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Investing in biodiversity

At first glance, biodiversity and the financial sector seem to have little to do with each other. However, with the rapid decline in biodiversity worldwide, there is also a growing awareness that investors and companies have an important role to play in combating biodiversity loss. This is because of their dependence on nature and ecosystems and their activities’ impact on biodiversity. What can investors do to combat this?

What is biodiversity?

Biodiversity is the diversity of life on earth. It is the variation in ecosystems, species and genes in the world or a particular living environment. This diversity is necessary for the functioning of ecosystems and the services they provide to our economies and societies. These so-called ‘ecosystem services’ consist of producing services, such as food and drinking water; regulating services, such as pollination and water purification; and cultural services, such as a green living environment for recreation.

Biodiversity dependencies and risks

The global decline in biodiversity is putting increasing pressure on ecosystems and ecosystem services. This creates several risks for companies that depend on them and indirect risks for investors who invest in companies that do not sufficiently consider these dependencies:

  • Physical risks relate to the material damage caused by biodiversity loss, which can result in financial losses. Physical risks can be chronic or acute. Examples of chronic physical risks are declining harvests due to overexploitation of soil, a decline in pollinators and increasing droughts. Damage to assets is an acute physical risk. For example, water damage can be caused by reduced coastal protection and more extreme weather events, both as a result of biodiversity loss.
  • Transition risks arise from policy measures, legal action, changing consumer preferences and technological developments. Transition risks include increasing regulatory pressure due to the Global Biodiversity Framework (GBF) targets, maximum allowable carbon or nitrogen emissions, increasing requirements for biodiversity-related disclosure (CSRD and SFDR), and the recently adopted EU Deforestation Regulation. Failure to adapt to these developments can lead to adverse financial consequences for a company, such as legal repercussions, reputational damage or a decline in revenue.
  • Systemic risks of biodiversity loss refer to the broader and more profound impact that biodiversity loss can have on ecosystems, societies and the global economy. Continued biodiversity loss will lead to tipping points where recovery is no longer feasible. Furthermore, tipping points can reinforce and accelerate each other so that the collapse of one ecosystem can affect other ecosystems or geographies, creating a domino effect of nature loss. The consequences of disrupting ecosystems will affect both economic and financial systems. For investors, systemic risks can be seen as general macro risks that are not specific to an individual investment or company but can be mitigated by the activities of that company.

Causes of biodiversity loss

However, companies and the financial sector are not only dependent on biodiversity but also have a significant negative impact on biodiversity because their activities and investments contribute to the so-called ‘biodiversity loss drivers’. According to the IPBES, these are the five biggest causes (drivers) of biodiversity loss:

  • Changes in land use (e.g. through deforestation)
  • Overexploitation of species (e.g. through fishing)
  • Climate change
  • Pollution
  • Invasive species

These causes are interrelated and must all be addressed to combat biodiversity loss.

Combating biodiversity loss as an investor

The causes of biodiversity loss are clear, but how this can be reduced and stopped is not always clear. Fortunately, there are more and more tools to determine what you can do as a company or investor to minimise the impact on biodiversity.

Risk and impact analysis

The first step is to map out the dependencies, risks, impacts and opportunities for financial institutions and companies. Based on this, the right priorities can be set. The following initiatives can be helpful:

  • PBAF: The Partnership for Biodiversity Accounting Financials is a collaboration from the financial sector. PBAF provides practical guidelines for financial institutions to identify and measure their impact on and dependencies on biodiversity. This is formulated in the PBAF standard, as well as how financial institutions should report when it comes to biodiversity;
  • SBTN: The Science-Based Targets for Nature supports companies in assessing their impact on nature and ecosystems and in setting targets. At the moment, SBTN has guidance to set targets on the themes ‘land’ and ‘freshwater’;
  • TNFD: The Taskforce on Nature-Related Financial Disclosure is a tool that enables companies and financial institutions to identify and measure risks and opportunities in the field of nature and biodiversity. The guideline also provides support for setting goals and reporting. The tool has been developed in accordance with the Global Biodiversity Framework.

All these methods for measuring company risks and impacts involve certain important steps. Firstly, you can already get a global overview of a company’s relevant risks and impacts by examining the material topics of the sector. For example, mining companies or companies with mining in the chain have similar risks and impacts. After this, the company-specific risks and impacts can be identified.

Secondly, it is essential to include the entire value chain of a company in the measurements because many of the risks and impacts occur here. The results of these analyses can then be used to set priorities based on where the most significant risks and impacts lie. Based on this, actions and locations can then be determined for which concrete and achievable goals are set to prevent, reduce and ultimately restore biodiversity loss. For complete reporting, it is important to record these goals and collect data from the start so that progress on the goals can also be reported.

Using data to select companies

There is an increase in European legislation on sustainability reporting. This can provide more insight into which investments contribute to biodiversity:

  • CSRD: Companies subject to the Corporate Sustainability Reporting Directive (CSRD) must report using the European Sustainability Reporting Standards (ESRS). These can be used to report on non-financial information, including biodiversity. The European Financial Reporting Advisory Group (EFRAG) draws up the ESRS. ESRS E4 is the disclosure standard on biodiversity and ecosystems that companies can use to assess their impacts and dependencies on nature and comply with the CSRD;
  • EU Taxonomy: The EU Taxonomy classification system sets criteria for determining whether an economic activity is environmentally friendly. The system is part of the EU’s efforts to promote sustainable finance and investment. The SFDR refers to this system and requires disclosures based on the classification described in the EU Taxonomy. Financial institutions can use the EU Taxonomy to determine whether an investment contributes to the protection and restoration of biodiversity (target 6) and other EU Taxonomy objectives.

Information from the CSR risk checker and ENCORE can also provide insight into which sectors, products, and activities have a major negative impact on biodiversity. This data can be used to select or exclude companies, for example, by selecting the best-performing companies in sectors with a high impact on biodiversity.

Engaging on biodiversity

Engagement is By engaging, you, as an investor, can influence a company with a negative impact on biodiversity. This can be done by voting at shareholder meetings for policies that protect biodiversity or by engaging with companies on how they can take responsibility for the impact of their activities on nature. For example, through ambitious biodiversity policies, concrete goals and transparency about the precise impact of the company across the entire value chain. This can also be done by joining existing initiatives:

  • Finance for Biodiversity pledge: The Finance for Biodiversity Foundation has initiated this pledge, which financial institutions can join to commit to using their economic activities and investments to protect and restore biodiversity. The five steps of the pledge are:
  1. Collaboration and knowledge sharing;
  2. Involving companies;
  3. Assessing impact;
  4. Setting targets;
  5. Publicly reporting on the above before 2025.Furthermore, the Finance for Biodiversity Foundation takes joint action with the pledge’s signatories.
  • Nature Action 100: Nature Action 100 is a global investor initiative focused on driving greater corporate ambition and action to reverse the loss of nature and biodiversity. The initiative engages companies in key sectors considered systemically important to reverse the loss of nature and biodiversity by 2030.

More information on investing in biodiversity

  • Biodiversity and Business. This report highlights the actions and strategies companies are taking to reduce their impact on biodiversity. It emphasises the need for a more holistic approach to the topic. Also, it makes clear that companies often focus on only one of the five drivers of biodiversity, namely climate change.
  • Unravelling Biodiversity for Investors. This thematic study, among 60 institutional investors, provides insight into the topic and emphasises the growing role of investors in protecting biodiversity. The study shows, among other things, that many of the parties surveyed are not yet paying attention to this. The report also calls for a coordinated effort by all stakeholders to include biodiversity in financial strategies and decision-making.