Written by: Sara Rosner, Patrick O'Connell, CFA and David Tsoupros, CFA
Biodiversity in the Balance: What You Need to Know
Biodiversity is gaining prominence in fundamental investment analysis across asset classes, based on a deeper understanding of its importance as a potentially material issue for investors. By using a coherent analytical approach, we believe it’s possible to incorporate nature-related risks and opportunities in research and investment processes that support the efforts of capital allocators to harvest meaningful returns over time.
From South Africa’s endangered black rhinoceros to the shrinking Amazon rainforest, threats to the variability of life on Earth are mounting. Protecting biodiversity—animals, plants and other living organisms, and the ecosystems they are part of—is vital to maintain the health of our planet and the products, services and economic activity that sustain our daily life. Yet until recently, biodiversity hasn’t ranked highly among investors’ priorities.
This may seem surprising, given biodiversity’s importance as the living component of the natural world. Together with abiotic resources—the nonliving components of the natural world, such as land, water, air and minerals—biodiversity comprises natural capital, the world’s stock of natural assets. Natural capital provides the building blocks that enable ecosystem services—the positive benefits that societies and economies derive from nature—to sustain life and create wealth (Display).
For many years, governments and investors have focused mainly on the material impacts of climate change, with little consideration for the role of the natural world. But now there is a growing recognition of the high degree of interconnectivity and myriad feedback loops between climate change, people and nature.
Gaining Prominence in Investment Analysis
Consequently, biodiversity is gaining prominence in fundamental investment analysis across asset classes, based on a deeper understanding of its importance as a potentially material risk and opportunity for investors. Nature-related risks are defined by the Taskforce on Nature-related Financial Disclosures (TNFD) as the potential short- and long-term threats posed to an organization linked to its direct, upstream, and downstream dependencies and impact on nature.
With resources becoming scarcer, the human population growing and regulatory activity increasing, investors must be able to make informed judgments about how companies are exposed to the causes and effects of biodiversity loss—and to the opportunities that may arise from attempting to mitigate this loss. Depending on how these risks are managed, they could hurt portfolio valuations or be the basis for new investment opportunities. By using a coherent analytical approach, we believe it’s possible to invest in a way that’s more aligned with biodiversity and that supports the efforts of capital allocators to harvest meaningful returns over the long term.
Growing Focus on Biodiversity to Create Opportunities
This paper provides a comprehensive survey of biodiversity for investors. Our report defines biodiversity and presents the scale of its global economic impact. We discuss the regulatory frameworks that are pushing biodiversity onto the global investment agenda as well as the nature-related business and investment risks that deserve closer attention.
The growing focus on biodiversity will also create economic and investment opportunities. We illustrate this through case studies and provide a conceptual framework to help investors map out biodiversity risk across sectors and companies. Finally, we discuss what we’re doing at AB to begin incorporating biodiversity considerations across the firm.
Related: Beyond Profits: Investing for a Sustainable Tomorrow
1 Financing Nature: Closing the Global Biodiversity Financing Gap, Paulson Institute, The Nature Conservancy and Cornell Atkinson Center for Sustainability, 2020, 14
2 New Nature Economy Report II, The Future of Nature and Business, World Economic Forum and AlphaBeta, 2020, 4