As world leaders convene in Dubai for COP28 and green technology and sustainability-focused companies continue to see more clients and investment, many are trying to predict the next ESG-centered trend. While various social, value, and environmental-based funds have been growing in number and assets under management (AUM) and even outperforming traditional funds on a global scale this year, there are a few themes that have stood out as ballooning trends, and biodiversity is one of them. Biodiversity has been dubbed “the new frontier of sustainable finance” by MSCI and “the fastest developing ESG theme in global capital markets” by Catherine Howarth, chief executive at investment group ShareAction. But why biodiversity, and what does this have to do with investing?
Why Biodiversity and Investing?
They may not seem to have a whole lot in common at first, but the potential economic risks from biodiversity loss are becoming more significant at the company and portfolio level. Biodiversity encompasses the multitude of life on Earth, ranging from plants and bacteria to animals and humans. This also includes the evolutionary, ecological, and cultural processes that support and sustain life.
Biodiversity loss diminishes nature’s capacity to absorb greenhouse gasses, exacerbating climate change and presenting the same material risks to businesses and industries as climate-related risks, which have been well established. Understanding these risks, how they impact industries, and how companies are mitigating these risks is incredibly important when pricing and valuing assets in order to allocate capital.
What is Natural Capital?
Biodiversity is part of ‘natural capital,’ a term which encompasses renewable and non-renewable natural resources including carbon, soils, water, habitats, and species. According to MSCI research, 50% of global GDP is dependent on nature. In response to the increasing concern over biodiversity and habitat loss, soil erosion, and climate change (among many other major environmental issues), businesses and investors are attempting to address the risks to natural capital in order to secure a more sustainable future for both themselves and their investments.
Sources: MSCI ESG Research, World Economic Forum, and PwC. 2020.
The climate-related financial disclosure recommendations outlined by the Task Force on Climate-related Financial Disclosures (TCFD) have been immensely popular and adopted by companies worldwide. TCFD has helped standardize sustainability reporting and make climate-risk related data more accessible to investors and stakeholders. A newer initiative, the Taskforce on Nature-related Financial Disclosures (TNFD), is attempting to develop a similar standard and framework to report nature-related risks.
How Do You Invest in Biodiversity?
As regulators heighten their focus on ecosystem destruction, investors may be urged or required to incorporate biodiversity loss into portfolio decisions. But how do you invest in something so immense and intangible?
The answer lies in companies offering nature-based solutions to the world’s most pressing climate and biodiversity issues and funds specifically built to support those companies and others who are doing good – and making a profit. These initiatives and products differ from generic integration of ESG factors by specifically targeting investments with a focus on biodiversity and natural capital. While ESG investing considers a broad range of environmental, social, and governance factors, these natural capital-focused initiatives and products place a specific emphasis on the preservation and restoration of biodiversity and ecosystems.
By aligning capital-raising initiatives and investment products with natural capital themes, investors have the opportunity to directly contribute to addressing biodiversity loss while also potentially benefiting from the growth of companies and projects that are working to protect and enhance our natural environment.
How to Get Started
Instead of trying to determine legitimate funds from ones employing greenwashing tactics or sifting through the ESG reports and disclosures of companies, investing with a firm specific to sustainable and value-based investing can help with the headache of corporate jargon.
Socially responsible investing is Egéa SRI’s sole focus and forms the foundation of our approach. Egéa SRI assists individuals in recognizing the connection between financial decisions and values and customizing funds to align with requirements and values such as biodiversity-focused funds. We take pride in our chartered sustainable, responsible, and impact investing (SRI) counselors who demonstrate their ongoing dedication to SRI and ESG principles. Get in touch with us today to discover how we can assist you!
