How integrating natural capital in the investment process can help biodiversity bloom
Momentum is building for mandatory nature-related disclosures, but that is only the beginning. Investors and businesses may soon be looking to integrate biodiversity in decision-making at every level.
How should we value the natural world? Recent attempts to quantify how much economies and industries rely on natural capital have delivered varied results. Consultancy PwC, for example, estimates that more than half (55%) of the world’s GDP, equivalent to USD58 trillion, is moderately or highly dependent on nature. And index-provider MSCI has ranked industries by their dependence on nature (see Figure 1).
The stark reality, however, as pointed out by environmental policy strategist Paula DiPerna in a recent episode of CFA Institute’s Sustainability Story podcast, is that without nature, GDP would be just about zero.
DiPerna is an author and special advisor to CDP (previously known as the Carbon Disclosure Project). Her latest book, Pricing the Priceless, argues that in order to stave off the climate crisis and avoid accelerating biodiversity loss, economic accounting needs to be overhauled, so that it more accurately reflects the value humans derive from nature and the impact they have on it.
“We're just trampling all over nature, and it's not economically viable over time,” DiPerna said.
The first step to rectifying this is to put a price on the ecosystem services provided by nature (see Figure 2), including the food, fresh water and clean air that is essential to life, said DiPerna. Citing the example of a baseball card that sold for over USD12 million, she argued that “valuation is in the eye of the beholder,” adding that in the financial world, it is “often in the eyes of the asset managers and owners.”
“We do understand how to value intangibles,” she said. But when it comes to valuing nature, “to some extent we denigrate it because we didn't make it.”
But putting a price on nature will be neither easy nor straightforward. David von Eiff, Director, Global Industry Standards at CFA Institute, cites the example of a wetland.
“If you’re going to destroy a wetland to put in an apartment complex, how do you value that wetland?” he asked. “Is it just the value of the land itself, or also the wastewater treatment and oxygen creation performed by the wetland?”
“And then if you’re going to replace those things with modern technology, how much would it cost, and is that even feasible?” He continued: “You might replace the wastewater treatment, for example, but you can’t replace the carbon sequestration or species habitation portion very easily right now. Those are kind of un-priceable at the moment.”
Still, without some kind of effort to start valuing ecosystem services, the risk of their eventual collapse continues to rise. That has grave implications for the future of life on earth.
Biodiversity loss
Already, animal and plant life is vanishing at an unprecedented rate, with more than a million species currently on the brink of extinction. Given the complex interdependencies among species, this could lead to cascading effects.
This will be compounded by climate change, which has historically been the third-largest driver of biodiversity loss (see Figure 3) and could become the largest driver within this century.
“As climate change gets worse, you will harm biodiversity,” von Eiff said. “And as biodiversity gets worse, your ability to do climate adaptation and mitigation is also harmed, because you're losing those systems that prevent climate change in the first place.”
Accounting for nature-related risks
Although most investors and businesses currently do not account for nature-related dependencies, impacts, risks and opportunities, they are well aware of the risks posed by biodiversity loss and the degradation of nature. The World Economic Forum Global Risk Perception Survey 2023–2024 identified the four biggest risks facing the world over the coming decade as extreme weather events, critical change to Earth systems, biodiversity loss and ecosystem collapse, and natural resource shortages (see Figure 4).
The tide is turning
In the past five years or so, the risks to biodiversity and natural capital have finally started gaining prominence on the international stage, said Sylvaine Rols, Senior Specialist, Nature at the Principles for Responsible Investment (PRI).
The United Nations biodiversity summit (COP15), originally slated for 2020 in Kunming, China, eventually took place in December 2022 in Montreal. That meeting resulted in what was hailed as biodiversity’s “Paris moment” – a reference to the breakthrough in international climate commitments that came at the 2015 climate conference in the French capital. More than 190 countries adopted the Kunming-Montreal Global Biodiversity Framework (GBF), committing to restore and conserve 30% of ecosystems by 2030, and to scale up biodiversity-related financing from public- and private-sector sources.
