Investors have recently developed an acute awareness of climate change as a systemic risk to global markets. But there is another crisis – the world is losing biodiversity and ecosystems at an unprecedented rate. From 1970 to 2016 there was a 68 percent decline in the World Wildlife Fund’s principal wildlife indicator. This matters to the sectors we invest in and how our portfolio companies operate.
Later this year, country delegations will convene in China for the latest UN Biodiversity Conference, COP15. The hope of many is that, much as with climate change via the Paris Agreement, a global agreement will be reached to stem and reverse biodiversity loss.
Biodiversity must also move up the agenda of investors, and private capital can play an important role in helping to protect biodiversity and potentially even drive a reversal in anthropogenic damage to nature.
Biodiversity is in crisis
Between 1970 and 2016, humanity has grown in numbers and wealth; the global population has roughly doubled, and GDP has grown by more than four times. Without adjusting for inequality, this approximate doubling in GDP per capita looks broadly positive. But it has come at the expense of our natural capital. The data here shows we need a significant global solution. Scientific research has found that three-quarters of the world’s land, has been “severely altered” by human actions, with a million species at risk of extinction.
Nature is important for many socio-economic reasons. Pollinators, soil microbia and plant diversity are vital to food security. Natural ingredients form significant constituents in medicines. Nature provides raw materials – fuel, building materials, fertilisers. Ecosystems protect from storms, flooding, wildfires and provide water cycles we need for homes, industry and agriculture. The World Economic Forum found that $44 trillion– more than half of global GDP – is moderately or highly dependent on nature.
Sustainable development is a much-cited mantra – society, environment and economic growth in harmony. But as humans have caused extinctions and disrupted ecosystem functions, our activities clearly point towards unsustainable development. Pollution, habitat degradation, resource exploitation for food and materials, some traditional medicines, invasive species and climate change all play major roles in damaging the natural systems that sustain us.
Investor frameworks regarding biodiversity are still emerging. The Taskforce on Nature-related Financial Disclosures will offer a global tool for reporting and action on nature-related risks.
In France, financial institutions are now required to disclose biodiversity risks and impacts. Similarly, the Dutch regulator requires large financial institutions identify portfolio exposure to biodiversity risks.
These changes are all important because, to date, markets have struggled to calculate and assess biodiversity risk. Methodologies that can compute, quantify and reduce to a few data points, are in their infancy. And without data, then value and price – the very essence of markets – are hard to ascertain.
The private capital contribution
Private capital is particularly well placed to help the world address biodiversity issues, both by encouraging best practice within investment portfolios and by backing innovative businesses proactively tackling the crisis.
At Triton, we now require our portfolio companies to report explicitly on natural capital, ideally incorporating a biodiversity risk assessment, alongside reporting on climate change risks and circular economy opportunity assessments, both of which are adjacent areas important to managing biodiversity risks. Engagement is a cornerstone of responsible investment and will be key for investors in private markets in mitigating biodiversity impacts across their holdings.
We also seek to invest in companies offering products and services that are well-placed to provide solutions to biodiversity loss, including in materials and water efficiency, biodiversity-positive property maintenance, ecosystem restoration and sustainable food supply. We view natural capital as an investable theme in and of itself, not just an exercise in risk management.
The degradation of our natural world cannot be ignored while we address other global concerns, as it can act as a risk multiplier, driving more people towards food poverty, destabilising countries and threatening economic activity. The biodiversity crisis must become firmly embedded into responsible investment practices, especially among private capital investors who can lead by example, using active ownership to encourage biodiversity best practices, and the resources to fund necessary innovation.
Ashim Paun is head of sustainable investing at European investment firm Triton Partners.