What is biodiversity and why does it matter?

What is biodiversity and why does it matter?

Biodiversity can broadly be defined as the balance, variety, and diversity of all organisms and ecosystems on Earth. It includes all forms of life in the natural world, from microbes to rainforests, and how that life interacts with each other, essentially serving as the fabric that holds the planet (and all lives on it) together¹.

Unfortunately, global biodiversity is experiencing a rapid decline. The World Wildlife Fund’s “2022 Living Planet Report”² reported an average 69% fall in global populations of mammals, fish, birds, reptiles, and amphibians since 1970. While the 2019 Global Assessment Report³ by the Intergovernmental Platform on Biodiversity and Ecosystem Services found that 1 million animal and plant species are now threatened with extinction, the highest number in human history, with many species expected to go extinct within decades.

While this is stark news in and of itself, it also causes major challenges to human life on earth given the extent to which we are dependent on the environment, including:

Pollination – around 75% of global food crops rely on animal pollination (35% of global food production by weight)⁴.
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Carbon sequestration – the reliance on plants, soils, and the ocean to remove and store carbon from the atmosphere.
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Clean water – the earth’s water d the planet, naturally purifying it through a variety of processes.
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Pharamaceutical products – it’s estimated over 50% of commercially available drugs are based on bioactive compounds extracted (or patterned) from non-human species⁵. As such, the countless potential life-saving drugs never discovered if the rate of biodiversity loss continues, is of extreme concern.
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Looking at this in aggregate, the World Economic Forum estimate that c.$44 trillion of global value generation (more than 50% of the world’s GDP) comes from industries that are highly or moderately dependent on nature⁶.

What initiatives are occurring at a global level?

We are seeing policymakers increasingly focus on biodiversity, and nature more broadly, at a global level. The Convention on Biological Diversity⁷ (CBD) took place in two parts over 2021 and 2022, part one in Kunming, China, and part two in Montreal, Canada. This saw the agreement of the Global Biodiversity Framework – a mission to halt and reverse biodiversity loss by 2030 with 23 underlying targets serving to work towards the mission. In the same way that the Paris Agreement in 2015 serves as a landmark international accord in the fight against climate change, it is hoped that the CBD will play a similar role for biodiversity.

Alongside this we have seen the development of biodiversity-related regulations in countries and regions across the world. This includes the European Union’s Sustainable Finance Disclosure Regulation, which in part aims to make it easier to compare and understand the sustainability and biodiversity profile of investment products, and Article 29 of France’s Energy and Climate law, requiring all financial institutions to disclose biodiversity- and climate-related risks. In the UK the consultation period for the FCA’s Sustainability Disclosure Requirements (SDR) and investment labels regulations closed in January 2023, with the final rules and guidance expected to be published in a Policy Statement in Q3 2023 – this will tighten-up how investment firms categorise and market sustainable investment products (including those claiming biodiversity benefits).

We have also seen a range of other initiatives, including the Finance for Biodiversity Pledge⁸, in which over 125 investment firms and banks with over $20 trillion in assets have committed to protect and restore biodiversity through their activities and investments. As well as Nature Action 100+⁹, a global investor engagement initiative focused on driving greater corporate ambition and action to reduce nature and biodiversity loss. Finally, the Taskforce on Nature-related Financial Disclosures (TNFD)¹⁰ was established in 2021, with the mission of developing and delivering a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities, with the ultimate goal of shifting global financial flows towards nature-positive outcomes.

How can investors consider biodiversity risk in portfolios?

While biodiversity currently remains a slightly more nuanced topic in the investment space, there are a range of approaches an investor can take to consider biodiversity risk in portfolios:

Evaluate biodiversity risk from a sector and industry perspective – for example, seeking to invest in portfolios with lower exposure to industries with a large environmental footprint, such as mining and animal agriculture.
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Invest in portfolios that use funds with carbon targets or screening in place, as global warming and biodiversity are two intertwined risks – for example in ebi’s Earth portfolio range, we use a number of funds managed by Northern Trust that target a 30-50% reduction in carbon emissions relative to their benchmarks.
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Utilise ESG tools to identify portfolios with superior carbon and/or environmental product involvement – for example as part of ebi’s InSight report service, we include Morningstar analysis of carbon and product involvement for our Earth range compared to the wider market and other strategies (on request).
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There are also a number of funds that target biodiversity more specifically through a thematic approach, including the AXA WF ACT Biodiversity Fund and the HSBC World ESG Biodiversity Screened Equity ETF. While we welcome innovation in the space and the targeting of this incredibly important issue, at this stage we believe it’s slightly too early to determine the merits of adopting such a thematic biodiversity approach as part of a globally diversified evidence-based portfolio. Nonetheless we continue to monitor the developments around this topic, and will provide an update to clients if our position changes.

Conclusions

Biodiversity is in significant decline across our planet, with cascading impacts on countless species and humans’ way of life on earth. However, not all is lost – a range of initiatives are now well under way seeking to combat this threat as best we can. Investors can adopt a number of approaches to consider biodiversity as part of their portfolios, including considering risk from a sector or industry perspective, utilising funds with carbon targets or screening in place, and using ESG tools to identify funds with favourable characteristics.

While we do not feel it’s appropriate to adopt a thematic biodiversity fund as part of a globally diversified evidence-based approach, we continue to monitor the developments around this topic and will provide an update to clients if there are material developments in this space.

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References

1 https://unfccc.int/blog/why-biodiversity-matters
2 https://livingplanet.panda.org/en-GB/
3 https://www.ipbes.net/global-assessment
4 https://ourworldindata.org/pollinator-dependence
5 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1847427/#B49
6 https://www.weforum.org/press/2020/01/half-of-world-s-gdp-moderately-or-highly-dependent-on-nature-says-new-report/
7 https://www.cbd.int/
8 https://www.financeforbiodiversity.org/
9 https://www.natureaction100.org/
10 https://tnfd.global/

Blog Post by Jon Griffiths
Investment Product Manager at ebi Portfolios.

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