“This has certainly been a much faster journey than for climate, in part benefiting from lessons learned there, but we are still a few years off from reaching a similar level of awareness, engagement and commitment from stakeholders,” said Rols of the PRI.
That gap could close quickly as countries roll out policies to support the GBF’s 23 action-oriented global targets by 2030 (see Figure 5).
The PRI has published a technical report providing an overview of the key implications for investors arising from the GBF’s 2030 targets.
Among these, Target 15 is especially important for companies and investors. It calls for businesses and financial institutions to assess, disclose and reduce risks and negative impacts.
Mandatory disclosure is coming
Countries that have adopted the GBF will need to implement its targets, including Target 15, by 2030 “The next few years will therefore be crucial for shifting from voluntary to mandatory nature-related disclosure,” said Rols.
After months of deliberation, the Taskforce on Nature-Related Financial Disclosures (TNFD) released its final recommendations in September 2023. The framework outlines a clear approach to assess, monitor, disclose and report on nature-related risks, dependencies, impacts and opportunities. It should help drive consistent and comparable reporting by businesses and financial institutions worldwide.
“The data and disclosures around climate are not perfect, but they are becoming robust. More and more companies are publishing their transition plans to a low-carbon economy. I see the same trajectory taking place for nature-related disclosures,” said Sonia Gandhi, Senior Director, Education at CFA Institute.
To help financial institutions approach the issue, TNFD has outlined its LEAP (locate, evaluate, assess, prepare) approach, setting out an initial set of scoping questions to help prioritize and focus efforts in the assessment of financial portfolios:
- Locate your interface with nature
- Evaluate your dependencies and impacts on nature
- Assess your nature-related risks and opportunities
- Prepare to respond to nature-related risks and opportuntiies and to report on your material nature-related issues
Rols highlighted two other GBF targets: Target 18 to identify and repurpose harmful subsidies and Target 14 to integrate biodiversity in decision-making at every level.
In line with the goal of incorporating biodiversity into investment analysis and decision-making, the PRI has released guidance outlining a three-pronged approach for asset owners and managers to incorporate biodiversity via the investment process, stewardship and disclosure (see Figure 6).
Redirecting harmful investment flows
The United Nations Environment Program (UNEP) estimates that almost USD7 trillion is invested globally each year in government subsidies and private investments that have a direct negative impact on nature. In line with Target 18, the UNEP wants this to be repurposed, and has outlined next steps for responsible investors.
The call to integrate nature-related considerations in the investment process is also championed by Finance for Biodiversity, whose 153 members have over USD21 trillion in assets under management. And various other initiatives have been established to help investors act on nature.
The GBF’s ambitions are mirrored in policy developments at the regional level, such as EU Biodiversity Strategy for 2030, Brazil’s Law on the Protection of Native Vegetation and China’s Guidelines on Corporate Sustainability Disclosures, among others (see Figure 7).
Examples of Biodiversity-Related Regulations Around the World
- Investors will have to consider how the implementation of the GBF will impact regulations affecting their clients and projects they invest in.
- Increased reporting requirements will require in-depth analyses and monitoring of the nature-related risks and opportunities with portfolios.
Examples of thematic regulations |
Examples of disclosure regulations |
|---|---|
Sources: Principles of Responsible Investment
Many more national biodiversity regulations and strategies will likely be implemented over the coming months and years in support of the GBF’s objectives. They will not only place an onus on investors to reduce their negative impacts on nature, but could also create a broad range of opportunities.
While businesses with negative impact on nature are vulnerable to transition and liability risks, those with positive impacts could benefit as harmful subsidies and investment are repurposed.
Meanwhile, banks and international agencies have also proposed or introduced new financing mechanisms to support biodiversity, including: green bonds, debt-for-nature swaps, biodiversity credits, and natural capital or biodiversity-focused funds.
Still, halting and reversing biodiversity loss will require an enormous, concerted effort. As businesses and investors increasingly heed nature’s call to incorporate natural capital in their balance sheets, it may be possible to slow or even reverse the current trajectory.
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