Investments in solutions that fight biodiversity loss are a vital step in curtailing climate change and nature-related risks.
Caring for the environment is about more than just limiting our greenhouse gas emissions. Governments, investors, corporations and other stakeholders are becoming more focused on the growing crisis of nature and biodiversity loss, which poses significant risks to societies, economies and the well-being of current and future generations.
“The COVID-19 pandemic was a clear demonstration of the risks posed by human mismanagement of natural capital,” says Kent McClanahan, head of Content Strategy and Responsible Investing for RBC Wealth Management. “The SARS-CoV-2 virus likely originated from nature and showed just how extensive and disruptive the risks can be.”
But thriving biodiversity is also a key component of climate change solutions and presents sizeable economic opportunities. The United Nations regards biodiversity as the world’s strongest natural defense against climate change. Nature-positive projects and transitions could generate up to $10.1 trillion in annual business value and create 395 million jobs by 2030, according to World Economic Forum estimates.
“It has become clear that as a society we cannot solve the climate crisis without addressing the nature crisis,” McClanahan says. “As a result, understanding the financial materiality of nature and biodiversity is becoming increasingly important in the investments space.”
Biodiversity is the variety of all living species on Earth. It helps maintain healthy life-supporting ecosystems, including the provision of food and clean water, as well as the invisible functions necessary for life, such as flood protection, nutrient cycling, water filtration and pollination. It’s fundamental to maintaining high-quality natural capital. A good example is a single English oak tree, which is estimated to support 2,300 different species of insects, fungi, plant life and birds.
Natural capital is the world’s stocks of natural assets, including geology, soil, air, water and all living things. Humans derive a wide range of services from this natural capital, such as food, water, and plant materials used for fuel, building materials and medicines.
Investors are recognizing biodiversity and nature loss as potential systemic risks to society, business and the economy. The World Economic Forum has estimated that more than half of the world’s GDP, about $44 trillion, is either moderately or highly dependent on nature and its services.
An example of this dependency is the critical importance of more than 20,000 species of pollinators to global food production. According to Global Change Biology, we are partially dependent on these pollinators for more than 75 percent of global food crop types, and approximately 35 percent of total food production globally. Yet the UN cites that the main driver of biodiversity loss remains our use of land—primarily for food production.
Our relationship with nature can be a delicate balance, and businesses that directly impact or depend upon nature are typically the most exposed to nature-related risks. These risks may create disruption in companies’ activities or value chains, ultimately affecting their risk-return profile as investible assets and challenging their long-term survival.
The agricultural sector is a good example of how being highly dependent—and having an impact—on nature can affect the financial performance of a business.
“Lower rainfall and increased vulnerability to pests are physical risks that could threaten crop yields and reduce land value,” McClanahan says. “Increased costs from switching to alternative farming methods and new drought- and disease-resistant crops highlight the risk associated with transitioning; whereas potential fines or damages due to fertilizer runoff impacting ground water quality could expose the business to liability risk.”
Significant investment in solutions to nature and biodiversity loss is required if nature-related risks are to be constrained. Yet the funding gap is seismic. As highlighted in the UN’s State of Finance for Nature report, $4.1 trillion in financing for nature protection must be bridged by 2050 to limit global warming, stop biodiversity loss and achieve land degradation neutrality.
More commitment is needed from the private sector. According to the UN, currently only 17 percent—or $26 billion per year—of total global investment in nature-based solutions comes from private industry. But there are signs of progress. Although a recent CDP report found that only 10 percent of financial institutions currently measure their portfolio impact for forests and water, an additional 30 percent plan to do so within the next two years.
“The financial implications of biodiversity loss and nature loss are now apparent to governments and the wider financial community,” McClanahan says. “They are realizing the opportunity in solutions that protect and restore natural ecosystems and curb systemic risks.”
Solutions leveraging nature—such as reforestation, regenerative agriculture and wetland restoration—represent one of the most cost-efficient and effective tools to combat climate change. Equally, products and services that alleviate pressures on land and sea use, reduce demand for natural resources and lessen pollution are all key to maintaining our supply of natural capital.
New forms of finance are being developed to support activities focused on protecting nature and biodiversity. A prime example is the World Bank’s “Rhino Bond,” a pioneering financial instrument that channels investments to achieve conservation outcomes, measured in this case by a boost in black rhino populations. Rhinos are considered an umbrella species that play a crucial role in shaping entire ecosystems on which countless other species depend.
Categorizing and quantifying nature-related risks can be challenging, but data and tools are improving. Initiatives such as the Task Force for Nature-Related Financial Disclosures (TNFD) are progressing to provide a framework for companies to identify, assess, manage and disclose nature- and biodiversity-related risks and opportunities.
“The TNFD enables business and finance to integrate nature and biodiversity into decision-making,” McClanahan says. “It offers a structured framework that allows companies to scan and triage nature-related issues, even with limited data, knowledge or expertise. Ultimately, this will support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes.”
McClanahan says assessing the potential impacts of nature loss on expected returns across portfolios will become more important for investors. “By supporting companies with robust biodiversity-management policies and practices, and prioritizing products that promote conservation and sustainable land use, investors can safeguard natural capital, contribute to sustainable development and mitigate financial risk.”
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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