Investors want to understand clearly how the companies they invest in affect biodiversity and how the loss of natural capital brings financial risks. Such clarity is some way off, judging by the latest data from CDP, the not-for-profit organisation that runs the world’s largest environmental disclosure system. The data shows that less than half the almost 8 000 companies responding for the first time to its questionnaire are taking effective action to deliver on their commitments.
The CDP findings – based on a new set of questions on biodiversity developed through funding from BNP Paribas Asset Management – render the outcomes of the UN Biodiversity Conference (COP15) in Montreal (7-19 December) even more critical.
Target 15 of the Global Biodiversity Framework, to be negotiated at COP15, includes a proposal for mandatory assessment and disclosure by all large businesses and financial institutions of their impact and dependencies on nature.
Such transparency could underpin an economic transformation. It would likely drive more and faster action from companies to reduce biodiversity loss and ecosystem degradation.
It would also help investors understand the biodiversity-related risks and opportunities in their portfolios, making them more confident in redirecting capital toward sustainable activities.
Why biodiversity is important
Biodiversity, natural capital, ecosystem services are topics that are fast making their way up company, investor, governmental and societal agendas. But why?
Biodiversity is the variabilityamong all living organisms – on land or in water – and the ecological complexes they belong to. It includes diversity within and between species, and of ecosystems1. It is the living component of what can be thought of as ‘natural capital stocks.’
The biodiversity of a system is a key factor in determining the generation of goods and services. In general, greater biodiversity means:
- A greater range of goods and services being available
- A system more resilient to change that might happen
- A system that can better adapt to change that has happened.
Natural capital is the stock of renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, and minerals) that combine to yield a flow of benefits to humankind2. It underpins economies and society as a stock of assets providing people and businesses with a flow of goods and services, also known as ‘ecosystem services.’
Ecosystem services are the contributions of ecosystems to the benefits that are used in economic and other human activity3. They are generally categorised as:
- Provisioning– e.g., the provision of fresh water, food, medicines or fibres
- Regulating/maintaining – e.g., controlling organisms that cause disease or regulating the climate
- Cultural – e.g., the pleasure or spiritual value people derive from the environment, or the business value derived from environmental tourism.
Trillions of dollars in value
The World Economic Forum has estimated that USD 44 trillion of economic value generation – more than half of the world’s total GDP – depends moderately or highly on nature and its services and is therefore exposed to nature loss.
On the other side of the value coin, recent losses of biodiversity and associated ecosystem services are already costing an estimated USD 4–20 trillion a year.
And – unless urgent action and investment is put in place – this could well increase exponentially as planetary boundaries (nature’s points of no-return) are broken in the coming decades.
Talking, but not walking
As the CDP data shows, most companies worldwide are not translating commitments on biodiversity into action.
The data shows there is corporate preparedness to disclose on biodiversity, with 31% of companies publicly committing and/or endorsing biodiversity-related initiatives and another 25% planning to do so within the next two years.
However, CDP’s data also indicates that companies are not yet delivering. More than half (55%) have taken no action to progress their biodiversity-related commitments in the last year.
Furthermore, 70% do not assess the impact of their value chain on biodiversity. These results are even starker when looking at sectors known to have the most damaging effects on nature: Nearly three-quarters of those in the apparel sector and 73% of those in manufacturing do not assess the impact of their value chain on biodiversity.
This suggests that many of the companies with the opportunity to make the greatest positive impact are still failing to take meaningful action to stop biodiversity loss and environmental degradation.
Disclosure and investor protection
At BNPP AM, we believe there needs to be better, more consistent disclosure from the private sector, which is why we provided funding to CDP to introduce new questions linked to nature-loss and biodiversity.
Our preliminary analysis shows that we have better-than-average responses to CDP’s biodiversity questions from many companies that we hold in our portfolios. We will share the results of our analysis in an upcoming blog post.
The drive for improved disclosure – to give investors better decision-making insights – is also why we actively participate in the Taskforce on Nature-related Financial Disclosure (TNFD) and support Business for Nature’s Make it Mandatory campaign.
We believe enhanced disclosure will enable us to allocate capital in a way that can help protect clients from risk, while contributing towards a better future for people, businesses – and the planet.
2 TNFD from Capitals Coalition (2016) Natural Capital Protocol – connecting nature and people
3 TNFD from UN (2021) System of Environmental-Economic Accounting – Ecosystem Accounting