Starting December 7, 2022, government representatives from around the world will gather in Montreal, Canada to negotiate and finalize the post-2020 Global Biodiversity Framework. Likened to the Paris Agreement of 2015, which mobilized governments and the finance community worldwide in addressing climate change, many hope that the conclusion of the 15^th Convention of Parties on Biological Diversity (COP15) will catalyze global action to protect and replenish biodiversity and natural capital across the globe.

In this article, we discuss the financial materiality of biodiversity to investors, expectations for COP15, and how investors can evaluate biodiversity and nature-related risks across investment portfolios.

Defining nature & biodiversity

Nature is comprised of four realms: land, freshwater, ocean, and atmosphere. It is the overarching term that encompasses both the extent (amount) of these realms on Earth, as well as the condition and health of the species and ecosystems that inhabit them. In an economic sense, natural capital is the stock of nature, from both renewable and non-renewable sources, from which businesses, societies, and economies create value.

Biodiversity is a characteristic of nature and natural capital. It can be defined as the variety of all living species on Earth, including flora and fauna, as well as bacteria, fungi and natural ecosystems.

Good biodiversity is vital to maintaining high-quality natural capital. It supports healthy ecosystems, which in turn clean the water, purify the air, maintain the soil, regulate the climate, recycle nutrients and provide food.

Natural capital

Financial impacts of biodiversity

Investors have long recognized biodiversity as one environmental factor among a suite of potentially material environmental, social, and governance risks. Over the last few years, however, biodiversity loss and nature loss are increasingly recognized as potential systemic risks as well. This means that their loss could trigger large, widespread impacts across financial markets, geographies, and societies. As businesses’ and society’s impacts and dependencies on nature become more apparent, efforts to measure the potential financial implications of these risks are increasing.

At the company level, businesses that directly impact or depend upon nature are the most exposed to nature-related risks. These include sectors like food and beverage, extractives and mineral processing, health care, resource transformation, consumer goods, renewable resources and alternative energy, transportation, and infrastructure.¹

For example, companies whose operations and/or revenue are highly dependent on nature may face outsized physical risks, as a decline in nature can cause a direct decline in companies’ operations. Those that greatly impact nature – for example, through emissions or waste – may face outsized liability risks due to potential litigation. Both types of companies face potential transition risks, arising from changes in policy, technology, or market behaviour. These risks may create disruption in companies’ activities or value chains, volatility in raw materials prices, adaptation costs, stranded assets or capital destruction, among other effects. Each of these factors could affect the risk-return profile of investments in these companies and present potential investment risks for equity and fixed income investors.²

At a macroeconomic level, the World Economic Forum has estimated that over half of the world’s GDP, about US$44 trillion, is either moderately or highly dependent on nature and its services.³ This estimate is based on the recognition that a loss of nature means a loss of economic value and productivity, as well as potential social disruption and political unrest.

An example of this dependency is the systemic importance of more than 20,000 species of pollinators, like wild bees, flies, moths, butterflies, bats, birds, monkeys, and more on global food production. We rely on these pollinators for over 75% of global food crop types, and about 35% of total food production globally.⁴ This translates to an estimated market loss risk of US$235-577 billion worldwide resulting from the loss of pollinators.⁵

Beyond the potential direct financial loss, a material decrease in production of foods like cocoa beans, avocados, nuts, coffee beans, and various fruits could disproportionately affect developing economies where many of these crops are grown. It may disrupt food supply and security globally – perhaps especially in developed nations whose diets tend to consist of more pollinator-dependent foods. It can also negatively affect other pollinator-dependent services related to medicines, biofuels, fibres, and construction materials, among others.

For investors, assessing the potential impacts of nature loss on expected returns across their portfolios may become increasingly important.

The role of COP15 & the Global Biodiversity Framework

COP15 is the 15^th annual gathering of countries that are signatories to the Convention on Biological Diversity (CBD), a part of the United Nations Environment Programme (UNEP). This year’s conference is particularly important, as nations are expected to finalize negotiations on the post-2020 Global Biodiversity Framework (GBF).

The GBF is a global agreement, which will set global targets for 2030 to address the five main drivers of biodiversity loss: land-and sea-use change, climate change, pollution, overexploitation, and invasive alien species. At COP15, nations are expected to finalize these targets, with a focus on the following:

The aim of the GBF is to create a “Paris for Nature”, referencing the Paris Agreement, signed in 2015 as a call to action on climate change. Similar in concept to the Paris Agreement which required countries to establish climate pledges, called nationally determined contributions (NDCs), the GBF aims to have countries establish National Biodiversity Strategies and Action Plans (NBSAPs), which would be monitored and updated over time.

To date, as part of the High Ambition Coalition for Nature and People (HAC), more than 100 countries have already committed to protect 30% of land and ocean by 2030 (known as ‘30x30’). In addition, 94 countries have endorsed the Leaders’ Pledge for Nature, a commitment to reverse biodiversity loss by 2030. Notably, with only an estimated 15% of the world’s land and 7% of the ocean currently protected, achieving these goals would require drastic policy and technology changes to double current land protections and quadruple ocean protections.⁷

All of these initiatives are important and indicative of the direction of travel on managing biodiversity and nature-related risks. However, progress on addressing these issues will depend on the actual policies, frameworks and actions plans put in place by countries and corporations. Policy, technology, and market developments for addressing biodiversity and nature loss could present material investment risks for investors and their portfolios.

Implications for investors

As the financial implications of biodiversity and nature loss become more apparent, the role of the financial system in the nature and biodiversity discussion is increasingly in focus. In March 2022, the Network for Greening the Financial System (NGFS), a global network of 114 central banks and financial supervisors, released a statement acknowledging that nature-related risks could have significant macroeconomic implications, and that failure to account for, mitigate, and adapt to these implications may pose a risk to financial stability.⁸

However, methodologies and tools for measuring these risks are still in development. Unlike with climate change, where one key metric (carbon emissions) is at the crux of most climate impact accounting and risk measurement, there is not yet an established biodiversity metric around which companies, countries, and investors can organize. While biodiversity and nature- related risks are challenging to categorize and quantify, both data and tools are improving:

• Initiatives such as the Task Force for Nature-related Financial Disclosures (TNFD) are progressing apace to provide a framework for organizations to measure and report on nature-related risks.
• Efforts are underway to expand the availability of data and establish methodology, through third-party data providers and industry collaborations such as the Partnership for Biodiversity Accounting Financials (PBAF).
• The Science Based Targets Network (SBTN) has also issued initial guidance for businesses that wish to set science-based targets for nature.
• Several other tools, standards, and initiatives continue to be developed, released, and refined, including those by the International Sustainability Standards Board (ISSB),
  the Global Risk Institute (GRI), the IPBES, and the Natural Capital Finance Alliance (NCFA – ENCORE tool), among others.

For investors, as data and disclosures continue to advance, it will be important to determine the materiality of nature-related risks and biodiversity loss on portfolios and investments, and to take these factors into consideration as part of the investment decision-making process, where material.