Part 1: The relevance of biodiversity

What is biodiversity and why is it important?

Biodiversity, the variability among living organisms, is crucial for productive, resilient, and adaptable ecosystems. These ecosystems, in turn, provide essential services such as food provision, water filtration, and climate regulation. Nature, encompassing the living components of the natural world, is intricately linked to biodiversity. An estimated US$58 trillion of global GDP relies on nature and its ecosystem services. However, economic activities significantly impact biodiversity, with approximately US$7 trillion invested annually in activities that harm nature.

Biodiversity is in decline

Biodiversity is experiencing an unprecedented decline, with global wildlife populations shrinking by 69% since 1970. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) reports that 75% of terrestrial and 66% of marine realms have been significantly altered, and over a million species face extinction. This decline is driven by factors like land-use change, overexploitation of resources, climate change, pollution, and invasive species.

Why does it matter to investors?

Biodiversity loss poses substantial risks to businesses, investors, and the global economy. It’s a systemic risk that could lead to the breakdown of financial and natural systems, affecting all asset classes and sectors. This loss can materialise as physical risks (e.g., reduced agricultural yields due to pollinator loss) and transition risks (e.g., litigation from non-compliance with deforestation regulations). However, addressing biodiversity loss also presents opportunities, with a potential US$10 trillion in annual value and 395 million jobs by 2030.

Policy developments

Investors are increasingly recognising the materiality of biodiversity loss. Regulations like the EU’s Sustainable Finance Disclosure Regulation (SFDR) are mandating biodiversity considerations in investments. The Kunming-Montreal Global Biodiversity Framework (GBF), adopted by 188 countries, aims to halt and reverse biodiversity loss by 2030. It includes targets for aligning financial flows with biodiversity goals, assessing and disclosing risks, and realigning incentives.

Part 2: How should asset owners respond?

Asset owners should articulate their position on biodiversity, considering their fiduciary duties, material risks and opportunities, and core values. They can develop biodiversity policies and strategies, incorporating biodiversity considerations throughout their investment process. This includes assessing portfolio exposure to biodiversity risks and opportunities, engaging with investee companies on biodiversity issues, and aligning disclosures with frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD).

The investment process

Asset owners can incorporate ESG (Environmental, Social, and Governance) factors, including biodiversity, into their investment analysis and decision-making. This involves adopting a biodiversity policy, developing an investment strategy, and integrating biodiversity considerations throughout the investment process. The policy should be approved at the highest level and integrated into governance frameworks. The investment strategy should identify material risks and opportunities, define governance and accountability, and assess biodiversity-related opportunities across asset classes.

Stewardship

Asset owners can be active owners and incorporate ESG issues into their ownership policies and practices. They can develop active ownership policies, exercise voting rights, file shareholder resolutions, and participate in policy development and collaborative engagement initiatives.

Disclosure

Asset owners should disclose their biodiversity-related policies, practices, and impacts, and require similar disclosures from investee companies and external managers. They can align their disclosures with the TNFD recommendations, which provide a framework for assessing and disclosing nature-related risks and opportunities.