial and marine ecosystems is critical in our efforts to mitigate and adapt to climate change and fundamental to achieving food security, poverty reduction, and more inclusive and equitable development.

At Schroders, we believe that biodiversity loss presents a significant investment risk. Globally, the value of ecosystem services has been estimated at as much as US$125-140 trillion annually, more than 1.5x global GDP. The costs of inaction on biodiversity loss are huge. With more than half of our global GDP dependent on the natural world, the reality is stark: nature risk is an integral factor to investment risk. That’s why action on nature and biodiversity goes to the heart of our fiduciary duty to our clients.

Global collective action to halt and subsequently reverse biodiversity loss needs to be scaled up dramatically and urgently. As a global investment manager, we have a responsibility to mitigate risks in the portfolios we manage for our clients. We use our influence to encourage the companies in which we invest to mitigate damage to the natural environment, to promote and preserve their financial wellbeing. And we want to go further than this; we also believe there is an opportunity for our clients to invest their capital in solutions to restore and protect natural capital, while also delivering a financial return.

We are calling on policymakers to take urgent action to join up the climate and nature agendas and accelerate transformation in the real economy and financial services to deliver a nature positive economy.

Our Plan for Nature

Our Plan for Nature outlines the role of investment in accelerating a nature positive future and creating real investment potential for our clients. It highlights our ambition to harness the power of investment to accelerate a nature positive future via three areas:

• Insights – developing our understanding and analysis in order to identify the exposure to nature risk companies and assets have;
• Influence – engaging with and influencing companies to reduce their exposure to nature risk and their impacts on nature;
• Innovation – offering investment solutions in both public and private markets that channel capital to protect and restore nature and deliver attractive long-term returns.

We have five key recommendations for policymakers on the steps they can take to facilitate the development of a nature positive economy. We are calling on policymakers to:

1. Set out robust plans to address biodiversity loss and take action to protect and restore nature with urgency this decade – National Biodiversity Strategy and Action Plans submitted ahead of COP16 in 2024 should contain clear policy signals and legislative pathways to meeting the Global Biodiversity Framework.
2. Require companies, asset owners, and investors to report on their risks, impacts, and dependencies on nature by 2025. This should be complemented by a clear timeline for future convergence with the global harmonization of sustainability reporting standards (via the International Sustainability Standards Board).
3. Require central banks to assess state and sub-state level financial stability risk arising from nature loss, including robust stress testing of the financial sector and supporting scenario analysis.
4. Support the development of natural capital markets, biodiversity credit markets, and nature bonds to scale up private and public capital flows to nature and address the funding gap for the transition to a nature positive future.
5. Underpinning each of these recommendations is a need to align global action on nature and climate to enable a nature positive, net zero, and climate resilient future.

Setting robust plans

At COP15, the Convention on Biodiversity (CBD), global leaders agreed the Kunming-Montreal protocol. This included committing to four goals to achieve the vision of “Living in Harmony with Nature – by 2050 biodiversity is valued, conserved, restored and wisely used; maintaining ecosystem services, sustaining a healthy planet and delivering benefits essential for all people”, underpinned by 23 targets for 2030 ranging from targets on conservation, financial subsidies, and excess nutrients.

With the economy dependent on the ecosystem services provided by nature, as investment managers we believe that action to reverse nature loss and replenish natural capital assets which will continue to sustain long-term returns for our clients is critical. Policy action is needed to address negative externalities which markets alone cannot price in. We are therefore supportive of the governments taking action to meet the 23 targets for 2030 and look forward to engaging with them on the publication of their National Biodiversity Strategy and Action Plans ahead of COP16.

To achieve these targets, governments should work with industry to develop sector-specific pathways for a nature positive, net zero, and climate resilient economy; focusing initially on the most materially impacted sectors such as energy, infrastructure, and agriculture. These pathways should aim to quantify and guide on any trade-offs that may be needed between biodiversity and climate change, for example on the need to convert ecosystems to mine transition metals.

Many of these targets will have direct impacts on the long-term growth and profit of the assets and companies we invest in. Take, for example, the target to “reduce excess nutrients by half”. This will have a significant impact on companies operating in the agriculture industry who rely heavily on the use of fertilizers and pesticides. Policy uncertainty on the scope and timing of these actions can result in investment valuation risk for these companies and will not give those companies the opportunity to adapt their business model and turn to capital markets for support in this transition.

SDGs, Targets, and Indicators

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

• SDG 14: Life Below Water
• SDG 15: Life on Land
• SDG 13: Climate Action
• SDG 2: Zero Hunger
• SDG 1: No Poverty
• SDG 8: Decent Work and Economic Growth
• SDG 17: Partnerships for the Goals

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

1. Target 14.2: Sustainably manage and protect marine and coastal ecosystems
2. Target 15.1: Ensure the conservation, restoration, and sustainable use of terrestrial and inland freshwater ecosystems
3. Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters
4. Target 2.3: Double the agricultural productivity and incomes of small-scale food producers
5. Target 1.1: Eradicate extreme poverty for all people everywhere
6. Target 8.4: Improve progressively, through 2030, global resource efficiency in consumption and production and endeavor to decouple economic growth from environmental degradation
7. Target 17.14: Enhance policy coherence for sustainable development

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

No specific indicators are mentioned or implied in the article.

4. 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: schroders.com

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