Getting biodiversity back on the agenda
With Brazil’s incoming president promising to put biodiversity front and centre of his policies, is this time for investors to review how the theme sits in their portfolios?
Brazil’s president-elect Luiz Inácio Lula da Silva, who assumes the role again in 2023, has brought international attention to the Amazon and the topic of deforestation. Conservation was a key tenet of Lula’s election campaign, and he has vowed to prioritise the protection of Brazil’s rainforests.
For this reason, Lula’s victory has made conservationists excited about the prospect of the Brazilian government better protecting the world’s largest rainforest. This has also given investors greater motivation to develop a view on biodiversity risk and what this means for both the planet and portfolios.
Professor David Hill, ecologist and founder of the Environment Bank, says: "Lula’s election victory in Brazil sends the critical signal to markets and investors that biodiversity protection and restoration in the Amazon transcends short-term policies that have got the planet into such a horrendous mess.”
Now, Hill says investment has a “paramount” role to play in abating biodiversity destruction. A company’s role in biodiversity damage, such as the exposure it has to rainforest deforestation in its supply chain, could become an increasingly scrutinised factor by investors.
Unearthing biodiversity risks
This is already being analysed by some. The Finance for Biodiversity Pledge is an international working group of investors specifically addressing this issue and, as of October 2022, has 111 signatories representing £14.3trn in assets. Asset manager Robeco is a founding signatory and has already created an internal biodiversity task force to map such risks within its investments.
“We are looking at data on an issuer level so we can set targets for our portfolios,” explains Daniela da Costa-Bulthuis, emerging markets equities portfolio manager at Robeco. “We also engage with companies to discuss and try to align their biodiversity risks and policies to our commitments.”
This work isn’t just conducted for the good of the environment, but for the benefit of returns. Da Costa-Bulthuis explains there is a direct link between biodiversity and financial stability for certain companies and countries, with Robeco producing research on the subject.
“We have recently published a study, in partnership with Cambridge University, where we analysed the vulnerability of degraded land to extreme weather events and how it can deliver a blow to asset value,” she says. “We looked at companies in the agribusiness supply chain in Brazil for this assessment.”
The study found that Brazilian farmers operating on degraded land saw their market value decline by 13% while those on healthy soils increased by 6%. Further up the supply chain, smaller packaged food companies sourcing from areas of degraded land saw a negative impact on valuations as high as 45%.
These findings may be illuminating, but gaining visibility of such biodiversity risks is not easy. At GAM Investments, global head of sustainable and impact investment Stephanie Maier says data quality around biodiversity has yet to reach the levels around climate change.
However, given greater attention towards the plight of the Amazon – and biodiversity in general – Maier says this could potentially change: “To achieve net zero, protecting the planet’s carbon sinks, including the Amazon, is essential.
“Brazil’s new administration that pledges to reverse damaging deforestation is, therefore, a welcome move in the financial community. Eyes will also be on COP15 in Canada where policymakers will come together to shape the future trajectory for nature and people.”
A systemic concern
The financial cost of biodiversity in given sectors is very real, with Maier saying “trillions” could be lost in areas such as food production, but many point to the risk as much graver.
There is now overwhelming evidence that biodiversity loss poses a systemic risk to the global economy, with a Global Futures report by the World Wildlife Fund revealing this could result in a loss of between 0.5% and 1.5% of global GDP over the next 30 years.
For Hill, this means international cooperation – with policies built around biodiversity protection – is crucial.
"With [ecosystem] collapse will come the collapse of businesses and our quality and way of life – at last this is being recognised by businesses across the world because exposure to biodiversity loss represents a massive risk to business,” says Hill. “Only by adopting a Nature Positive regime will the natural environment be restored at the scale and speed necessary to avert a collapse in the ecosystems on which we rely."