- Biodiversity, the term used to describe life on Earth, or simply Nature, is declining at an alarming rate, and human activities are driving this loss.
- Yet nature provides economic and social value through material benefits (such as food) and ecosystem services (i.e. climate regulation, pollination, water & air purification).
- However, companies generally under-estimate how much they both impact and rely on nature.
- We can identify three types of risks for corporates that depend on biodiversity: systemic risks through far-reaching impacts on food security, health and socioeconomic development; physical risks such as extreme weather events; as well as transition risks.
- Addressing biodiversity loss can also be an opportunity for corporates: the World Economic Forum (WEF) has identified this opportunity to be valued at around $10 trillion/year by 2030.
- In order to integrate biodiversity considerations into investment analysis and portfolio construction, there is a need, as investors, to understand better how companies affect and depend on biodiversity.
- Going forward, emerging regulations and working groups trying to address problems linked to biodiversity reporting will contribute to speeding up action on biodiversity.
- Finally, engagement will continue to be a key tool for investors to push companies to adopt best practices and encourage standardized and transparent reporting on material ESG topics. This is why Amundi has launched a major engagement campaign on biodiversity in 2021.
Biodiversity, or the term used to describe all living organisms and ecosystems of which they are part, is declining at an alarming rate with now 1 million (out of an estimated 8 million) plant and animal species being threatened with extinction1.
According to the IPBES 2019 report2 the main drivers of biodiversity loss are land degradation and habitat destruction; unsustainable resource exploitation; pollution; climate change; and invasive species. Human activities are both directly and indirectly driving biodiversity loss and yet nature provides economic and social value through material benefits (e.g. supply of food, water, fibers, wood and fuels) and other ecosystem services (e.g. climate and flood regulation, crop pollination, water and air purification, soil fertility, recreational activities, spiritual well-being, etc.).
While the risks associated with biodiversity loss have always existed, global awareness of the subject is still in the early days. With regulations only beginning to emerge, investors have a key role to play to ensure that companies understand how biodiversity loss affects the company and vice versa, and ensure that companies are prepared to report on it accurately and effectively.
What is biodiversity and why is it so essential?
Biodiversity describes all life on earth. It provides key services to society in three different ways:
- Provisioning services: such as food, energy, and medicines. For example, in addition to food, 70% of drugs used for cancer are natural or synthetic products inspired by nature and over 2 billion people rely on wood fuel to meet their primary energy needs3.
- Cultural services: nature is often tied to one’s cultural identity and plays a key role in a person’s physical and psychological wellbeing.
- Regulating services: such as pollination, climate regulation, carbon sequestration, flood & erosion prevention, water purification, and habitat provision. For instance, 75% of global food crops rely on animal pollination4. Furthermore, marine and terrestrial ecosystems are carbon sinks for anthropogenic emissions with global gross sequestration of around 5.6 gigatons of carbon per year (equivalent to 60% of global anthropogenic emissions)5.
A fourth category is often considered as well: the supporting services. They are necessary for the production of three other ecosystem services, for example by providing plants and animals with living spaces, allowing for diversity of species, and maintaining genetic diversity.
Biodiversity is in a Rapid State of Decline…Which Poses Significant Risks for Society
The IPBES Biodiversity Intactness Index (BII) estimates how much originally present biodiversity remains on average across regions. According to this index, biodiversity loss has accelerated rapidly over the last 60+ years across the globe.
In turn, biodiversity loss poses significant risks to society, and notably to corporates.
Biodiversity is fundamental to food security as it ensures a stable environment, fertile soil, and healthy population of pollinators like bees. Agricultural production (with a value estimated in 2016 at $2.5 trillion) has increased threefold since 1970, but land degradation has reduced agricultural productivity by 23%. On top of that, between USD$235 and $577 billion of annual global crop output is at risk due to pollinator decline6.
Biodiversity loss also represents significant risks to human health. Almost three quarters of emerging infectious diseases in humans come from other animals, also known as zoonotic diseases including Ebola, Avian Influenza, SARS, and HIV. Land-use change and wildlife exploitation increase people’s proximity to potential pathogens. It makes pandemics an ever more likely occurrence7 . Nature also helps purifying air and water: vegetation can help absorb excessive nitrogen dioxide, ozone and particulate matter for example8. With around 4.2 million people9 dying every year due to air pollution and nitrogen largely exceeding planetary boundaries, anyone can understand the need to protect our biodiversity, which regulates these threats.
Moreover, biodiversity protects us against climate-related events and provides stable conditions in our surrounding environment. Mangroves are good illustrations: they provide extensive flood protection against chronic events like tropical cyclones. It is unfortunately estimated that over 35% of their original cover is lost and, if today’s mangroves were to disappear, 18 million more people would face flooding every year. This would represent a 39% increase in floods and a 16% increase in annual damages to property at roughly $82 billion10.
These threats create systemic risks for society. Economic growth and prosperity have come at the expense of intensive use of natural systems, which underpin all life on Earth. In turn, biodiversity loss resulting from human activities poses severe risks to economic stability in our society. Indeed, the 2022 World Economic Forum Global Risks Report has identified biodiversity loss in the top three most severe risks for the next decade. Furthermore, the estimates of the financial toll from biodiversity loss are staggering. A 2014 study estimates that declining biodiversity resulted in financial losses of up to $20 trillion per year between 1997 and 201111.