We’re increasingly making sense of our natural world, and the value of our natural assets. How can investors get behind the biodiversity theme to protect natural capital for future generations?
Biodiversity loss is set to be one of the most significant environmental crises of all time, impacting economies and societies across the globe. And the window to halt and reverse it is rapidly closing.
“The World Economic Forum (WEF)’s Global Risks Report for 2022 has ranked biodiversity loss as the third most threatening global risk over the next 10 years.”says Cheuk Wan Fan, Chief Investment Officer, Asia, HSBC Global Private Banking and Wealth.
“Compared with climate risk, which is widely discussed, we think biodiversity loss is an underestimated risk despite the threat it poses to the global economy. This is the key reason why more strategic investors are focusing on biodiversity preservation.”
From crop pollination to water purification, cooling the atmosphere and carbon sequestration, our ecosystem services are vital to how the world functions. “Our entire global economy – every dollar, job and product – is dependent on nature,” says Simon Zadek, Chairman of the Finance 4 Biodiversity initiative, which aims to raise the profile and materiality of biodiversity in financial decision-making.
The World Economic Forum values the world’s ecosystem services and natural capital at USD44 trillion. Industries highly dependent on nature generate 15 per cent of global GDP, and those moderately dependent on nature generate 37 per cent1.
“This only counts what we can measure,” says Thomas Maddox, Global Director of Forests and Land at CDP, a not-for-profit that supports companies, cities, states and regions in measuring and disclosing their climate change, water security and deforestation impact. “Biodiversity describes the level of variation within natural systems. This is important because it relates to quality. Biodiverse systems provide a greater range of services and are more resilient and adaptable to change.”
“If these natural assets continue to degrade, and collapse, it would be devastating to human health and the global economy.”
Human activity has already significantly altered 75 per cent of the world’s terrestrial ecosystems; 66 per cent of marine environments have been affected2. This means that roughly 25 per cent of plant and animal species globally are threatened by extinction due to human actions.
“The rapid damage of our planet’s natural capital has raised investor awareness about the urgency of biodiversity restoration and the need to stop ecosystem deterioration,” says Fan.
Biodiversity and climate change – inextricably linked
In addition to the understanding that healthy ecosystems are needed for healthy economic growth, we are also increasingly aware of the link between a warming world and biodiversity loss: climate change threatens biodiversity conservation, while degradation of natural ecosystems contributes to climate change.
Protected and diverse ecosystems are not only able to cope better with rising carbon emissions, they also help humanity ‘keep 1.5 alive’ – the Paris Agreement goal aimed at preventing temperatures from rising more than 1.5 degrees Celsius above pre-industrial levels.
“Nature is sending mankind a loud and clear message,” notes Fan. “The COVID-19 pandemic was a powerful catalyst, raising awareness of the fragile planet. The crisis has led many of our clients to rethink their relationship with their natural environment and reallocate capital to build a more resilient world.”
COP26, the global climate summit held in November 2021, was certainly a shot in the arm, with a significant declaration on facilitating financial flows to reverse forest loss and promote biodiversity3. However, it is the second part of the COP15 UN biodiversity summit in Kunming, China, scheduled to take place later this year, that could be a game changer.
The Kunming Declaration, adopted at the first part of COP15 in October 2021, calls for “ecosystem-based approaches to address biodiversity loss, restore degraded ecosystems, boost resilience, mitigate and adapt to climate change.” It saw world leaders pledge to reverse animal and plant loss by 2030 and protect at least 30 per cent of land and oceans around the world4. Ratification is now close.
“COP15 is going to finalise the post-2020 global biodiversity framework, which will drive regulatory changes and define standards for nature-related disclosures across the world,” Fan explains. “This will affect how businesses and economies operate in the future, because they will be required to comply with new regulations aimed at mitigating biodiversity risks and reversing ecosystem decline.
“It will also affect international goals and collaboration efforts to preserve and regenerate biodiversity ¬– especially among Asian nations given that China is hosting COP15 – and translate biodiversity protection goals into actions to protect nature.”
Time to calibrate nature
There are challenges around measuring a company’s or investment portfolio’s impact on biodiversity. Unlike climate science, data points on biodiversity are limited. “We do not yet have a 1.5-degree equivalent for biodiversity,” says CDP’s Maddox. “And measuring biodiversity is very complicated, although this is changing.”
In addition to the targets to be set at COP15, the Taskforce on Nature-related Financial Disclosures (TNFD) is starting to outline what sort of information companies need to report to capture biodiversity-related risk.
There is no doubt that legislation and calibration are key factors here. Nature-related risks are now rapidly becoming mainstream when it comes to regulatory concern and market practices. Biodiversity will likely be factored into financial risk assessments in the same way as climate-rated factors.
“One of the few certainties we have is that things have to change. Globally we are consuming natural resources at a rate that is 1.7 times faster than they are being regenerated. Companies which make disclosures have shown that taking steps to mitigate environmental damage will limit financial losses, and lead to efficiency savings across their businesses,” explains Maddox.
“These foresighted companies are ahead of competitors in addressing sustainability issues, which are being written into law across many jurisdictions. This puts them in a much stronger position to grow and take advantage of new opportunities in the green economy.”
Closing the biodiversity financing gap
If humanity is to meet biodiversity, climate change and land degradation targets, it needs to close the USD4.1 trillion financing gap by 2050. The current investments in nature-based solutions amount to USD133 billion, most of which comes from public sources5. So, the opportunities for investors are huge.
“The preservation of the oceans, as well as marine-related funds, such as blue bonds and carbon credits, have potential,” Fan says. “Oceans and marine-related opportunities are mainly related to the shipping and tourism sectors. There are also interesting investments related to the preservation of wetlands and mangroves.”
The transition to the circular economy presents opportunities related to biomaterials, technologies to control plastic pollution and innovation on more sustainable manufacturing practices, especially given tightening environmental protection regulations.
“Building a more circular economy, creating a sustainable food system and reducing unsustainable extraction of natural resources are crucial secular themes for the years ahead,” Fan adds.
Late last year, HSBC launched an investable biodiversity screened benchmark covering a broad range of equities. The index series provides a benchmark for investors as to which stocks to include in their portfolios and which to exclude, based on how a company’s overall activities impact nature and biodiversity.
“It can be challenging for private investors to identify individual investment projects or companies that will benefit from investments to mitigate biodiversity risk,” Fan notes. “Nature-based investment remains under-researched, which is why we look for actively managed investment solutions run by highly skilled asset managers with credible biodiversity expertise, robust investment processes and proven track records.
“Investors can consider thematic discretionary solutions or long-only funds that adopt a nature-based investment strategy, as they will allow private investors to build a core holding in biodiversity-exposed investments for long-term sustainable returns. Investing in biodiversity is a multi-decade trend – not just a one- or two-year theme. Investing in natural capital resources is something we are excited about, as it will allow our children to continue to benefit from our ecosystems for generations to come.”
Sustainability has seen a leap in interest from investors and has become key to many companies’ strategies. HSBC Global Private Banking can help investors consider biodiversity and overall sustainability in making their investment decisions. To learn more, contact us.
It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the full amount invested. Investing should normally be seen as a medium to long term commitment, for example at least 5 years. Advice fees and eligibility apply.
1 Nature Risk Rising, WEF, January 2020 ↩
2 Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, May 2019 ↩
3 Glasgow leaders’ declaration on forests and land use, UN Climate Change Conference, November 2021 ↩
4 Convention on Biological Diversity, August 2021 ↩
5 State of Finance for Nature, UNEP, May 2021 ↩