Biodiversity loss is often overshadowed by climate change, despite the fact that the issue is just as important for the future of the planet. Ahead of this year, hopes were high to finally see natural capital in the spotlight. The upcoming 15th Conference of the Parties (COP15) to the UN Convention on Biological Diversity (CBD) is expected to establish a global framework for biodiversity and give the issue a boost, in the same way that the Paris Agreement did for climate action.
It is now clear that the COP15 meeting, which was due to take place in Kunming in April-May 2022, has once again been postponed and that the preparatory UN negotiations in Geneva in April made little progress. As no progress has been made, an additional meeting is to be held in Kenya in June. Admittedly, the proposal to aim for the protection and restoration of 30% of land and water has received broad support. However, agreeing on a new target is only a start and will have no effect without adequate funding and careful monitoring.
How do we manage the planet’s natural capital?
For professional investors, accustomed to diversifying their assets to create a robust portfolio, the logic behind the need to conserve biodiversity should be easy to understand. Biodiversity is a key factor in ensuring that our ecosystems are resilient and continue to provide the ecosystem services that are essential for the sustainable development of society. Nature contains a complex set of interdependencies that support its continued existence. The potential domino effect of a biodiversity crisis therefore poses a very real risk to humanity.
“We are all asset managers,” writes Professor Partha Dasgupta in her well-known report, The Economics of Biodiversity: The Dasgupta Review. Commissioned by the UK government and published in 2021, this wide-ranging review shows, sadly, how poorly we have managed natural capital as an asset. Dasgupta estimates that while capital produced per capita doubled and human capital per capita increased by around 13% globally between 1992 and 2014, natural capital per capita has declined by almost 40% over the same period.
There is no shortage of statistics to quantify the crisis that biodiversity is in. Perhaps most important is to look at the underlying causes. According to Dasgupta, market players have neglected to take into account the value of the goods and services that nature provides. The costs of negative ‘externalities'[1] have not been properly allocated because important natural resources have been considered to be publicly available at no cost. For example, we have only recently begun to understand the enormous value of insect pollination to agriculture.
Investors must become part of the solution
The UN estimates that annual investment in nature-based solutions (NbS) would need to increase substantially by 2050. Much of this capital would need to come from the private sector.
In a 2021 report, State of Finance for Nature, the UN notes that inflows are currently around USD 133 billion per year in NbS, using 2020 as the base year, of which 86% is public funding, primarily from national governments. Nearly two-thirds of this money is used to restore forests and peatlands, pursue regenerative agriculture, protect water resources and create natural pollution control systems.
Private sector funding for conservation amounts to $18 billion a year, including biodiversity loss compensation, corporate investments in sustainable supply chains, private investment and smaller amounts from philanthropic foundations. Compared to climate finance, these private investments appear relatively modest.
Investment in nature-based solutions needs to at least triple in real terms by 2030 and quadruple by 2050, according to the UN report, if the world is to meet its climate change, biodiversity and land degradation targets. This rate of increase would equate to cumulative total investments of up to $8.1 trillion and future annual investments of $536 billion. The researchers are careful to point out that their report does not include all types of NbS. For example, necessary measures related to the marine environment are not included in the estimates.
In 2021, SWESIF chose to make a special effort on the issue of biodiversity. See Professor Beatrice Crona’s presentation “Why care about biodiversity?”, the video from the webinar “Biodiversity and Finance – Why and What?”, or the video from the webinar “Biodiversity and Finance – How?”.
Where to start?
Asset managers and other financial actors need a practical framework for identifying the areas where they have the greatest impact on biodiversity, analysing them carefully, setting relevant targets and embarking on a systematic change process. The United Nations Environment Programme (UNEP) Finance Initiative offers an example of such a framework in its 2020 report, Beyond Business as Usual, written in collaboration with the Natural Capital Finance Alliance (NCFA).
The report identifies a number of sectors, such as oil and gas, mining, agriculture, or transport where portfolio holdings should be reviewed. Once the relevant sectors have been identified, it is important to assess the materiality of biodiversity risks posed by investments in companies in these sectors. This is a prerequisite for prioritising and setting relevant and realistic targets for future work.
The internal biodiversity targets of financial actors can vary. However, it is important that they are aligned with global and national targets. UNEP and NFCA suggest using, for example, the UN Sustainable Development Goals (SDGs) 14 ‘Life under water’ and 15 ‘Life on land’ as guidance, pending a more comprehensive framework promised by COP15.
How to measure performance?
Professional investors have long used a wide range of financial analysis tools to maintain a healthy balance between risk and return in their portfolios. As they began to pay serious attention to the climate crisis, the toolbox needed to be expanded to include greenhouse gas (GHG) metrics, such as carbon dioxide equivalent (CO2e) and implied temperature rise (ITR). A prerequisite for these tools and metrics to be embraced by more investors is that they are designed to be simple and effective at the user level.
The biodiversity crisis once again makes it necessary to expand the toolbox, this time with methods and metrics that can help investors oversee their impact on natural capital. The complexity of the biosphere’s interlinked processes and services cannot be captured in one or a few metrics. “Finance for Biodiversity – Guide on biodiversity measurement approaches” provides guidance.
Policy makers and other societal actors are moving towards setting biodiversity measures and targets, but much work remains to be done. While waiting for clear guidelines and rules to be put in place, it is important that responsible investors do not lose momentum, but continue to progressively integrate biodiversity considerations into their management. Financial actors have shown in the past that they can get ahead of regulation, for example by incorporating climate and environmental considerations into their operations. Hopefully they will do so again and not wait to integrate biodiversity into their business models and decision-making processes. The important work of ensuring that nature is protected and restored cannot wait.
[1] Externalities can be described as economic transactions that affect the benefits to third parties.
Image by Gerd Altmann from Pixabay
