For decades, scientists have detailed how humanity is degrading Earth and its natural systems. Biodiversity loss is now acknowledged by international governments and industry bodies such as the UN PRI as a systemic risk. The events of the last twelve months have indeed brought the reality of our relationship with nature into the spotlight, highlighting that not only climate change, but biodiversity loss presents challenges that require a radical shift in thought, action and investment. But what is the role of investors in this shift, and alongside risk, could there be opportunity?
Earlier this year, the independent review on the Economics of Biodiversity – the Dasgupta Review – made clear that humanity’s current engagement with the natural world is endangering our economies, livelihoods and well-being. Biodiversity loss is not just an ecological issue, it is an economic issue. All economic activities depend on ecosystems and the services they provide. Over half of global GDP – $44trn of economic value generation – is moderately or highly dependent on ecosystems and its services. The World Economic Forum reports that $8trn of gross value added (GVA) is generated from the three largest sectors that are highly dependent on nature: construction ($4trn), agriculture ($2.5trn), and food and beverages ($1.4trn). Financial returns ultimately rely on nature’s returns.
The Review underscored the critical role the global financial system will play in enabling a more sustainable engagement with the natural world. That is, in order to balance humanity’s demands with nature’s supply on a sustainable basis, a significant reorientation of financial flows and better management of nature-related financial risks and uncertainty is needed. Given that financial flows supporting identifiably ecological harmful activities – as highlighted recently by Global Canopy’s Little Book of Investing in Nature or UNEP’s recent report that around $5trn per year of global subsidies are directed to harmful practices, the current scales of global finance are currently firmly tilting in one direction: An unsustainable direction. On the other hand, investments in conservation and restoration of ecosystems and their biodiversity range at around $100bn per year – equivalent to around 0.1% of global GDP – small, relative to estimates of what is required to prevent further declines in biodiversity.
But those scales can be altered. First, evidence matters. It is widely accepted that measuring changes in biodiversity is more complex than measuring climate change; company disclosures on how they impact biodiversity and the natural world are patchy at best, and non-existent at worst. ESG data providers will be encouraged to fill the gap. But, for an issue as complex as nature, the data potentially used to direct trillions of dollars’ worth of capital flows must be based on the best science we can muster if unintended consequences are to be avoided.
Evidence-based frameworks uniting science and sustainable finance, combined with systematic data collection, technology and transparency from business, will be key. The rise of geospatial data, remote sensing, and multiple growing data lakes to capture quantitative data points and aggregate them with more power than ever before means that connecting activities and their impacts can finally be revealed. As highlighted in the Dasgupta Review, transparency of impact, supported by innovations like AI and spatial data, can close the data gap.
Second, there is a role to play for disclosures and in setting effective conventions. The Dasgupta Review highlighted the importance of disclosures in building out understanding and awareness among private actors, and to provide consistent and transparent information to global markets. Disclosure regimes such as the forthcoming SFDR demand new levels of insight and transparency of investors on behalf of their investee companies when it comes to biodiversity and deforestation.
Finally, as with climate-related investments, measurement may actually herald the birth of a new asset class, this time with pro-nature outcomes. Long-standing barriers – be it tangible returns, readily available projects, or robust data – to private investments may then become available to balance the scales in favour of both nature and returns. The mechanisms suggested by the Dasgupta Review – blended finance, pooled funds, nature bonds or broader sustainable investing may all become beneficiaries for innovative investors.
Combined with this, international organisations, for example the recently formed Taskforce on Nature-related Financial Disclosures (TNFD) – which aims to build awareness and capacity on Nature-related dependencies, impacts, and financial risks among financial institutions – are encouraging greater engagement with investors and broader financial market participants alike.
Ultimately, improved understanding and management of nature-related dependencies, impacts, and financial risks has the potential to further unlock financial flows that achieve twin aims: both enhancing natural assets, and supporting sustainable economic activities. The result could be a paradigm shift in capital allocations at scale – one that is positive for investors, and for nature.