An investor perspective on biodiversity

‘Don’t put all your eggs in one basket.’ It’s a piece of advice as old as time and one that has underpinned investment approaches since the first time Markowitz decreed this common-sense logic as ‘modern portfolio theory’ in the 1950s, writes Nicole Martens

Today, no investor worth their salt would ever dare suggest that a portfolio characterised by a lack of diversity makes any sense – at least, not if the aim of the investor is to generate maximum returns. The same logic applies to biodiversity.

In the same way that diversity in a portfolio of financial assets protects against events that negatively impact one asset or an asset class, so too is biodiversity vitally important to ensuring the planet’s resilience and hence its ability to endure shocks.

The recently released Dasgupta review on the economics of biodiversity sets out to explain how, as the global community, the way that we have been operating over the last few centuries has acted to systematically destroy the ability of our planet to offer diversification, rapidly decreasing the ability of natural systems to regulate shocks and leading to an exponential increase in the risk of total system collapse.

In addition to direct impacts on immediately surrounding ecosystems, biodiversity and ecosystem service loss impact businesses as a result of transition − physical, litigation and regulatory − and systemic risks, which have the potential to affect investment value in the short, medium and long term. The problem of biodiversity loss also manifests in what might at first appear to be unexpected ways – like pandemics. It is now widely accepted that the COVID-19 pandemic had its origins in the illegal wildlife trade and habitat destruction which brought an animal disease into contact with humans. This most recent example of the degrees of interconnectedness between − and complexity of − our environmental, social and economic systems brings into sharp focus the need for investors to up their game when it comes to dealing with issues of biodiversity protection as part of their investment approach.

As investors, if we’re after maximum returns in perpetuity (the purpose of investment, when last I checked) we need to position biodiversity loss as a systemic risk and address it accordingly. This means understanding the risk at the sector, economic and global level and working to address it in a way that generates real-world outcomes, as per the guidelines of the post-2020 global biodiversity framework.

More practically, this means that investors should:

  • Allocate capital to sectors or business models which are avoiding and reducing biodiversity loss and increasing opportunities for positive outcomes on the ground, including restoration
  • Engage investees on reducing negative biodiversity outcomes and designing stewardship approaches to deliver positive biodiversity outcomes, and
  • Engage policymakers on reforming incentives, including subsidies, to activities that drive biodiversity loss

Furthermore, taking the threat of biodiversity loss seriously means that investors should also be working to address some of the underlying issues that prevent action on biodiversity. They can do this by building internal capacity to ensure awareness of biodiversity’s importance; testing new tools and measurement approaches to understand how investments shape biodiversity outcomes; engaging with companies and data service providers to provide meaningful, consistent data; engaging with green funds, bonds, commodities and certification schemes to integrate biodiversity into existing standards; and collaborating with peers and stakeholders to enhance nature-related financial disclosures.

If you’re an investor, you should be asking yourself where you are in this process and making moves to take it up a notch (or, ideally, a few notches). If you’re advising investors, you need to be pushing this agenda – hard. If you’re a client or beneficiary of investment services, you need to be pressuring your service providers to be transparent about and do more to understand the impacts of their investment decisions on biodiversity – and of course, to change tack appropriately.

Taking these steps – and doing so sooner rather than later – is the only way that the investment value chain can even begin to think about addressing the ever-increasing risk posed by biodiversity loss – a risk posed, lest we forget, not only to investors but to the real economy and, primarily, to the planet and its people.

AUTHOR Nicole Martens, Head of Africa & Middle East, UN-Supported Principles for Responsible Investment (PRI)