Biodiversity is the next big thing for investments after climate change

Following the conclusion of the 15^th Conference of Parties to the UN Convention on Biological Diversity held in Montreal in 2022, biodiversity is becoming the next buzz word after climate change. In fact, biodiversity and climate change are interwoven. The stepped-up efforts in conservation, restoration of nature and disclosure of biodiversity strategy have significant implications for investments.

Biodiversity means all variety of life in all forms, which include the number of species, their genetic variation and the interaction of these lifeforms within complex ecosystems. We rely on healthy ecosystems for clean air, fresh water, good quality soil, and crop pollination. Biodiversity helps us fight climate change and adapt to it as well as reduce the impact of natural hazards. Conversely, biodiversity loss means the extinction of species, the depletion of genetic variations, which can have a far-reaching impact on the food chain and the dynamics of ecosystems, based on which we human beings thrive.

There are five main drivers for biodiversity loss – changes in land use (e.g. deforestation, intensive mono-culture, urbanisation), direct exploitation such as hunting and over-fishing, climate change, pollution, and invasive alien species. In fact, scientists have warned that one million species – out of an estimated total of eight million – are threatened with extinction, many within decades.

In response to the threats of biodiversity loss, regulators and rules are playing a pivotal role, affecting industries and investments.

For businesses

EU Biodiversity Strategy for 2030

The EU Biodiversity Strategy for 2030 demonstrates that the EU is ready to lead the efforts in biodiversity. Ambitious targets are set, including, among others, protecting a minimum of 30% of the EU’s land areas and 30% of the EU sea area, integrating ecological corridors, and including at least 10% of EU land and 10% of EU sea under strictly protected areas. To achieve this, financing and investments is two of the important measures that can facilitate the necessary transformative change.

Biodiversity in EU Taxonomy

In relation to investments in biodiversity, one important incentive is the EU Taxonomy. “Protection and restoration of biodiversity and ecosystems” is one of the six climate and environmental objectives under the EU Taxonomy. It aims to direct capital flows towards sustainable investments. According to the recently approved delegated acts to the EU Taxonomy, economic activities that contribute to biodiversity include two activities:

1. Conservation, including restoration, of habitats, ecosystems and species
2. the operation of hotels, camping grounds and similar accommodation, and holidays in general, providing certain criteria are fulfilled.

We expect investments to be encouraged and incentivized across these activities.

The EU Deforestation Regulation (EUDR)

EU Deforestation Regulation – the inaugural EU rules on deforestation. The EU Deforestation Regulation, passed in June 2023, aims to fight deforestation globally. Deforestation and the resulting change of land use is one of the largest causes of biodiversity loss. Commodities that we consume and use daily, such as palm oil, coffee, chocolate, soybeans, beef, and timber, may lead to deforestation and the degradation of forest ecosystems. Since the EU is a large importer and trader of these commodities, it requires operators and traders to perform due diligence to ensure raw materials and derived products are deforestation-free. This regulatory framework and other upcoming ones such as the Corporate Sustainability Due Diligence Directive (CSDDD) will bring transparency and traceability along the value chain while changing business processes. Companies such process already in place are well-prepared and could stay ahead of the competition, while others may incur additional costs and implementational challenges.

For financial institutions

As outlined above, businesses are facing more stringent requirements in managing their biodiversity footprints, which have financial and reputational implications. Financial institutions making investments in companies need to consider biodiversity-related risks and financial impact.

For financial institutions, both mandatory and voluntary disclosure in biodiversity-related risks is on the rise. 

In May 2021, France published a regulation requiring financial institutions to disclose biodiversity-related risks and climate-related risks, using the concept of double materiality, and their strategy for reducing biodiversity impacts. Specific targets and a measure of alignment with international biodiversity goals must be included.

In addition to the regulators’ move, a market-led approach is in action, too. Taskforce on Nature-related Financial Disclosures (TNFD) is a voluntary framework for businesses and financial institutions to find out and disclose information they need to understand how nature impacts the organisation’s immediate financial performance, or the longer-term financial risks that may arise from how the organisation impacts nature, be that positively or negatively. Ultimately, nature-related risks and opportunities are incorporated into their strategic planning, risk management, and asset allocation decisions.

Conclusion

In summary, the regulatory landscape and reporting framework for biodiversity-related risks are changing rapidly. Investments in businesses that are well-prepared are going to participate in the trend, with such companies proving to be resilient in dealing with emerging regulations. Biodiversity-related risks need to be carefully analysed not only to preserve the wealth of investors but also our mother Earth.

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.