Biodiversity sees traction with insurance investors
Often ignored, biodiversity has gained steam ahead of COP15, with the insurance industry detailing its intentions to ramp up investment efforts.
Maya Sibulposted on Friday, November 04, 2022
Biodiversity, the varied presence of animal and plant species in an environment, was once climate change’s forgotten younger sibling in the environmental family (the E of ESG).
In recent months, however, it has gained traction in the market with the Conference of Parties to the United Nations Convention on Biological Diversity (COP15) due to take place in December in Montreal, Canada. This event has seen the industry turning toward biodiversity with renewed vigour.
Because biodiversity provides services essential to the survival of all organisms, including humans, its benefits are diffuse. In an October release, the European Commission noted that the climate and biodiversity crises are critically intertwined. They both require “urgent” and “increased action at the global level” in order to “deliver on the Paris Agreement and keep the objective of limiting global warming to 1.5°C within reach.” This means that many investors see it as an essential part of their ESG strategy though it has often been forgotten due to the urgency of climate change.
Professor Jim Skea, Chair of Sustainable Energy at Imperial College London, said at The Geneva Association’s Climate Change & Environment Conference 2022 that institutional investors, including insurers, have a large role to play in balancing this. “Finance enables us to achieve the changes we need [to protect biodiversity].”
Between environment and sustainability
Elena Tedesco, Global Impact Equities Portfolio Manager for Vontobel Asset Management, said it can be argued that biodiversity is “the new climate” in the E of ESG, which could mean it will gain further traction. This because many of the UN’s Sustainable Development Goals (SDGs) cannot be achieved without first restoring and preserving biodiversity. These goals include the climate objectives that have already gained global awareness.
“The disappearance of species and the erosion of ecosystems undermines progress made towards 80% of SDG targets related to water, poverty, land, marine life, and health."
Biodiversity remains critical to environmental efforts and therefore to investor’s sustainability efforts. Tedesco said that the “ongoing disappearance of species and the erosion of ecosystems undermines progress made towards 80% of SDG targets related to water, poverty, land, marine life, and health.” This number could have dire implications, and as a result restoring biodiversity is paramount: a “powerful multiplier across the entire SDG agenda.”
Tedesco was also keen to highlight the monetary value of biodiversity, which research showed is roughly two times the entire GDP of the US. This is partially the reason that more states and private enterprises are paying attention to the issue as they look toward future investment opportunities.
“This political attention could lead companies to shift their strategies and to allow Earnings per Share growth for the companies that have a hedge. We have seen it before with carbon taxes for polluters and incentives for clean energy, and this changed the name of the game for investors,” Tedesco said. “If history repeats itself, biodiversity-centred solutions could represent good opportunities for investors with a long-term view.”
“Biodiversity is a crossroad between the E and S in ESG.”
This means that investors who are willing to invest their capital in companies that are actively preserving or restoring biodiversity will generate momentum – a cycle that benefits not only the environment but also the wellbeing of ecosystems and organisms globally. Tedesco added that biodiversity “is a crossroad between the E and S in ESG.”
Because of this, insurance investors must plan accordingly. Martin Davies, the Global Head of Nuveen’s land-focused asset management arm, Nuveen Natural Capital, said that asset managers should act as quickly as possible, collaborating with land occupiers to make transparent changes that foster and restore biodiversity. Insurers that employ the services of asset managers should be aware of these trends and prepare for upcoming industry shifts – otherwise there will be financial consequences.
In terms of concrete measures, Davies added that a simple tactic such as planting the right cover crops in orchards can have wide-reaching effects.
Land-based solutions must become constant and widespread if they are to make a substantial impact. This is because biodiversity is often enhanced through consistent cyclic processes in which small actions create larger ripple effects. Improving pollination conditions, creating healthier soil, and reducing the need for chemical inputs (often in the form of fertilisers) are concrete steps that encourage greater biodiversity, Davies added. Insurance investors must begin to prioritise these areas.
“Ecosystem services are typically provided silently and invisibly, so they’re often taken for granted.”
Still, there are notable roadblocks. Davies said that nature’s capacity to provide these necessary services is increasingly compromised, largely due to the depletion of natural ecosystems and resources. “Ecosystem services are typically provided silently and invisibly, so they’re often taken for granted.” Some estimate that the hidden value of these silent services is around 140 trillion USD. This amount alone is enough to put biodiversity on the radar of asset managers and insurance investors.
Better investment decisions
Monique Mathys-Graaff, Head of Sustainability Solutions at WTW, noted that while biodiversity hasn’t historically been a headline-grabbing topic, it requires action now rather than crisis management later.
“Once biodiversity is gone, it’s gone,” she said. Regenerating diverse ecosystems “should be squarely in the thinking of any good long-term investor.”
One area that could see insurance investors take note is the developing sphere of biodiversity regulations, which are still developing – and standardised procedures are still emerging – but could expand in the future. There are important steps to be taken today, and Mathys-Graaff said that the Taskforce on Natural-Related Financial Disclosures provides a helpful roadmap to begin integrating nature and biodiversity considerations into the investment processes.
“It means extending existing governance processes and measurement capabilities, and broadening approaches to sustainable investing."
“Investors need to integrate nature and biodiversity into investment decisions. This means extending existing governance processes and measurement capabilities, broadening approaches to sustainable investing, and integrating these factors closely into investment processes.”
A prominent example is considering sustainability impacts on farms and forests when constructing portfolios. Factors such as the unique location of an ecosystem and surrounding economic activity are crucial to the equation. For example, Mathys-Graaff explained that because planting fruit trees and horticulture requires a lot of water, it’s an activity that takes about eight years to produce an annual return on fruit production. “There is an annual yield and revenue generation, resources can be extended to other activities in the area, and technologies can be employed to reduce the water footprint over time,” she said.
Short vs long-term issues
Biodiversity will remain a key issue for several years as further industry steps are taken to bring about frameworks as well respond to likely incoming legislation and other requirements.
Whilst COP15 will likely see it given attention in the short-term evidence shows that investors would be wise to pay attention to it in the long-term.