The hidden B in ESG: Biodiversity is the new hot topic in impact investment
Biodiversity is important in investment because all businesses rely on nature for the value they generate in some fashion. The recognition of the significance of sustainable investing has been reflected by the rise in impact investing, which has an estimated market size of $1.64 trillion according to the Global Impact Investing Network (GIIN). Impact investing is an investment strategy that aims to deliver environmental and social benefits alongside financial returns. There is sometimes a perception that there is a trade-off between sustainable investments and financial returns, but this has been shown to be inaccurate: impact investments target a range of return expectations and most surveyed by the GIIN aim for, and achieve, competitive market-rate returns.
The impact investing asset class/return rate spectrum adapted from GIIN
Biodiversity is becoming a hot topic for impact investors as its value becomes clearer to businesses and regulators. New legislation, such as the Environment Act in England, indicates that regulators are becoming increasingly aware of the importance of biodiversity and the need for significant forced changes to reduce impacts on the natural world. In the UK, large businesses must now follow recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD), so legislation based on the Taskforce on Nature-related Financial Disclosures (TNFD) may follow in the near future. The negative impacts that businesses have on the environment and the implications these have for the economy are clear: the World Economic Forum (WEF) placed biodiversity loss in the top three most severe risks to people and the planet; meanwhile, damage to ecosystems could cause losses of around $10 trillion to the global economy by 2050 according to WWF. Protecting the environment, rather than damaging it, will create significant value. The WEF estimates that a transition to sustainable infrastructure and built environments could generate over $3 trillion in additional annual revenue by 2030. However, a large amount of investment is needed to facilitate this transition. The Convention on Biological Diversity (CBD) estimates that $103–895 billion will be needed per year to fund the transformation to a nature-positive economy, and the longer that businesses wait to take effective action, the higher the cost will be. Currently, annual global expenditure on the restoration and protection of biodiversity and ecosystem services is only $51–53 billion. Investors will be instrumental in bridging this funding gap and realising the rewards of being nature positive rather than the costs of business as usual.
Progress in integrating the measurement of the impacts businesses have on biodiversity into investment has been developing quickly. Various organisations, such as the United Nations Environment Programme Finance Initiative (UNEPFI), are developing projects to quantify the value we receive from nature. Microsoft hopes that the Planetary Computer, a platform that will provide access to data on nature-related questions, will improve data accessibility. This is an important development because reports on biodiversity are difficult to produce owing to disparity and the challenges involved in gathering data. Clearer and more concise data will also make reports easier to understand for investors. In conjunction with tools such as IRIS+ that recommend consistent and standardised core metrics that cover social, environmental and financial measures, businesses will be empowered to deliver comparable and comprehensive reports that are useful to investors and unlock more of the potential impact investing has.
Nature Positive can provide advice to you and your business on how to measure and monitor your biodiversity impacts, creating a robust foundation for sustainability reporting. We can also support you and your business at any stage in making your investment portfolio more sustainable.
*Banner image by Nikola Majksner on Unsplash