Biodiversity, natural capital and ESG

The issues around climate impacts from carbon emissions are a well-discussed topic, mentioned often across the media and in our own blogs, but climate risk is not the only significant environmental issue we face on a global scale. Unsustainable consumption of natural resources, and loss of habitat and biodiversity, together with the reduction or loss of ecosystem services (or benefits) we derive from these are equally important.

The World Economic Forum top risks 2022 lists climate inaction and biodiversity loss within the top three ‘most impactful’ challenges.

What is natural capital?

The UK government defines natural capital as including “certain stocks of the elements of nature that have value to society, such as forests, fisheries, rivers, biodiversity, land and minerals. Natural capital includes both the living and non-living aspects of ecosystems…”

We know that more than half of the world’s total gross domestic product is moderately or highly dependent on nature and its services. We also know that there is no route to net zero without biodiversity. So why has natural capital been so overlooked?

Natural capital and asset management

There is no universal objective for natural capital, unlike climate change and society’s shift towards net-zero, which is underpinned by the Paris Agreement’s common goal to keep rising global temperatures to 1.5°C. Natural capital and biodiversity loss have traditionally been included in the generic integration of environmental, social and governance factors.

No distinct target has resulted in a lack of consideration when it comes to investing, as revealed by ShareAction’s 2020 report. Research found that, of the world’s 75 largest asset managers, none had a dedicated policy on biodiversity, and only 11 per cent of asset managers had policies requiring portfolio companies to mitigate harmful impacts on biodiversity. Findings highlighted that biodiversity loss often was not scrutinised on a standalone basis.

Due to human mismanagement of the environment, science suggests a sixth great extinction of plants and animals in Earth’s history is already underway. Loss of biodiversity is considered as serious as, and intrinsically linked to, climate change, and investors are increasingly realising that they have an important role to play in conserving it.

This week the Financial Times reported that things are on the up. Now coming into the spotlight, biodiversity is “the fastest developing ESG theme in global capital markets,” notes Catherine Howarth, chief executive at responsible-investment group ShareAction. “In just three years, the issue has moved from being virtually ignored by mainstream institutional investors to being acknowledged by all.”

Looking ahead

One problem for investors is that there is no standard methodology for assessing and reporting biodiversity. A preliminary framework is in the pipeline from the Task Force for Nature-Related Financial Disclosures (TNFD) with the goal of developing and delivering global risk management for organisations to report and act on evolving nature-related risks. With final recommendations due in 2023, the framework is intended to ultimately support a shift in financial flows toward nature-positive outcomes.

But investors shouldn’t wait in the meantime. Instead they must analyse how portfolio companies are contributing to, or are vulnerable to, biodiversity loss. This needs to be facilitated by engaging with companies at a granular level.

Understanding the systemic risks associated with biodiversity loss and working to mitigate the damage is likely to become a priority of investment planning and preparation. Organisations that consider natural capital and biodiversity as an integral part of their ESG strategy can help increase their businesses sustainability and resilience, reduce risks, improve reputation, open up new investor markets, and be prepared for emerging regulations. By working together, we can ensure that our economy functions in a way that does not jeopardise the future of our planet.