The impact of biodiversity loss presents a real and tangible risk for business, and therefore a greater focus from investors is warranted. There are investment risks and opportunities that arise from companies addressing biodiversity loss, and it is important to look at the impact of biodiversity loss on investee companies. It also imperative to focus efforts towards companies where the potential impact or dependencies that they have is material.
For example, the team here considers biodiversity through resource intensity within a environmental risk assessment, and also through the lens of SDG 14 (Life below water) and 15 (Life on land), which sadly have some of the lowest levels of stated focus or alignment by corporates. On average, companies in the portfolios have just a 16% alignment with SDG 14 and just 11% with SDG 15 versus an ideal 100% alignment. A much greater effort needs to be made by corporates to ensure a biodiversity-friendly approach to running their business activities.
Consumer company operations and supply chains can have a material impact on biodiversity, but they also stand to benefit from more resilient supply chains, more reliable sourcing and also reputational gain amongst conscientious consumers.
Compared to other sectors, there are strong commitments in the consumer space through engagements with investee companies.
An example is French-based luxury goods brand Kering. Through engagement discussions, the team has been pleased to see them build out a new biodiversity strategy during 2020.
Kering have already been working extensively with third parties to meaningfully measure the end-to-end impact of their value chain and the materiality of these impacts on the climate through their environmental profit and loss.
The company has recognised the largest impact occurs in tier 4 of their supply chain, i.e., raw material production, and is far greater in the land use category. It is this analysis that has prompted the firm to look for solutions and offsets.
As its products begin their lives in farms, fields, forests and other ecosystems globally, Kering has acknowledged the need to safeguard nature within the supply chain and champion transformative action beyond that to “ensure humanity operates within planetary boundaries”.
Specifically, Kering’s new biodiversity strategy commits to a net positive impact on biodiversity by 2025. They plan to achieve this by regenerating and protecting an area, about six times their total land footprint, including one million hectares of critical, “irreplaceable” habitat outside of the supply chain.
There remain some key challenges when considering biodiversity from an investment perspective, one of which is measurement. Unlike climate change risk, where the market has coalesced around carbon emissions as the metric, there is currently no obvious unifying equivalent for biodiversity. Furthermore, investors still lack consistent and transparent data from investee companies, which would enable them to truly incorporate biodiversity into their decisions.
Corporates must assess their impact in the broader sense of the term, by capturing the whole ecosystem of their business activities, from raw materials to final production, and to utilisation and end-of-life cycle of the products that they produce. The Martin Currie team is developing a framework for identifying companies for which biodiversity and ecosystem factors are most material.
As with climate change analysis, it is important to recognise that for biodiversity there is dual materiality. A business may have a high dependency through its direct operations or supply chain, or high impact in its operations or value chain. These criteria tend to be more profound in certain sectors. Obvious examples are the food and beverage industries, while material impacts are recognised in construction and mining.
As well as risks, growth opportunities will be highlighted in the framework. Solution providers or best practitioners with a potential to benefit from a transition to a biosphere positive business model will be recognised alongside examples of best practice.
As data and disclosure around biodiversity develops, it is sensible to expect more companies in relevant industries to adopt a biodiversity policy. This will ensure that investors have more oversight of business operations and the relationship to ecosystems.