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Biodiversity in Your Portfolio

As we all know, a successful investment portfolio is one that minimises risk by increasing diversity, however, what about biodiversity? With more than half of the world’s GDP, $44 trillion, generated by businesses dependent on nature, responsible investors need to start to take biodiversity and sustainability more seriously. It is widely documented that biodiversity is shrinking at the hands of climate change, spearheaded by the globally celebrated broadcaster and natural historian Sir David Attenborough, however, it is only responsible for 11%-16% of the total biodiversity loss. Above all, it is three main socio-economic systems which are damaging the earth’s biodiversity the most, and investors have both a moral duty and a financial incentive to invest in companies that use our natural resources responsibly and sustainably.

Biodiversity’s Descent

Biodiversity, defined as the “volume of life on Earth and how different species interact with each other and with the physical world around them” by the Natural History Museum, is the very lifeline of this planet, providing humanity with food, clean air and water, our livelihoods and above all, climate resilience – it is “the very fabric of natural capital”.

Biodiversity and ecosystem loss has been classed in the World Economic Forum’s 2020 Global Risks Report as a top five threat to humanity over the next 10 years. Agriculture and livestock take up half of all habitable land, however we lose 3 million hectares of forests every year, and marine dead zones – aquatic areas where life cannot flourish – have increased fourfold in just 50 years. Due to human activity,  around 1 million species could go extinct in decades to come and coral reefs could decline a further 70% by 2050, even at 1.5 degrees of global warming. A report by PwC reveals that species diversity has already dramatically dropped, with the number of freshwater species in particular dropping by 83% from 1970 to 2018 (cf. 1).

Figure 1: The Decrease in Different Species over 48 years (1970 to 2018) (PwC)

Stemming from farming and agricultural activities, a fifth of the total nitrogen fertilizer input each year collects in our soil and a third enters our oceans. Meanwhile, diminishing rainforests, reefs and boreal forests could trigger dangerous biome shifts already evident by the rise in natural calamities such as tsunamis and forest fires. The 2004 Indonesian tsunami exemplifies the importance of preserving earth’s natural protection, as areas with mangroves were far less effected, revealing the dire ramifications of the dissipating natural protection both environmentally and financially, as financial institutions face greater default risk as nature’s defence is weakened by human behaviour.

The result of the destruction of natural habitats to make way for human activity has pushed wild animals to live closer to both each other and to us, with the number of non-native species increasing by 70% since 1970 – this will only amplify the chances of transmission of zoological diseases such as COVID-19, the repercussions of which we are all currently experiencing.

The Impact of Biodiversity on Portfolios

With more than half of the world’s GDP tied to nature in some way (cf. 2), the loss in biodiversity presents a systemic risk, and due to the lack of a known upper bound, the cost could be exponentially higher than what research bodies are currently predicting.

Figure 2: Nature dependencies classification by region (WEF)

Agriculture alone is a $5 trillion industry that relies heavily on rainwater from forest, soil and water body evaporation. Due to the shrinking population of pollinators, worldwide crops, valued at $235-577 billion each year, face substantial risk. Moreover, as genetic diversity in the likes of rice, wheat and maize – the source of over half of the world’s food – fall, so does their resilience to pests. The result is an estimated annual yield loss of up to 16%, equivalent to $96 billion, due to invasive species. Similarly, the offshore fishing industry, valued at more than $150 billion annually, heavily relies on conservation in order to preserve yields, and now faces a loss of $83 billion a year. The healthcare and pharmaceutical industries also rely on biodiversity, with 75% of our antibiotics originating from natural materials and 70% of cancer medicines being “inspired” by nature. As a result, a third of the world’s population depends heavily on forests and its products.

Agriculture, forestry, fishery and aquaculture, food beverages and tobacco, heat utilities, construction and electricity are the most directly dependent sectors on nature. The top three (construction, agriculture and food and beverages) generate twice the size of Germany’s economy in terms of gross value added (GVA), therefore as nature is increasingly unable to provide the products and services these sectors rely on, the WEF have warned that they could “suffer significant losses”.

Next Step for Investors

The three socio-economic systems responsible for 80% of the global loss of biodiversity have been identified as:

1. Food, Land and Ocean Use

Breeding food insecurity and inequality, this system impacts 72% of all (near-) threatened species.

2. Infrastructure and the Built Environment

Poor planning and management of infrastructure and the built environment is leading to congestion, pollution, utility loss, and higher costs for carrying out public services. This system impacts 29% of all (near-) threatened species.

3. Extractives and Energy

Produces unsustainable levels of pollution and emissions, costing at least $9 trillion a year. This systems risks impacting around 18% of all (near-) threatened species.

These three systems, together with climate change, impact around 79% of all (near-) threatened species, therefore it is paramount for investors to invest in environmentally conscious companies that use the world’s resources responsibly and which support the transition away from the current exploitation and overuse of our natural capital. Here’s how:

1. Food, Land and Ocean Use

Investors should invest in businesses with higher value land use models, spatial and land use master planning, innovative design and construction that works with nature, as well as in companies that work on recycling and producing cleaner air and water. Opportunities like these are forecasted to unlock $3 trillion and generate 117 million jobs by 2030.

2. Infrastructure and the Built Environment

Opportunities could come in the form of sustainable farming, regenerative agriculture and organisations advancing responsible consumption and transparent traceable supply chains. Opportunities such as these could unlock up to $3.6 trillion in revenue or savings and 191 million new jobs by 2030.

3. Extractives and Energy

Circular production models, non-evasive exploration, offsetting, and balancing the climate benefits with the biodiversity risks when transitioning towards renewables could all support a transition towards a healthier planet, as well as create an estimated 87 million new jobs by 2030.

In summary, our planet’s biodiversity is in critical danger, increasingly damaged at the hands of humanity’s activity and urban expansion. This presents a systemic risk, as society’s most important and valued sectors rely on the resources and the protection that nature provides us. It is now not only species that are being threatened, but also global supply chains and economies that are facing detrimental losses due to the fall in biodiversity. As a result, investors have a duty to select responsible investment destinations which will not only help revitalise earth’s biodiversity but also help generate trillions of dollars and millions of jobs: the less damage caused to biodiversity the less damage caused to our economies and humanity.