Biodiversity: Humanity's Last Hope?

The significance of biodiversity loss extends beyond the environment, posing a substantial threat to the global economy and the very fabric of human well-being. According to the World Economic Forum’s Global Risk Perception Survey, biodiversity loss is considered the third most pressing risk to humanity, trailing only behind climate change and its extreme weather manifestations.

In fact - more than 50% of global GDP is directly dependant on biodiversity.

In the face of these challenges, institutional investors are increasingly recognising the importance of incorporating biodiversity considerations into their investment frameworks. Yet, quantifying and integrating biodiversity metrics into investment strategies have remained elusive, largely due to the lack of a universally accepted measurement framework. That is, until now.

‍

‍

The introduction of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) framework in 2020, identifies five major drivers of biodiversity loss, marking an important advancement in addressing this gap. This framework offers institutional investors a tangible way to assess and mitigate their investments' impact on biodiversity:

1. Land and sea use change
2. Climate change
3. Natural resource exploitation
4. Pollution
5. Invasive alien species (not the supernatural kind!)

Over the next two weeks, we’ll look at the five key drivers of biodiversity loss, and how investors can take them into account when looking at their portfolios. This week we will look at Land and sea use change and climate change.

‍

‍

‍

‍

1. Changes in Land and Sea Use:

‍

The transformation of natural landscapes and seascapes to accommodate human activities is the foremost driver of biodiversity loss globally. According to IPBES, half of all habitable land has been altered for agricultural and livestock purposes, reshaping the Earth's surface and its natural habitats. This extensive conversion of land not only disrupts ecosystems but also erodes the biodiversity that underpins ecosystem functionality and resilience.

‍

Annually, over 3 million hectares of these forests, known for their biodiversity, are cleared. This deforestation contributes significantly to species extinction, reduces carbon sequestration capacity, and alters hydrological cycles, demonstrating the profound environmental impacts of land use change.

Marine ecosystems are equally affected by human activities. Overfishing, coastal development, and pollution have led to the degradation of coral reefs, mangroves, and seagrass beds, crucial habitats for marine biodiversity. These activities not only threaten marine species but also jeopardize the livelihoods of millions of people reliant on marine resources.

‍

‍

For investors, the implications of land and sea use change are multifaceted. Stricter environmental regulations aimed at preserving sensitive areas, such as forests and wetlands, pose potential risks to companies with significant land holdings or those reliant on natural resources. For instance, Nestle faced challenges with its bottling plant operations due to restrictions on water withdrawals in California, highlighting the financial risks associated with environmental regulations.

From an investment perspective, the transition to sustainable land and sea use practices offers both challenges and opportunities. Companies that proactively adapt to environmental constraints and invest in sustainable practices are likely to navigate regulatory risks more effectively and secure a competitive advantage in the long term. This shift necessitates a reevaluation of investment strategies to prioritize companies that are not only compliant with environmental regulations but also contribute to the conservation and sustainable use of natural habitats.

Investors, therefore, must look into the nature of a company's operations, particularly its products and services, to see the alignment with sustainable land and sea use principles.

Take, for instance, Sime Darby, a palm oil producer. The company's engagement in land conversion for agricultural purposes places it in direct opposition to the goals of sustainable land and sea use, marking it as entirely misaligned due to its contribution to ecological degradation and habitat fragmentation. On the flip side, there is room for positive impact through enhancing land use efficiency, showcased by innovations in agricultural technology. Deere & Company emerges as a prime example, with 66% of its revenue derived from producing agricultural machinery that fosters improved farming practices and boosts crop yields, demonstrating alignment with sustainability objectives.

‍

‍

‍

2. Climate Change:

Unsurprisingly, climate change poses a huge threat to global biodiversity. A small example is that coral reefs could decline by 70% to 90% with just 1.5°C of warming, and more than 99% at 2°C.

The relationship between climate change and biodiversity is a complex web of cause and effect. Rising temperatures, shifting weather patterns, and increasing frequency of extreme weather events disrupt the delicate balance of ecosystems. These changes affect species migration patterns, reproduction cycles, and, ultimately, survival rates. For ecosystems like coral reefs, which are biodiversity hotspots, even slight temperature increases can lead to catastrophic bleaching events, jeopardizing marine life and the livelihoods dependent on them.

‍

‍

From an investment standpoint, assessing a company's alignment with climate change mitigation efforts is crucial. This involves examining their direct carbon emissions and their role in contributing to or combating climate change. We’ve already looked at the key environmental KPIs that investors should know.

To add a little more color, companies like Chevron Corporation, with significant carbon emissions, represent a misalignment with climate objectives and carry higher risks related to regulatory changes, reputational damage, and physical impacts of climate change. Conversely, companies such as Vestas Wind Systems, which contribute to the development and deployment of renewable energy technologies, not only mitigate these risks but also offer the potential for long-term sustainable growth.

Next week, we’ll look at the other three drivers, and show how investors can mitigate and even strengthen their biodiversity footprint.

Follow and don’t miss out!

‍