Where we stand on biodiversity loss and footprinting

Robert-Alexandre Poujade, Biodiversity Lead, discusses the importance of biodiversity, our biodiversity roadmap and the steps in assessing the biodiversity footprint of our portfolios.

Why does biodiversity matter?

Healthy functioning ecosystems underpin society: they produce the oxygen we breathe, help mitigate climate change and support at least 55% of the global economy.But about 25% of all species is at risk of extinction by 2050 – that is roughly one million species of plants and animals.

There are five main threats to biodiversity

Land/sea use change
Pollution
Overexploitation
Invasive species
Climate change.

Biodiversity loss threatens the achievement of UN Sustainable Development Goals related to poverty, hunger, health, water, cities, climate, oceans, and land, according to IPBES 2019. That is another reason to reverse the destruction of ecosystems and biodiversity loss.

What is being done to protect nature?

At COP15, around 200 countries agreed on the Kunming-Montreal Global Biodiversity Framework. Its centrepiece is a target to protect 30% of nature by 2030. We believe this makes financial sense: A University of Cambridge report has found that the financial benefits of protecting 30% of world’s land and oceans outweigh the costs involved by a ratio of 5 to 1.

Governments have also agreed to phasing out subsidies that harm nature. Subsidies linked to biodiversity loss are estimated to cost around USD 2 trillion annually. The agreement set a target of spending USD 200 billion a year on conservation.

Apart from public sector investment, funds could come from private finance or blended finance as well as pushing the private sector to invest via impact funds and other instruments.

What does this mean for investors?

Biodiversity loss is a systemic risk. Investor assets could be impacted negatively by the loss of even a bee. Bees are responsible for pollinating about one third of the world’s food supply. In the US alone, honeybees provide pollination services valued at roughly USD 15 billion to USD 20 billion a year.

We believe it is important for investors to understand what the risks are. To do so, they require companies to disclose environmental information to help them assess a firm’s impact on biodiversity. However, data from CDP (formerly the Carbon Disclosure Project) has shown that most companies are not translating a commitment on biodiversity into action.

The Global Biodiversity Framework calls on governments to encourage companies and financial institutions to disclose their risks, dependencies and impacts related to biodiversity. Pressure for greater transparency is likely to drive more action from companies to reduce biodiversity loss.

In our view, regulatory action should help investors understand the biodiversity-related risks and opportunities in their portfolios. To this end, we have been involved in the Taskforce on Nature-related Financial Disclosures (TNFD) to develop a framework. It is due to be published on 18 September.

What can asset managers do?

There is currently an annual USD 700 billion gap when it comes to financing the protection of natural systems, according to the Paulson Institute. This can be reduced by cutting subsidies that harm biodiversity and raising more funds through carbon markets, biodiversity credits and green financial products. BNP Paribas Asset Management supports the alignment of financial flows and global biodiversity goals and measures requiring consistent and decision-useful corporate disclosure.

We have detailed our views on the nature and urgency of this crisis in our biodiversity roadmap Sustainable by Nature. The roadmap is based on the six pillars of our approach to sustainability-related investing:

Integrating environmental, social and governance considerations
Stewardship
Responsible business conduct
Taking a forward-looking perspective
Investment solutions for sustainability
‘Walking the talk’ through corporate social responsibility.

Stewardship can be used to bolster a company’s efforts to reduce biodiversity loss, a recent example being our engagement with the pharmaceutical industry to phase out the use of horseshoe crab blood for testing.

Environmental investment strategies can also address climate change and biodiversity loss by helping to bridge the funding gap [1] to restore, protect and preserve Earth’s resources. Our biodiversity-focused range includes an exchange-traded fund and a thematic equity fund.

What next?

We have analysed our global assets under management to understand our exposure to water and deforestation risks and how much we depend on ecosystem services.

Also, to measure how our investments impact biodiversity, we have done research on a ‘biodiversity footprint’.

In Sustainable by Nature Sequel: Our Portfolio Biodiversity Footprint,our analysis focuses solely on negative impacts without addressing dependencies or the financial risks from nature loss. Together with our water and deforestation footprints, we aim to integrate this into our sustainability-based approach to investment decisions.

What is biodiversity footprinting? It is a tool that helps investors combine modelled and reported data of companies they have invested in and their supply chains to quantify their potential impact on biodiversity, without the need to gauge actual biodiversity change on the ground.

This biodiversity footprint assessment complements analysis our Environment, Social and Corporate Governance (ESG) analysts perform at a sector and issuer level and helps to identify key targets for direct engagement by our stewardship and portfolio management teams.

Many challenges remain. Biodiversity in or beneath the soil, marine biodiversity, extinction risk and species richness dimensions have not yet been captured fully, and pressures such as invasive species and resource overconsumption have yet to be modelled.

There is still a lack of data usable by investors, linking specific impacts to individual companies. This is a significant blind spot. However, for us, this is not a valid reason to remain passive. On the contrary.

References

¹ Also read Closing the biodiversity funding gap: a call to investors (bnpparibas-am.com)

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.