The role of investors in stemming biodiversity loss

We are losing biodiversity at unprecedented rates, in real time. US$44 trillion in economic value generation — more than half of global GDP — depends significantly on nature. We rely on nature for our food, our livelihoods and our protection. But the connections between our welfare and nature are frequently hidden: For example, how many of us know that 60% of all medicines are based on natural organisms?

The current rate of biodiversity loss is unsustainable and nothing less than a global emergency. To address this problem, we need collaboration and innovation in finding and scaling up solutions.

Those responsible for allocating private sector capital have a significant role to play. A high proportion of investments in physical assets is already constrained to some degree by environmental considerations, for example through environmental impact assessments. However, current practice often takes little or no account of “system-wide” effects, such as the potential consequence for the health of wider ecosystems of the damage to a single site. Meanwhile, investors seeking to avoid harming biodiversity typically lack both the information and the tools for effective risk analysis. And the absence of economic tools to support the restoration of individual habitats is holding back significant investment opportunities in nature-positive solutions.

Confronting the issue — some lessons from environmental action

Biodiversity loss is intrinsically hard to tackle, not least because we simply don’t understand nature well enough.

And it is hard to protect what we don’t understand, especially when biodiversity loss has so many drivers. These include changes in land and water use, the direct exploitation of nature, climate change, pollution and invasive species. This makes it difficult to attribute the causes of damage, or to identify actions to mitigate losses.

Addressing the issue is also complicated by the absence of clear, common definitions surrounding what constitutes biodiversity loss, and by the lack of metrics. Unlike climate change, for which greenhouse gas concentrations in the atmosphere are a measurable indicator of progress, biodiversity has no simple global measure, and its losses are typically local and habitat dependent.

Despite this, some of the lessons learned from our experience of environmental management over the decades may serve as a guide to build upon in confronting the biodiversity crisis in five main areas:

Joint international action. Successful efforts to tackle environmental challenges have often involved multiple government stakeholders pooling their knowledge and resources and agreeing upon collective action.

Effective market-based approaches. Many environmental problems reflect market failure, which can only be addressed by regulation or other government action.

Useful metrics. Metrics are vital to tackling environmental issues. Only by tracking levels of pollutants in our air and water have we been able to inform and enforce policy solutions.

Impact assessments. We have much to learn from the well-established practice of environmental impact assessments. These techniques could be readily extended to encompass a broader array of biodiversity challenges.

Blueprints for action. Lessons can be applied from the success of policy roadmaps that have guided long-term changes in corporate behavior and investment linked to environmental goals.

Charting a course forward

Although the search for answers to this challenge is at an early stage, there are some fundamental principles that could lay the foundation for progress in stemming biodiversity losses:

Breaking down the challenge. To confront biodiversity loss effectively, we need to disaggregate the umbrella topic into a set of specific “Biodiversity Imperatives” for analysis.

Taking a “multi-local” approach. Many parts of the world have local biodiversity or ecosystem issues in common, and hence a “multi-local” approach, in which many policymakers coordinate their actions, can be effective.

Creating a shared vision. This should help us identify nature-positive solutions, for example new markets linked to ecosystem services. Where developing economies are important custodians of natural capital, they must be at the heart of solutions. Key to this will be a shared vision of the economic and financial opportunities that can be generated by addressing biodiversity loss. Initiatives like the Natural Capital Investment Alliance, of which Impax is a member, can help catalyze and scale-up nature-based opportunities.

An effective role for investors. To reduce and potentially reverse biodiversity loss will require effective collaboration between the public and private sectors, so those responsible for financial institutions have a vital role to play in supporting the development of solutions. Investors should seek to analyze and manage biodiversity-related risks and consider opportunities. They should also target progress through engagement activities and proxy voting. For example, recently more than 30 financial institutions, including Impax, committed to use their best efforts to eliminate forest-risk agricultural commodity-driven deforestation activities at the companies they invest in or lend to by 2025.

We are only in the foothills of developing the policy frameworks that adequately addresses the challenge of biodiversity loss, but the window for taking effective action is closing. Over the coming months, we will be exploring the risks this global issue poses to investors as well as the role that policymakers, companies and financial institutions can play in addressing this grave threat to our prosperity and wellbeing.

Julie Gorte is SVP, Sustainable Investing, at Impax Asset Management. Chris Dodwell is Head of Policy and Advocacy, Impax Asset Management.