GUEST SUBMISSION: In May 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services released its much awaited report on the global state of biodiversity.

This three-year long investigation, compiled by 140 global experts relying on 15,000 scientific and government sources, concluded that a staggering one million species are threatened with extinction and that “transformative changes” are needed to protect and restore nature.

While the issue of environmental degradation is not new, it is undeniable that nature and biodiversity loss are accelerating at an unprecedented rate. It is also clear that land and sea use change, overexploitation of natural resources and anthropogenic climate change are amongst the key instigators of this global decline.

This nature crisis poses unique risks and opportunities to our society and the global economy, a fact emphasized by global conventions and discussions on this topic. These include the recent United Nations Biodiversity Conference (COP15) where 196 countries signed the Kunming-Montreal Global Biodiversity Framework to halt and reverse biodiversity decline by 2050.

Since COP15, we have seen new regulations, reporting frameworks and investor initiatives tabled on biodiversity. Growing momentum in this area has presented financial institutions with a distinct set of challenges and opportunities.

Why investors care

Institutional investors, including pension funds, asset managers and banks, are exposed to nature-related risks and opportunities through their dependencies and impacts on ecosystems.

Dependencies include reliance on ecosystems for resources such as wood and cotton, while impacts consist of deforestation and pollution to soil, water and air. Although these may be less severe at the operational level, such risks and opportunities often materialize at the portfolio level.

Portfolio companies in priority sectors such as energy (like oil and gas extraction), materials and consumer staples like forestry products are particularly exposed to nature-related risks due to reliance on natural resources and operational impacts on ecosystems.

Investors with assets in these sectors may be subject to enhanced risk exposure, reputational impacts and financial and legal liabilities.

As an example, a resource extraction issuer charged with habitat destruction might face fines from forestry regulations and negative media scrutiny, leading to reduced investor confidence and the need to engage or divest from the company.

On the flip side, addressing biodiversity loss and managing biodiversity impacts can create value creation opportunities for investors. These include enhanced reputation, improved portfolio and operational resilience, and access to new asset classes and markets.

To this effect, asset managers, primarily based in Europe, have recently launched biodiversity funds which seek to allocate capital toward companies that, for instance, perform well on nature-related metrics and prevent biodiversity loss through innovative solutions.

Action items

Investors preparing for these challenges should identify and evaluate exposure to nature-related risks and opportunities. This could be done by increasing familiarity with emerging disclosure frameworks, establishing portfolio-level processes and collaborating with investors and policy makers.

A starting point is given by the Taskforce on Nature-related Financial Disclosures (TNFD), which has developed a risk management and disclosure framework that enables financial institutions and companies to identify, evaluate and ultimately disclose their nature-related risks and opportunities.

Investors using the TNFD will benefit from tools and guidance designed to improve risk assessment, enhance transparency and ultimately incorporate nature-related factors in investment decision-making.

Investors with material exposure to priority sectors may consider outlining expectations for issuers through sustainable investing policies and due diligence processes. This could include adding factors such as waste and water in environmental, social and governance (ESG) policies, incorporating language in proxy voting policies to encourage disclosure of nature-related impacts and dependencies, and engaging with companies on issues such as deforestation.

Financial institutions looking to shape the development of regulations, take advantage of collective influence, and share knowledge and best practices may find value from joining collaborative initiatives on nature. One such collaboration is Nature Action 100+, which provides a forum for investors to engage with 100 companies across priority sectors with the highest potential impact on nature.

While these endeavours have improved understanding of the intersection of finance and nature, they have also shed light on extant challenges such as data availability and the paucity of standardized metrics.

As financial institutions navigate these complexities, they will benefit from a host of new data offerings from ESG research providers that have released biodiversity-related solutions and insights. These range from data points that quantify issuer impacts on ecosystems to asset-level mapping showcasing company operations in biodiversity sensitive areas.

Looking ahead

Touted as an ESG trend to watch out for, nature will take the spotlight in 2025 with an increasing number of financial institutions committing to and building upon biodiversity-related initiatives.

By embracing biodiversity and incorporating nature-related issues into their investment strategies, investors can mitigate potential risks, take advantage of new opportunities and ultimately future-proof their portfolios.