Speaking at the COP15 conference on biodiversity in December 2022, UN Secretary-General António Guterres was blunt in his vision of the consequences of ecosystem loss. “We’re committing vicariously suicide,” he explained. “Because the loss of nature and biodiversity comes at a high human cost. . . lost jobs, starvation, disease and death [and an] an estimated $3 trillion in annual losses by 2030.”
Averting disaster, he said, requires bold government action and the private sector’s acknowledgment that “profit and protection must go hand in hand.”
For some investors, this recognition has already begun to influence their decisions. While it may not be easy or even desirable to set a price on a tiger or a colony of bees, money managers are finding ways to channel finance into improving the planet’s biodiversity while generating a return — although there are still considerable obstacles to doing so market growth.
“Investor demand for nature and biodiversity-related products is certainly there and growing,” says Oliver Moullin, managing director for sustainable finance at the Association for Financial Markets in Europe, a trade association. The rating agency MSCI describes biodiversity as the “new frontier of sustainable finance”.
Pragmatism is a central theme. Many investors are concerned about the impact degrading ecosystems could have on global supply chains. The World Economic Forum estimated in 2020 that more than half of global GDP is “moderately or heavily dependent on nature.”
Kristina Koberdanz, chief sustainability officer at Macquarie Asset Management, says the financial sector is “increasingly adapting to the risks of biodiversity loss and exploring opportunities for investing in biodiversity conservation” – although she adds that it is far from ” a mature market”.
Count them if you can: Obtaining rigorous data is a stumbling block for biodiversity funding © Marco Ugarte/`
Papers released in 2020 by researchers from the OECD and the Paulson Institute calculated the size of biodiversity funding at US$78-91 billion and US$124-143 billion per year, respectively. Most of this is public spending: the OECD estimates that private finance accounts for only $6.6 billion to $13.6 billion of the total.
But a greater focus on biodiversity from governments and regulators is likely to push private numbers higher. The agreement reached at COP15 included a new obligation for signatories to ensure companies monitor and report their dependency and impact on nature.
The summit, which attracted a large cohort of investors for the first time, “should have long-term implications for companies,” Barclays analysts said. “The pressure on companies to make nature-related claims is likely to increase.”
However, Moullin says a lack of solid data is currently hampering market growth. While greenhouse gas emissions can be used to measure a company’s climate impact, “there’s not yet an equivalent” for biodiversity, he says. And data is important to answer a key question: “How do you know your investment is actually benefiting biodiversity?”
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According to Luke Sussams, an ESG analyst at investment bank Jefferies, some money managers have started “to do company-level biodiversity analysis” to identify better-performing companies.
For investors looking to put money into this space, one option is to back startups that serve companies looking to make their operations and supply chains more sustainable.
Alexa Firmenich, co-director of the SEED initiative measuring biodiversity at research group Crowther Lab, anticipates a “massively growing interest in early-stage companies” developing ecosystem restoration technologies and monitoring biodiversity advances.
A turnaround in traditional bond markets could also be a way. Last year, the World Bank issued a landmark Wildlife Conservation Bond designed to protect South Africa’s critically endangered black rhino.
Investment grade: The World Bank issued a bond to protect black rhinos last year © Luis Tato/AFP via Getty Images
Investors in the $150 million five-year bond will receive no coupon payments; Instead, the World Bank makes payments to two protected areas. However, at bond maturity, investors will receive a “success payment” funded by a performance grant from the multilateral Global Environment Facility fund if certain conservation goals are met.
This novel structure “passes project risk to capital market investors and allows donors to pay for conservation results,” says the GEF.
Meanwhile, experts are predicting a growing appetite for biodiversity credits — the lesser-known cousins of carbon credits that have grown in popularity in recent years. Mike Korchinsky, founder of Wildlife Works, which is developing carbon credits to fund conservation projects, says biodiversity credits have sparked “a lot of interest from investors,” many of whom are “driven by personal passion.”
Firmenich emphasizes that since each ecosystem is unique, any biodiversity “offsetting” — or compensation for damage — should be “localized,” with recovery occurring in the same place as any damage caused by the credit buyer. In contrast, carbon credit buyers often use credits generated miles away from their polluting factories or facilities.
Beyond offsetting, companies could also purchase biodiversity credits to signal that they are helping to restore the natural world and protect their supply chains, Firmenich says.
A review will be required. Carbon credits have been plagued by allegations that they don’t always deliver the carbon savings promised, and experts warn that biodiversity credits are likely to face similar challenges.
Sussams points out that translating biodiversity drivers into financial risks and opportunities is “an extraordinary challenge”: the industry has yet to agree on which metrics are best, let alone fill the “huge data gaps” that exist .
The demand for funding for biodiversity initiatives may be there — but so far, Sussams warns that asset managers are “struggling” to meet them in a way that is “both scientifically and financially robust.”
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