ESG investors wake up to biodiversity risk
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As environmental, social and governance investing has swept across the financial world, the “E” in ESG has become nearly synonymous with attempts to mitigate climate change. But while the climate crisis is one of the planet’s gravest problems, it is not the only environmental threat that needs tackling.
Companies and investors are becoming increasingly concerned about the significant financial risks stemming from biodiversity loss and the destruction of natural ecosystems.
“It’s ESG not ‘CSG’,” says Karen Degouve, head of sustainable business development at French bank Natixis. “It’s not ‘climate’, social and governance.”
Damage to ecosystems including forests, grasslands and coral reefs — and the associated loss of biodiversity — could drain nearly $10tn from the global economy by 2050, according to the Global Futures report from the World Wide Fund for Nature (WWF), the conservation group.
The loss would stem from smaller crop yields and fish catches, and greater exposure to floods and other natural disasters, among other factors. Healthy ecosystems also absorb large amounts of carbon, which helps offset the climate-changing effects of greenhouse gases.
Yet investors and companies often fail to put a price tag on the benefits they receive from the natural world. “Biodiversity is this major risk that we face but which people have largely ignored within our sector,” says Ashim Paun, co-head of ESG research at British bank HSBC. “All the attention has been on climate change, which overlaps with biodiversity . . . but this has not been addressed very much.”
A reason for that is a lack of data and measurement standards, he says. While climate-conscious investors can look at metrics such as “CO2 equivalent” — which provides a standardised way to quantify greenhouse gas emissions — there is no similar measurement for biodiversity.
“We take value from biodiversity in an ecosystem in many different ways,” says Mr Paun, adding that because we do not pay for these benefits, we are not in the habit of pricing them. Cities, for example, typically do not put a monetary value on the natural water filtration systems provided by the trees and other vegetation in their watersheds.
That, however, may be changing, as corporations such as Microsoft and organisations including the UN Environment Programme’s Finance Initiative (Unep FI) launch projects to quantify the value that humans and companies receive from the natural world.
In April, Microsoft joined forces with Esri, a company specialising in geographical information software, to create a “Planetary Computer” that aggregates data from satellites and ground-based observers to provide a detailed picture of the environment.
“We think the world just doesn’t have enough accurate data to map the ecosystems of the world,” says Brad Smith, Microsoft president. The project, he adds, is part of a multipronged plan to promote sustainability: the US tech group this year announced its intention to go “carbon negative” by 2030.
“We cannot be successful as individuals, families or companies, unless we can do a better job of protecting and preserving this planet,” Mr Smith says. “It’s the obvious shared resource for humanity, and the planet is under threat in the air, in the oceans and rivers and lakes, and in the land.”
Separately, the Unep FI last week said it was teaming up with the governments of the UK and Switzerland, WWF and others to develop a Task Force on Nature-related Financial Disclosures. The body is modelled on the Taskforce on Climate-related Financial Disclosures (TCFD) headed by former Bank of England governor Mark Carney, which set guidelines for how companies should disclose their carbon emissions.
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“Given that a lot of the evidence shows that biodiversity in nature also has economic implications . . . we are focusing on how that would potentially affect financial institutions,” says Liesel Van Ast, biodiversity lead at Unep FI.
The coronavirus pandemic underlines the importance of such efforts, says Ms Degouve from Natixis. “Research has shown that it’s the destruction of biodiversity that creates the conditions for new viruses. . . to emerge,” she says. “[The pandemic] has, in my view, worked as an accelerator.”
Natixis has set a biodiversity investment target of €2bn for its asset management affiliates, but it is still early days for investors in this area. There are few for-profit companies working specifically to improve biodiversity and many businesses appear to far from recognising the financial risk they face. There has not yet been a “Stern review” for natural capital, says Ms Degouve, referring to the landmark 2006 report that quantified the financial risk of climate change.
“They need to realise that it’s the same as climate change for natural capital loss,” she says. “It is going to threaten the world’s economic stability at some point, and ultimately the survival of human beings.”
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