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Investors are noticing biodiversity is an ESG blind spot. What are they doing about it?

A parrot sits in the middle of the picture on a branch, surrounded by trees in a black and white image of a rainforest
Image credit: Unsplash / Roberto Nickson

Days before delegates at the United Nations’ 15th conference on biodiversity, or COP15, passed the landmark 30-by-30 initiative, the UN’s Secretary General, António Guterres, painted a clear and frank picture of the interconnectedness between nature and business.

“Multinational corporations are filling their bank accounts while emptying our world of its natural gifts,” he said. “Ecosystems have become playthings of profit. With our bottomless appetite for unchecked and unequal economic growth, humanity has become a weapon of mass extinction. We are treating nature like a toilet.”

The Secretary General’s full December speech is worth the read or listen, but the most powerful quote from it may be his notion that we are “committing suicide by proxy. Because the loss of nature and biodiversity comes with a steep human cost.”

And now, investors are noticing.

The costs Guterres lists include jobs, hunger, disease, and death on top of the water, food, and energy we receive from nature, which all-in-all, adds up to $3 trillion in losses a year until 2030 due to ecosystem degradation. As a report by Moody’s Investors Services showed ahead of the summit, $1.9 trillion is already at stake.

And the number won’t go down after 2030, especially when the total economic output dependent on animals and ecosystems is $44 trillion according to the World Economic Forum.

That’s half of the world’s GDP reliant on what the Secretary-General says we are treating “like a toilet.”

It’s an understatement to say the risk is on investors’ radars. The 30-by-30 initiative proposes 21 targets and 10 milestones be completed by 2030 en route to ‘living in harmony with nature’ by 2050, as the U.N. puts it. The crown jewel of these milestones is, of course, conserving and protecting at least 30% of Earth’s lands and oceans by 2030.

As the U.N. outlines in the draft proposal, the landmark conservation effort has some monetary calls to action from reducing and eliminating incentives harmful to biodiversity by at least $500 billion annually and increasing the financial flows to developing countries by $200 billion. These countries, which are generally the richest in rainforests and natural habitats bare the brunt of biodiversity loss.

This past biodiversity COP was the first time the conference attracted a large number of investors, and in just a couple of months after, as Financial Times puts it, these investors are now channeling funds to safeguard biodiversity.

In the wake of the historic COP15 decision, biodiversity risk is emerging as a new regulatory framework in ESG (Environmental, Social, and Governance), a framework that helps stakeholders understand how an organization manages risks and opportunities around sustainability issues, from pollution and carbon emissions to deforestation and now biodiversity.

As a new analysis by the nonprofit ShareAction shows, biodiversity is an ESG “blind spot” for asset managers. As it emerges as a risk, only 10% of the asset managers surveyed say they have a dedicated biodiversity policy covering all their portfolios. As COP15 changes the ESG landscape, ShareAction concludes that protecting important habitats is a top priority.

“Investors be aware,” Luke Sussams, ESG strategist at the investment banking group Jefferies, wrote in a note to clients on the subject back in January, warning them that they may be underestimating the ESG risks posed by biodiversity loss, especially from a regulatory standpoint.

As Bloomberg reports, Sussams says the European implementation of the Global Biodiversity Framework (GBF) agreed at COP15 “is well underway,” although this is a development of which “investors might not be aware.”

The European Union is beginning to implement biodiversity safeguards. During COP15 the conglomerate agreed to a law preventing the import of goods linked to deforestation so that products like coffee beans and palm oil won’t come at the expense of habitats in biodiverse regions like Brazil’s rainforests and Uganda’s jungles.

The new regulations in Europe won’t stop there. Sussams says while the deforestation law is the “most significant” target right now, new regulations may also impact investments in energy, mining, and industrial activities, with the fallout from regulations also impacting fertilizers and food waste. Thus, investors will soon set their eyes on technologies targeting improvements in these areas.

Sussams isn’t alone in this opinion. As Alexa Firmenich, co-director of the SEED initiative to measure biodiversity at research group Crowther Lab said via Financial Times, she expects “massive growing interest in early-stage companies” that are developing technologies to restore ecosystems and monitor progress on biodiversity.

Right now, biodiversity startups are drawing the short end of the stick when it comes to raising capital, even among investors focused on ESG goals. As a December report from the financial services firm Morningstar shows, only 14 funds with $1.6 billion of combined assets have strategies based on biodiversity. That is a drop in the ocean compared to climate strategies targeted by roughly 1,100 funds holding over $350 billion in global assets.

Still, the report concludes that a turning point is happening and COP15 was the catalyst.

Aside from triggering laws and regulations worldwide that will over time significantly impact businesses, Morningstar reports that asset managers have already started to update their engagement and voting policies on biodiversity preservation.

On top of that, biodiversity startups are beginning to gain the capital they need to protect wildlife because companies are looking to them to ensure their operations and supply chains are sustainable. As 7 investors interviewed by TechCrunch agree, ocean conservation, for example, is becoming “the next climate tech.”

“Our systems are at a point where it is more productive to work with nature than against it. While energy and agriculture are further along the J-curve,” Sanjeev Krishnan, chief investment officer at S2G Ventures, said referring to the dramatic gain of energy and agriculture tech, “the oceans sector is more nascent but presents an investable opportunity that impacts almost every sector of the global economy.”

Direct investment in startups isn’t the only way investors are turning to mitigate nature loss risks. Both the Morningstar report, Sussam, and other investment experts predict an evolution in the emerging market for nature-based carbon credits and biodiversity credits, both of which the U.N. suggests as potential means for funding the 30-by-30 conservation goals.

However, due to the challenges and controversy that carbon credits and so-called “offsetting” face, Sussams said via Financial Times that translating biodiversity factors into financial risk and opportunity is “exceptionally challenging” because the industry has yet to agree on which metrics are best, let alone to plug the “vast data gaps” that exist.

Still, the industry will have to move swiftly.

“Nature and biodiversity are in the spotlight like never before. We may be mobilizing billions today, but that has to become trillions –and fast,” Peter Harrison, Schroders’ chief executive officer, said in a note to clients. According to the Morningstar report, Schroders stood out in its biodiversity dependency for its investment in apparel and foods, thus the firm is trying to blaze a trail in biodiversity investment strategies.

“That’s non-negotiable for a world looking to chart a course towards a nature-positive future,” Harrison said. Last year, Schroders invested in Natural Capital Research, which measures assets such as forests and mangroves using satellite data and machine learning tools. Other startups using tech to monitor biodiversity may soon feel the results of investors taking Schroders’ lead, and putting their biodiversity ESG blind spots into focus.

As Bloomberg reports, Harrison says failing to mobilize money into conservation puts companies and investors at a liability, thus 2023 is bound to be a turning point for biodiversity investment.

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