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Why investors need to start tracking their impact on biodiversity

Author
Marie-Anne VincentVP Strategy & Regulatory
Category
Insight
Topics
ESG
Published
19 July 2023

As the world grapples with the urgency of addressing climate change, it is essential for investors to broaden their perspective and look beyond their carbon footprint. While reducing greenhouse gas emissions remains a critical priority, a crucial aspect often overlooked is the impact on biodiversity. Earth's delicate ecosystems are facing unprecedented challenges, with species loss and habitat destruction reaching alarming levels. In this blog post, we delve into why investors should track their impact on biodiversity and integrate it into their sustainability strategies.

What is biodiversity?

Biodiversity encompasses the vast range of life forms and ecosystems present on Earth, including several million species of plants, animals, and microorganisms, as well as their intricate interconnections. At various levels, from genetic diversity within a species to the abundance of different species within natural habitats, biodiversity plays a vital role in maintaining the health and balance of our natural world.

It is also crucial for climate regulation, as diverse ecosystems help absorb and store carbon dioxide, which is a chief contributor to climate change. Natural habitats provide vital services such as water purification, soil fertility, and pollination, which are essential for our collective wellbeing. However, human activities, such as habitat destruction and deforestation, pose significant threats to biodiversity and disrupt the delicate balance of ecosystems.

The scale of biodiversity loss

According to the International Union for Conservation of Nature (IUCN) Red List of Threatened Species, more than 41,000 animals and plants worldwide are currently threatened with species extinction. Evidence suggests that the list of endangered species includes 41% of all amphibians, nearly 33% of coral reefs, 27% of the world's mammals, over a third of all marine mammals, and 13% of all known bird species.

The IUCN's report reveals that the decline in biodiversity is driven by various direct and indirect factors, many of which have intensified over the past 50 years. Among the primary direct drivers, pollution stands out as a significant contributor. Marine pollution, in particular, has surged tenfold since 1980, wreaking havoc on coral reefs and other aquatic ecosystems and impacting at least 267 species.

The growing human population has significant implications for biodiversity. As more people inhabit the Earth and their needs and consumption patterns increase, there is a greater demand for resources, including land, water, and energy. The expansion of human activities, such as agriculture, urbanization, and infrastructure development, often leads to habitat destruction and fragmentation.

Carbon measurement and biodiversity: Two sides of the same coin

A report jointly released by the Intergovernmental Panel on Climate Change (IPCC) and the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) has underscored the critical need for integrated management of climate change and biodiversity, which have historically treated as separate issues. The report highlights the co-benefits of taking action on climate change and protecting biodiversity, emphasizing the need to protect and restore carbon-rich ecosystems, manage sustainable agricultural and forestry practices, and create urban green spaces. This integrated approach is crucial to realizing our global climate and environmental ambitions.

The concept of the biodiversity footprint (CBF)

The Corporate Biodiversity Footprint (CBF) is a science-based measure developed by Alexandre GarelArthur RomecZacharias Sautner and Alexander Wagner to assess the extent to which an organization's activities have degraded ecosystems. 

The CBF metric quantifies a firm's direct and indirect impacts on biodiversity, considering land use, greenhouse gas emissions, water pollution, and air pollution. It captures biodiversity throughout the value chain and provides granular within-industry variation analysis. 

The CBF research also examines the relationship between a firm's biodiversity footprint and its stock returns. There is strong evidence that the biodiversity footprint began to be priced following significant nature-related policy events, such as the Kunming Montreal Agreement. The emergence of a biodiversity footprint premium suggests increased investor awareness and expectations of future regulations in this area. This finding also implies that investors may require a risk premium for large CBF stocks, leading to potentially higher returns for stocks with lower biodiversity footprints.

The benefits of measuring the biodiversity impact of your portfolio

There are a number of benefits of measuring the biodiversity footprint of your portfolio:

Enhanced sustainability performance

Measuring biodiversity impact allows you to assess your portfolio's environmental performance more comprehensively. It helps identify potential risks and opportunities related to biodiversity conservation, enabling you to make informed decisions and set sustainability targets that go beyond just carbon emissions.

Risk mitigation

Biodiversity loss poses risks to businesses, such as supply chain disruptions, reputational damage, regulatory compliance issues, environmental change, and legal liabilities. Measuring biodiversity impact helps your portfolio companies identify and understand these risks, enabling them to develop strategies to mitigate them effectively. By proactively addressing biodiversity risks, companies can safeguard their operations and ensure long-term resilience.

