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If you could sum up this topic in one snappy sentence, what would it be?
Investors are starting to get interested in protecting the world's biodiversity, but can they actually make a difference?
Biodiversity is all the different types of life such as animals, plants, fungi, even micro-organisms that make up our natural world. Around a million species are threatened with extinction, many within decades. That's according to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.
Between 1970 and 2018, according to the WWF, species population sizes had fallen by an average of 70 per cent. The World Economic Forum has estimated that more than half of global GDP is moderately or highly dependent on nature, especially due to its impact on global supply chains.
Biodiversity loss can result in lost jobs, hunger, disease, and death. The UN estimates an annual cost of $3tn by 2030. The key impacts humans are having are in changes in land and sea use, particularly deforestation. Pollution, including farming, pesticides, and plastic in the oceans is another driver. And invasive alien species have contributed to nearly 40 per cent of all animal extinctions since the 17th century.
So what's happening in the investor market with regards to biodiversity?
A wave of biodiversity funds has sprung up in the investor market to supposedly address this issue. Morningstar, the data provider, has counted 19 funds, many of which are less than a year old, but many have no meaningful performance data as yet.
A paper published in 2020 by the OECD calculated the scale of biodiversity finance at up to $91bn a year. To put that in perspective, governments spend approximately $500bn a year on support that is potentially harmful to biodiversity. That's five times as much.
So what sort of measurements or criteria might they use in the financial arena?
In the financial arena, one metric used is called mean species abundance, or MSA. MSA tries to measure what the actual level of biodiversity is in an area versus what it should have been if the company hadn't been active there. The problem with this method is that funds might invest in sectors that never had that much of an impact on MSA in the first place, like tech stocks or offices.
Not all funds use MSA as a criteria. Other funds take a mix and match approach, focusing on companies that are looking for solutions to the biodiversity problem and so-called best-in-class companies. These are companies that are doing better at addressing biodiversity than their peers even if they're not in the business of providing specific solutions.
Another potential growth area is in biodiversity credits. These are basically the lesser known cousin of carbon credits. So a company can purchase biodiversity credits to signal that they are making efforts in this area. Biodiversity funds are still at a relatively early stage.
There is a tendency in the fund management industry to launch products jumping on a bandwagon that are quite zeitgeisty but may not be very effective. So I think the industry is taking a wait-and-see approach to see whether these biodiversity funds will have an impact.
Where do you see these funds going?
The future for these funds is clearly long term, and there is still a lot of volatility. Regulation and investor interest is likely to increase. And that will come if investors push for companies to be more transparent about how they are affecting biodiversity loss. But if we want these funds to start making a genuine difference when it comes to protecting our biodiversity, we need to develop better metrics.
