Investors can no longer ignore the shift to protect biodiversity

THE PAST 30 years have seen a bigger improvement in human prosperity than all of the past centuries combined.

We have built more roads, buildings and machines than ever before. More people are living longer and healthier lives and access to education has never been better.

The average GDP per capita has grown 15-fold since 1820. More than 95 per cent of newborns now make it to their 15th birthday, as opposed to just one in three in the 19th century.

However, such progress has come at a great cost. As humanity has thrived, nature has suffered.

Humans are driving animal and plant species to extinction and destroying their habitats to feed an ever-increasing population. A landmark United Nations report warns that up to one million animal and plant species are at imminent risk of extinction.

Policymakers now consider biodiversity protection as urgent a priority as halting global warming. At the UN COP15 biodiversity summit in Montreal in December, governments agreed on groundbreaking targets to protect nature.

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But such efforts should not be confined to the policy arena. Investors, too, must play a more active role. As stewards of global capital, they are uniquely positioned to help build an economy that works with, rather than against, nature.

Nature and humans at odds

The problems arising from the ruthless exploitation of our natural resources to support growth are encapsulated by a concept known as the “environmentalist’s paradox”.

Simply put, it states that humans have prospered at nature’s expense.

Data shows that from 1992 to 2014 the amount of capital goods — such as roads, machines, buildings, factories and ports — generated per person doubled. Over the same timeframe, however, the world’s stock of natural capital — water, soil and minerals — per person declined by nearly 40 per cent.

Recent advances in technology offer the promise of using natural capital in more efficient ways.

Scientists estimate that the efficiency with which humans transform natural capital into GDP is currently improving at an annual rate of 3.5 per cent; for natural capital drawdown to halt, though, the efficiency improvement would have to climb to 10 per cent per year.

It is worth noting that by channelling investment to companies developing advanced environmental technology and services, the financial industry has helped to improve efficiency in everything from energy use, agriculture, trade and transport. For example, thanks to the development of agricultural technology, the world can produce almost three times as much cereal from a given plot of land as it did in 1961.

But greater efficiency — welcome as that would be — is unlikely to be enough. Building an economy that is in harmony with nature require governments, regulators, corporations and consumers all playing their part.

Spirit of Kunming

In a high-level pre-Montreal meeting in Kunming, China, governments promised to act urgently on biodiversity protection. What is more, President Xi Jinping pledged around US$230 million to support biodiversity in developing counties — often the hotspots of endangered species and degraded habitats.

The eventual Kunming-Montreal Global Diversity Framework commits signatories to restore at least 30 per cent of degraded ecosystems, protect at least 30 per cent of the world’s sea and land areas, control invasive species, reduce the risks from pesticides by at least half and eliminate pollution from plastic waste.

Once these targets become national policy, policymakers and regulators can quickly establish a framework for biodiversity protection and disclosure, with net zero as the template.

Businesses and investors can ill-afford to ignore the shift in attitudes.

Biodiversity finance: a burgeoning market

Intensifying political and regulatory efforts are a step in the right direction. But policymakers cannot turn the tide on their own.

Businesses and investors must also do more to place the world on a path to sustainable growth.

To begin with, they must gain a greater understanding of the risks biodiversity degradation presents to their bottom line and portfolios. By doing so, investors can begin to correctly price such risks, identify gaps in their current environmental, social and governance (ESG) framework and discover new ways to invest in natural capital.

But such efforts will come to nothing without an accompanying revolution in biodiversity-related capital.

The Organisation for Economic Co-operation and Development estimates that investments aimed at protecting biodiversity stand at less than US$100 billion a year. That compares poorly with what climate change attracts (US$632 billion), or with the US$500 billion per year invested in activities that harm nature, such as fossil fuel extraction and agricultural subsidies.

Historically, biodiversity finance has tended to focus on raising money for conservation activities. More recently, however, there has been a steady increase in biodiversity and natural capital investment.

Such strategies invest in companies developing products and services targeted at minimising biodiversity loss and restoring nature and aim to capitalise on the potential for long-term capital growth.

In recent years, the asset management industry has launched a number of high-profile funds investing in companies specialised in biodiversity restoration and ecosystem services, with nine out of eleven such funds having debuted since 2020.

Assets under management in this group have more than doubled to US$1.3 billion from just US$525 million at the start of the decade.

Such investment should also help embed more sustainable business practices across a whole value chain, involving industries such as agriculture, forestry, information technology, fishery, materials, real estate, consumer discretionary and staples, utilities and pharmaceuticals.

The Food and Land Use Coalition has found efforts to transform current food and land use have the potential to create a biodiversity and nature market potentially worth USD4.5 trillion by 2030.

By developing a thriving natural capital market, investors can help shift capital flows away from businesses and projects that degrade the natural environment and towards regenerative and circular initiatives.

Nature has always been the economy’s most important asset. It is time investors recognised that.

Laurent Ramsey is a managing partner at The Pictet Group.