Improved stakeholder engagement

Stakeholders, including customers, employees, and local communities, increasingly value companies that demonstrate a commitment to biodiversity conservation. By measuring their biodiversity impact, your portfolio companies can engage stakeholders more effectively, showcasing their efforts to preserve ecosystems and protect biodiversity. This enhances their reputation as responsible and environmentally conscious organizations, fostering trust and loyalty among stakeholders.

Innovation and competitive advantage

Measuring biodiversity impact can encourage your portfolio companies to explore innovative solutions and practices that minimize negative impacts and promote biodiversity conservation. This can drive research and development initiatives, leading to the creation of new products, services, and processes that are environmentally friendly. By integrating biodiversity considerations into their business strategies, companies can gain a competitive edge by differentiating themselves in the market and attracting environmentally conscious customers.

Collaboration and partnerships

Measuring biodiversity impact provides a common language and framework for collaboration with other organizations, NGOs, and government agencies working towards biodiversity conservation. It facilitates partnerships, knowledge-sharing, and collective action, enabling you to contribute to larger-scale conservation initiatives and amplify your impact on a larger scale.

Regulatory compliance and market access

Governments and regulatory bodies are increasingly introducing regulations and policies that address biodiversity conservation. By measuring the biodiversity impact of your portfolio and aligning with the relevant standards, you can ensure compliance with these regulations. Moreover, some markets, particularly in sectors like agriculture, forestry, and food production, require certifications or proof of sustainable practices for market access. Measuring biodiversity impact can help your portfolio companies meet these requirements and access such markets more easily.

Legislation for biodiversity protection

Legislation plays a crucial role in addressing the challenges and promoting the conservation of biodiversity. Several notable initiatives have emerged in recent years, aiming to enhance biodiversity protection and sustainability practices.

TNFD

One such initiative is the Task Force on Nature-related Financial Disclosures (TNFD). Inspired by the success of the Task Force on Climate-related Financial Disclosures (TCFD), TNFD aims to provide a framework for businesses and financial institutions to assess and disclose their impacts and dependencies on nature. By integrating nature-related risks and opportunities into financial decision-making, TNFD strives to drive investments towards biodiversity-friendly practices.

SBTN Land and SBTN Nature

SBTN Land focuses on securing land rights for indigenous communities and local populations, recognizing their traditional knowledge and sustainable land management practices. By empowering these communities, SBTN Land promotes biodiversity conservation and the preservation of natural habitats. On the other hand, SBTN Nature aims to mobilize resources to protect and restore critical ecosystems, such as forests, wetlands, and coral reefs, which are vital for biodiversity conservation and mitigating climate change.

PBAF

The Partnership for Biodiversity Accounting Financials (PBAF). PBAF aims to promote the integration of biodiversity considerations into financial decision-making processes. By providing a standardized framework for accounting and reporting on biodiversity-related impacts and dependencies, PBAF helps businesses and financial institutions better understand and manage their biodiversity risks and opportunities.

GRI

The Global Reporting Initiative (GRI) provides a comprehensive set of standards and guidelines for organizations to report on their environmental, social, and governance (ESG) performance. GRI includes indicators and metrics that can be used to measure and disclose biodiversity-related impacts and efforts, thereby encouraging businesses to integrate biodiversity considerations into their sustainability reporting.

The Kunming Montreal Global Biodiversity Framework

This is an internationally recognized agreement that sets ambitious targets and actions to address biodiversity loss and improve species richness. This framework was adopted at the 15th Conference of the Parties (COP15) to the Convention on Biological Diversity (CBD) in Kunming, China. Often referred to as "The Paris Agreement for Nature," the Kunming Montreal framework signifies the global commitment to safeguarding biodiversity and acknowledges the urgent need for comprehensive action to protect and restore ecosystems worldwide.

In summary

To address the urgent need for biodiversity conservation, investors must track and measure the biodiversity impact of their portfolio as part of their sustainability strategy. This goes beyond focusing solely on carbon emissions. Measuring biodiversity impact allows your portfolio companies to comprehensively assess their environmental performance, mitigate risks, engage stakeholders, drive innovation, and ensure regulatory compliance.

How Sweep can help

Sweep enables you to: 

  • Assess the biodiversity impact of your investments.
  • Measure the dependency materiality of your portfolio on the 21 ecosystem services.
  • Engage with your portfolio companies of biodiversity topics.
  • Comply with SBTN, PBAF, TNFD, CSRD and SFDR requirements on biodiversity.

Contact us to find out more about how we can support you.

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