How the loss of biodiversity requires relevance and attention

With climate change now finally at the forefront of financial decision-making, it’s biodiversity that demands more attention from responsible investors, for all our sakes.

At last, climate change has become a topic that towers over financial markets. We have come a long way in identifying its economic legacy, in understanding its transformational forces, and in distilling such insights down to the very bottom of financial markets.

There is ever-increasing transparency and awareness about the loans on bank balance sheets, the investments in wealth manager portfolios, and the risks and opportunities such positions entail from a climate perspective. Yet when it comes to our planet’s wellbeing, there is no respite. While we have only just begun to tackle the challenges of climate change, the topic of biodiversity incrementally moves out of its long shadow.

Biodiversity and climate change are deeply connected by the simple fact that our economy relies on natural capital. We may easily get the impression that innovation and technology determine our society’s wellbeing. However, we do not have to look far for a reminder of how the use of land still offers the basics of everyday life. The World Economic Forum estimates that roughly half of the world economy is highly or moderately dependent on nature. Food and agriculture is the obvious example of the value add offered. Tourism in some cases might be another.

Meanwhile, the dependence of the pharmaceutical industry on nature is lesser known. The challenge is the loss of biodiversity as natural habitats degrade: deforestation, pollution, and global warming are only some of the ways we interfere in ecosystems and threaten their balance. Pollination is key to agriculture and the shrinking population of bees has become a widely recognised, tangible example of how biodiversity issues translate into economic ones.

CHANGE OF PATH
Continuing on today’s path jeopardises the value add provided by nature. Today’s path risks destabilising the balance of ecosystems beyond their tipping points, unleashing self-reinforcing forces of destruction and degradation. Deforestation in South America and Southeast Asia, scientists warn, could lead to an irreversible transformation of rainforests into savannah, sending shockwaves into an ailing global climate system. The United Nations Sustainable Development Goal 15 – life on land – aims to raise awareness and foster action against these risks. Only by following a path of sustainable land use through protection, restoration, and responsible use of resources can we also rely on the value add nature offers.

Covid-19 sounded the alarm bell on biodiversity, but this alarm goes almost unheard among the noise of the broader crisis. Six out of ten infectious diseases are zoonotic, i.e. illnesses that spread between animals and people, according to the US Centers for Disease Control and Prevention. Covid-19 is zoonotic and in part was the result of human interference with natural ecosystems.

Biodiversity and climate change also are distinctly separate. We measure, or at least approximate, greenhouse gas emissions, which offers an element of control. Our purchases of goods and services, and the supply chains attached to them, leave a carbon footprint. Metrics such as CO2e (carbon dioxide equivalent) emissions per kilogram of food consumed, per kilometre of distance travelled, or per million sales of corporate activity make this trail of greenhouse gas emissions visible.

Measuring the loss of biodiversity remains a great challenge, and there are credible calculations showing how the planet’s extraordinary variety of species shrinks every year. However, such metrics lack a clear link to our consumption habits or corporate activity, and because biodiversity is about greatly diverse ecosystems, there is huge variability in how we interfere harmfully, how we overuse natural resources, and which metrics we should apply for measurement. Whether it is agriculture, fishery, or forestry, each activity requires a different methodology to map its impact on biodiversity in a meaningful way.

COMPLEX PROBLEMS
Biodiversity outshines climate change in its complexity. From a simple perspective, the vast majority of greenhouse gas emissions boil down to fossil fuels and cows. Relying less on both is the straightforward, yet difficult way to achieve solution. The plastic bottle is an example of the complexity of non-climate pollution. The material itself offers superior qualities in terms of packaging, enabling safe supply chains, weight and re-use. Recycling the staple plastic is less energy- and resource-intensive than recycling glass, an alternative for many uses. Unfortunately, reality differs from theory. Special-use plastics, leaking recycling loops, littering, and overuse of packaged goods are some of the many reasons we use too much plastic and it has become an environmental burden.

Natural resource-derived plastics could in part substitute fossil fuel-derived plastics, but this alternative supply chain brings its own set of environmental challenges, including burdensome land use. This example shows that plastic’s sustainability issues are less about the material and more about its use, economic development, and cultural values. This complexity is characteristic for most biodiversity issues. Financial markets are at the very beginning of incorporating the topic of biodiversity, in part because of complexity and unsolved measurement difficulties.

Financial markets are a rough mirror image of the economy, with the caveat that some businesses are over-represented and some are under-represented.

The fossil fuel business is capital-intensive and relies on investors offering equity or debt funding. Its presence on financial markets was pivotal for integrating the climate perspective from an investment angle. The key businesses at the front line of biodiversity loss, however, seem rather under-represented. Agriculture, forestry, and construction are largely private enterprises, at times small, at times large, at times with close ties to government, and they tend to rely on local bank loans rather than funds from a global investor base.

ADAPTING SWIFTLY
Facing all these hurdles, we must focus on what we know. Tackling the loss of biodiversity requires relevance and attention, which accelerates the transition of business and forces companies to adapt to change. Crop chemicals and fertilisers are at risk of tighter regulation, and producers are under pressure to develop products and practices that foster more sustainable agricultural practices.

This is one of the biodiversity front lines for equity markets. Innovation is sweeping through the areas of farming and food alternatives to meat, in part thanks to technological advances such as low-cost LED lighting and digitalisation enabling new methods of indoor, high-value-add crop cultivation.

The advances in image recognition and robotics allow the use of new agricultural equipment that boosts productivity and curbs environmental harm of field work. This is one of the biodiversity front lines of private growth capital markets as some countries and economies are under threat of losing natural capital in the long term as arable land degrades.

Data to identify and understand the related risks are under development but embedding this perspective into the analysis of a country’s long-term prospects and its implications for government debt are one of the front lines of economic research.

Biodiversity is the chapter of the responsible investing journey that we have only just begun to write.

Norbert Rücker is the head of Economics and Next Generation Research at Julius Baer