Mitigating deforestation risks in portfolios

Fidelity panel looks at the factors driving biodiversity loss

Deforestation risks are starting to translate into financial risk for corporates, according to Gabriel Wilson-Otto, head of sustainable investing strategy at Fidelity. 

Speaking in a webinar entitled Nature Positive: the new Net Zero with Jenn-Hui Tan, global head of stewardship and sustainable investing, and Velislava Dimitrova, portfolio manager of the FF Sustainable Biodiversity Fund, Wilson-Otto said the firm is so concerned that deforestation is a critical contributor to biodiversity loss and financial risk, it had developed it’s own deforestation framework.

“We’re seeing deforestation risks start to translate into financial risk for corporates,” Wilson-Otto said.

“We’re seeing changes in regulation in the EU, around sourcing agriculturally driven deforestation products. This could lead to a massive disruption in supply chains and cost of capital,” he warned.

Biodiversity loss

Meanwhile, Tan explained biodiversity loss is driven by five key factors: climate change; changes in land and sea use; direct exploitation; invasive species; and pollution. He warned further biodiversity loss could cause disruption of supply chains; accelerated climate change; a decline in medical discoveries, new diseases; mass famine and malnutrition; and economic decline. 

He added that companies are being exposed to a growing list of acute risks associated with biodiversity loss such as drought or disease outbreaks, or chronic, in the form of declining crop yields or supply-chain disruptions due to the scarcity of natural resources. He also highlighted transition risks, with a “wave of legislation” emerging and legal risks, given an acceleration in the number of climate-change litigation cases globally.

‘Investment megatrend’

Dimitrova explained that while investing in biodiversity is an emerging theme, with a relatively limited range of funds, these are increasing. She highlighted around 30 potential investable solutions including agriculture efficiency; fish farming; clean and autonomous transport; organic farming; recycling; and reduced food waste.

She said: “A fund invested in these solutions can be very well diversified, not only in terms of technology but sectors and geographies. These are not niche − you don’t have to be invested in small, new, emerging technologies and small-cap companies. They have been around for a while, they’re already scaled and they are economic.” 

Reflecting on investing in solutions for the causes of biodiversity loss, Dimitrova said: “These solutions need to be adopted globally in a relatively short period of time, which means that this will possibly be the largest investment megatrend in our lifetime.”

She added: “Not only is biodiversity a significant investment megatrend but also I believe that not investing in biodiversity poses a significant risk to broader client portfolios.”