Implications
The business case: why investors must pay attention to biodiversity
While the natural damage of biodiversity loss is significant, so are the economic consequences
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Over half of global GDP is highly or moderately dependent on nature
Biodiversity
And the vital role of investors
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Future solutions – protecting nature through corporate change
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Companies can help protect the environment, but this requires adopting new processes that are easier said than done
Biodiversity loss – sizing up the problem
Background
Biodiversity is pivotal to life on Earth but is in sharp decline. Investors must understand the challenge so they can play their part in addressing it
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Federated Hermes’ Amplified podcast recently hosted six episodes on the subject of biodiversity. It started by defining biodiversity and establishing its importance in a business context, before focusing on specific elements such as water, deforestation and agriculture.
Read our comprehensive paper on how investors can help tackle the biodiversity challenge
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Find out how Federated Hermes is tackling biodiversity loss through its investments and its commitment to deliver sustainable wealth creation
Investing for life and the planet
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Writer: Gareth Jones
The decline in biodiversity is one of the biggest challenges facing the world, and no industry will be immune from its impact. In its simplest form, biodiversity is the variety of life spanning plants, animals, insects and other organisms. Here’s why biodiversity loss has wide-ranging impacts with serious implications – not only for society, but for businesses and markets.
Biodiversity is pivotal to life on Earth but is in sharp decline. Investors must understand the challenge so they can play their part in addressing it.
The water cycle, clean air and the provision of food are fundamental to all life on Earth. Moreover, healthy soil and the regulation of nutrients are pivotal to enabling food crops and other plants to grow.
Our economies and societies are deeply embedded in nature; it is our life-support system
The benefits
Many medicines – especially anti-infectives and anti-cancer agents – originate from plants, fungi or bacteria, with many more nature-derived medical solutions yet to be discovered.
Nature is also crucial in saving lives.
Research shows a strong connection between the time spent in nature and reduced stress, anxiety and depression.
The environment brings benefits to physical, mental and spritual well-being.
Following the impact of Covid-19, it should be appreciated how healthy levels of biodiversity can help prevent new infectious diseases. Covid-19, SARS and Ebola all moved from animals to humans. The destruction of habitats through land-use change brings humans and animals into ever closer contact, which increases the risk of new infectious diseases being transmitted from animals to humans.
Biodiversity can help prevent new infectious diseases.
Biodiversity enables ecosystems to be resilient and adaptive to changes in external conditions. This capacity is essential as temperatures, precipitation patterns and the frequency and intensity of extreme weather events shift due to climate change.
Biodiversity is also pivotal in managing climate change.
The problem
Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), Global Assessment Report on Biodiversity and Ecosystem Services (2019). WWF and ZSL, Living Planet Report (2020). Conservation International, biodiversity hotspots. World Economic Forum and AlphaBeta, The Future of Nature and Business (2020).
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Analysis shows that the decline of biodiversity and ecosystems will undermine progress toward 80% of the UN’s Sustainable Development Goals and will have wide-ranging impacts on society and businesses . The causes of this biodiversity loss have been identified as changes in land and sea use, exploitation of organisms, climate change, pollution and invasive alien species. These issues all need addressing. Now is the time for societies and businesses to account for biodiversity loss and address the problem in policy and economic planning. That’s the only way we will be able to prevent further damage and repair the world’s ecosystems.
68%
Moreover, the Living Planet Index shows that mammal, bird, amphibian, reptile and fish population sizes have decreased by an average of 68% per year between 1970 and 2016 .
1,000,000
A global study revealed that one million out of eight million known species are at risk of extinction .
Despite its importance to life on Earth, current levels of biodiversity are in sharp decline
36
Conservation International has identified 36 areas where the risk of biodiversity loss is particularly high. While the hotspots only cover 2.4% of the world’s surface, they contain over half of all endemic plant species and more than 40% of endemic bird, mammal, reptile and amphibian species .
At risk areas
United States of America, Mexico, Colombia, Ecuador, Peru, Venezuela, Brazil, Democratic Republic of Congo, South Africa, Madagascar, India, Malaysia, Indonesia, Philippines, Papua New Guinea, China, and Australia
Source: UN Environment Programme WCMC, Biodiversity A-Z
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Map of mega-diverse countries
HOMEPAGE
Next article
Date: 25 April 2022
For companies, the health of their supply chains will be critical to their long-term profitability. For sectors in agriculture, food and beverages, this is especially true. The decline of pollinators due to pesticide use, climate change and habitat loss could pose significant risks to food security. Moreover, industrialised farming practices that result in the degradation of topsoil and water pollution are vulnerable to crop failures. The resulting damage to supply capacity are potential price shocks, prolonged shortages and devastating regional famines.
Supply-side risk
Reputational risk
Legal risk
Organisations that do not address their impact and dependence on nature also risk reputational damage. Consumers are increasingly critical of companies found responsible for deforestation, oil spills and any biodiversity decline. For instance, last year six European supermarkets announced that they will stop selling Brazilian beef due to concerns over links to deforestation in the Amazon rainforest. Biodiversity loss might also damage an organisation’s local relationships. Local communities play a critical role in securing a company’s license to operate in a region. In many countries, indigenous communities are also effective stewards of the land and local biodiversity. Engaging positively with these communities is key to ensuring that the materials are being sourced sustainably and allowing the organisation to retain operation in the region in the long term.
