Biodiversity: The next big investment trend?

You may recall the 2011 film Rio, about a pet macaw called Blu who wanted to win the heart of Jewel, also a macaw, and save their species from extinction. Viewers around the world cheered Blu on as he made his clumsy advances to the sound of samba.

Unfortunately, Blu and Jewel’s backstory is an all-too familiar one in the real world. According to a United Nations study published in 2019, one million animal and plant species are threatened with extinction. This staggering number is the result of numerous factors, with changes in land use, climate change and pollution among the biggest drivers.

Fifty per cent of global GDP

Biodiversity loss jeopardises the very foundations of our existence on Earth. It also poses a major threat to the global economy. According to the World Economic Forum, half of the world’s economic output, or 44 trillion US dollars, is dependent on nature. This is because only an intact ecosystem can supply the food, raw materials, water, air and the inspiration needed to develop and produce everything from medications to technology. Here’s some food for thought: if insects were to stop pollinating plants, it would cost the economy 153 billion euro.

So it’s not surprising that at the 2022 United Nations Biodiversity Conference in Montreal (COP15), 188 countries committed to protecting at least 30 percent of the world’s land and water by 2030. To support the achievement of this goal, they also committed to mobilising 200 billion US dollars per year in biodiversity-related funding from both public and private sources. Progress on the latter has, however, been especially slow.

A turning point?

But there is a clear trend reversal taking place in financial markets. The study "Do Investors Care About Biodiversity?" (published by the Swiss Finance Institute), by Professor Alexander F. Wagner from the Department of Banking and Finance at the University of Zurich shows that ever since COP15, the share prices of companies with a large biodiversity footprint have been coming under pressure. This suggests that investors increasingly expect a risk premium if there is uncertainty about how a company deals with its environmental risks. 

Biodiversity is also starting to move up on the agenda of many financial institutions. In 2021, for example, a number of companies joined forces with government representatives and NGOs to establish the Taskforce on Nature-related Financial Disclosures (TNFD). The aim of the Taskforce is to develop a framework for disclosing and reporting nature-related risks. Another recent and important initiative is Finance for Biodiversity. It is backed by financial institutions, including LGT, and aims to sensitise companies to biodiversity and motivate them to report transparently on it.

But despite these positive developments, many investors still struggle to support biodiversity through their investments. Why? Because compared to vehicles designed to combat climate change, which have mushroomed in recent years, most investment solutions that support biodiversity are still in their infancy. There are a number of reasons for this disparity.

Biodiversity has many faces

"Collecting data on biodiversity is more complex than for climate change. Biodiversity isn’t just about greenhouse gases, it’s caused by various closely interconnected factors", says Falko Paetzold, founder of the University of Zurich’s Center for Sustainable Finance and Private Wealth (CSP). This complexity can make it difficult to determine the extent to which biodiversity funds live up to their claims, and is compounded by the fact that there are still no widely accepted key performance indicators for biodiversity. Also lacking are investment approaches that take biodiversity risk management into account in environmentally sensitive sectors. This despite the fact they could have a significant positive impact.

"To address all of these issues, LGT is developing an approach for traditional investment strategies that takes into account a comprehensive range of biodiversity factors", says Christopher Greenwald, Head Sustainable Investing at LGT. Greenwald is convinced that this kind of focus on nature and species conservation can give rise to attractive investment opportunities. And the World Economic Forum has some impressive figures that support that argument: it estimates that companies which develop effective solutions for protecting biodiversity could generate up to 10 trillion US dollars in annual business value by 2030.

The sectors and industries most likely to benefit from this growth include agriculture, water reuse, waste management and the circular economy. Precision agriculture is a good example; companies working in this field are using smart systems to help farmers better analyse and manage their soil, resulting in a decrease in pesticide use, which in turn helps biodiversity.

According to Greenwald, taking an opposite approach and blacklisting all critical sectors such as energy or mining would not be expedient. On the contrary. "It’s in these sectors that strategies for reducing harmful business activities and supporting sustainable models can have the biggest impact", he says.

Catalysts of change

So can investors really support the transition towards greater sustainability? Falko Paetzold is convinced they can. "The most impactful things that shareholders can do is exercise their voting rights and invest directly in start-ups", he says. However, because opportunities for direct investments of this kind are rare and can entail significant risks, he suggests that, "People with less capital at their disposal can consider investing in an investment fund that aligns with their convictions."

Ultimately, the same rule applies for biodiversity as for all other investments trends: people who invest early on are more likely to benefit from growth in the segment (while also bearing the associated risks). However, with this type of investment, they have an additional opportunity, namely, to help ensure that animals like Blu come back from the brink of extinction and go on to thrive in their natural habitat.