Investors channel funds to safeguard biodiversity
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Addressing the COP15 biodiversity conference in December 2022, UN secretary-general António Guterres was unsparing in his vision of the consequences of ecosystem loss. “We are committing suicide by proxy,” he declared. “Because the loss of nature and biodiversity comes with a steep human cost . . . lost jobs, hunger, diseases and deaths [and an] estimated $3tn in annual losses by 2030.”
Averting catastrophe, he said, would require bold government intervention, and recognition by the private sector that “profit and protection must go hand-in-hand”.
For some investors, that recognition has already started informing their decisions. While it may not be easy, or even desirable, to put a price on a tiger or a colony of bees, money managers are finding ways to channel finance into improving the biodiversity of the planet while also generating a return — though there are still considerable obstacles to market growth.
“Investor demand for nature- and biodiversity-related products is certainly there and is growing,” says Oliver Moullin, managing director of sustainable finance at the Association for Financial Markets in Europe, a trade body. Rating agency MSCI describes biodiversity as the “new frontier of sustainable finance”.
Pragmatism is a key motive. Many investors are worried about the effects that deteriorating ecosystems could have on global supply chains. The World Economic Forum estimated in 2020 that more than half of global GDP was “moderately or highly dependent on nature”.
Kristina Kloberdanz, chief sustainability officer at Macquarie Asset Management, says the financial sector is “becoming more attuned to the risks of biodiversity loss and exploring opportunities to invest in safeguarding biodiversity” — although she adds that it is far from “a mature market”.
Papers published in 2020 by researchers at the OECD and the Paulson Institute calculated the scale of biodiversity finance at, respectively, $78bn-$91bn and $124bn-$143bn a year. Most of that is public expenditure: the OECD reckons that private finance comprises only $6.6bn-$13.6bn of its total.
But a greater focus on biodiversity among governments and regulators is likely to push the private numbers up. The agreement reached at COP15 included a new requirement for signatories to ensure that businesses monitor and report their dependency and impacts on nature.
The summit, which for the first time attracted a large cohort of investors, “should have long-lasting effects on companies”, according to analysts at Barclays. “The pressure on companies to provide nature-related disclosures is likely to mount.”
However, Moullin says a shortage of sound data is currently impeding market growth. While greenhouse gas emissions can be used to measure a company’s climate impact, “there isn’t yet an equivalent” for biodiversity, he says. And data is important for answering a key question: “how do you know that your investment is actually benefiting biodiversity?”
Luke Sussams, an ESG analyst at investment bank Jefferies, says some asset managers have started “trying to conduct company-level biodiversity analyses” in order to identify companies that perform better.
For investors looking to deploy cash in this area, one option is to back start-ups serving businesses that want to make their operations and supply chains more sustainable.
Alexa Firmenich, co-director of the SEED initiative to measure biodiversity at research group Crowther Lab, says she expects to see “massive growing interest in early-stage companies” that are developing technologies to restore ecosystems and monitor progress on biodiversity.
A twist on traditional debt markets might also be a way in. Last year, the World Bank issued a landmark “Wildlife Conservation Bond” designed to protect South Africa’s endangered black rhinos.
Investors in the five-year, $150mn bond do not receive coupon payments; instead, the World Bank makes payments to two conservation sites. But, when the bond matures, investors do stand to receive a “success payment”, financed by a performance-based grant from multilateral fund the Global Environment Facility, if certain conservation goals are met.
This novel structure “passes project risks to capital market investors and allows donors to pay for conservation outcomes”, the GEF says.
Meanwhile, experts predict a growing appetite for biodiversity credits — the lesser-known cousin of the carbon credits that have boomed in popularity in recent years. Mike Korchinsky, founder of Wildlife Works, which develops carbon credits that fund conservation projects, says biodiversity credits have sparked “lots of interest from investors”, many of whom are “driven by personal passion.”
Firmenich stresses that, since each ecosystem is unique, any biodiversity “offsetting” — or compensating for damage — should be “localised”, with restoration occurring in the same place as any harm done by the credit buyer. By contrast, buyers of carbon credits often use credits that were generated miles away from their polluting factories or facilities.
Beyond offsetting, companies might also purchase biodiversity credits to signal that they are contributing to the restoration of the natural world and safeguarding their supply chains, Firmenich says.
Scrutiny will be needed. Carbon credits have been plagued by accusations that they do not always represent the carbon savings that they promise, and experts warn that biodiversity credits are likely to face similar challenges.
Sussams points out that translating biodiversity factors into financial risk and opportunity is “exceptionally challenging”: the industry has yet to agree on which metrics are best, let alone to plug the “vast data gaps” that exist.
Demand to fund biodiversity initiatives may be there — but, so far, Sussams warns that asset managers are “struggling” to meet it in a way that is “both scientifically and financially robust”.