As well as reputational risk, companies that fail to address their impact on biodiversity will experience policy and legal pressures. Climate regulation across the world is advancing. Various countries have clamped down on the use of single-use plastic, with the regulatory landscape likely to expand to hold companies accountable for ongoing environmental damage. For instance, the UK government is looking to introduce legislation requiring companies to conduct due diligence on their supply chains to ensure there are no ties to illegal deforestation . Firms are also facing litigation risk. In 2010, the Deepwater Horizon oil spill released 130 million gallons of crude oil into the highly biodiverse Gulf of Mexico. The clean-up and litigation costs amounted to $65bn . As the importance of biodiversity becomes a public policy priority, the regulatory risks and litigation costs for companies associated with biodiversity loss are only likely to increase.
Key Findings
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The risks
implications
While it is immediately apparent that biodiversity plays an essential role in the wellbeing of nature, biodiversity is also invaluable to businesses. Estimates place the value of ecosystem services and natural capital at between $125tn and $145tn per annum , while over half of global GDP is highly or moderately dependent on nature . Companies cannot afford to overlook their impact and dependence on nature. Doing so poses risks from an economic and reputational perspective.
“Estimates place the value of ecosystem services and natural capital at between $125tn and $145tn per annum”
Companies that do not pivot to a nature-positive economy also risk failing to capitalise on opportunities and falling behind their competitors. In 2020, the World Economic Forum concluded that “nature-positive” solutions can create almost 400 million jobs and over $10tn in business opportunities by 2030 . Companies should therefore be proactive and innovative in developing nature-positive solutions. Doing so will improve the resilience of their business models and enable them to realise significant future business opportunities. Overall, there is no sector left unaffected by biodiversity loss. It is time for organisations to recognise their dependency and impact on the environment so they can develop solutions.
Getting ahead of the curve
The five main drivers of biodiversity loss
Direct exploitation of organisms
Climate change
Pollution
Invasive alien species
Change in land and sea use
Costanza, Robert, et al. “Changes in the global value of ecosystem services.” Global environmental change 26 (2014): 152-158 World Economic Forum and PWC, Nature Risk Rising (2020). The Guardian, Supermarkets drop Brazilian beef products linked to deforestation. Reuters, British supermarkets threaten Brazil boycott over proposed forest law. The Guardian, BP’s Deepwater Horizon bill tops $65bn. World Economic Forum and AlphaBeta, The Future of Nature and Business (2020).
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Source: Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services
The human impact on nature cannot be addressed overnight. The value of biodiversity and ecosystem services, which include clean air and water, healthy soils, and climate stability, is vast but often difficult to quantify for society and businesses. To implement change, companies need to understand the problem, develop a strategy, and then set targets for the future. Implementing these processes may not always be a simple task, but following these steps can help.
The next step will be seeing the type of projects that funds support
Companies can help protect the environment, but this requires adopting new processes and practices
Developing a strategy
Once organisations understand their material dependencies and impact on biodiversity, they can start developing measures that will reduce, and potentially reverse, the negative impacts. Companies should integrate these considerations into their strategic decisions. For instance, they could target geographical areas and commodities where they have a high dependence and footprint. A key facilitator of this process needs to be governance and accountability. Boards should work to understand their key risks and take responsibility for ensuring that their company’s operations and supply chain make a positive contribution to nature. To reinforce this process, companies should set targets to track their progress. For example, they could target a net-positive impact on biodiversity by regenerating farmland or winding-down activities in specific mining sites. To ensure they are on track to meet their goals, they should regularly report on their approach through a disclosure framework. By regularly reporting their progress, companies can assess whether they are successful in achieving their desired outcomes and identify parts of their process that need refinement.
Before corporates can develop a strategy and set targets for their organisations, they need to understand how biodiversity relates to their business models. For instance, those in the consumer goods and retail sector might identify that their business is dependent on ecological variables such as pollination, soil quality and water flow. Understanding a company’s relationship with nature will be vital to identifying where their most material challenges are. There is significant up-front time and cost necessary to implement such reporting systems, so frameworks and metrics will need to accurately assess the risk posed to companies in order to justify the investment.
Understanding the problem
Looking into the future
While some companies have already started implementing these processes, most are still only beginning to reduce their environmental impact. For instance, some banks and asset managers have taken positive steps by setting up funds dedicated to preventing deforestation. While the initial investment is promising, the next step will be seeing the type of projects the funds end up supporting. Even though there is room for optimism, there are also risks to be aware of. Attributing a financial value to the cost of biodiversity does help to quantify the scale of the problem, but it also risks allowing nature to be treated as just another form of capital. Natural capital is very different to human and manufacturing capital as it is not substitutable, is not easily replaceable, and cannot be remanufactured. Nature needs to be treated cautiously, as a finite resource. As companies march forward with implementing their sustainability strategies, they should not forget that everything is interconnected. If nature is permanently damaged, there will be long-lasting implications for climate change, society, and the economy
• engagement to understand the relevance of nature to a company, with the objective of achieving nature positive outcomes • increased collaborative engagement to reverse bio diversity loss • encourage systems based strategies that address interconnected sustainability challenges
Investor stewardship
Outcomes
• nature loss reversed and company contributes to positive outcomes for biodiversity • mitigation of a range of risks • company operations and supply chain operate within planetary boundaries
Target
• to have a net positive impact on biodiversity throughout operations and supply chain
• of a company's impacts and dependencies on biodiversity and ecosystem services
Measurement
Strategy
• focused on material impacts • supply chain engagement • nature-positive innovation • regenerative agriculture • no deforestation • nature-based solutions
Governance
including board oversight and advocacy for the protection of nature
in line with emerging best-practice frameworks
Disclosure
Summary of Federated Hermes’ engagement priorities and expectations
BIOSOLUTIONS: the final episode of our six-part podcast series on biodiversity looked to the future and the solutions being worked on to address current problems. Previous episodes outlined the magnitude of the task, tackling issues such as deforestation, soil erosion and the threat of species extinction.
