Call of the wild: Biodiversity preservation goes beyond trendy investments
Biodiversity has the potential to become the next big thing for the financial industry. The situation is currently unclear, especially when it comes to what is expected from companies. Similar to the climate protection topic, there are multilateral agreements for species protection. Career officials jet around the world to negotiate them. The Biodiversity Convention was adopted in 1992 at the "Earth Summit" in Rio and came into effect in 1993. The Cartagena Protocol followed at the turn of the millennium, and in 2010, the Nagoya Protocol and the "Aichi Targets" for global species protection. Nonetheless, three years ago, it was found that not a single one of the 20 goals set in 2010 had been achieved.
Don't waste another decade
Last year, the Global Biodiversity Framework of Kunming-Montreal was agreed upon, outlining 23 goals. "We don't have another decade to waste", said British author and activist Tony Juniper, who was appointed Chairman of Natural England by then-Environment Minister Michael Gove in 2019. He spoke at the "Nature Calls!" conference hosted by the Swiss private bank UBP (Union Bancaire Privée) in London. The institute invited scientists, company representatives, and investors to discuss the topic together.
Parallels to climate change
Now it's about making progress and hoping that as many people as possible will follow suit, stated Juniper, who has written books like "What Nature Does for Britain". There are parallels to climate change. When focusing on biodiversity, the worldwide food system is "the big thing". However, it is even more complex than global warming.
EU leading the way
The call of the wild is increasingly reaching corporate headquarters. In the EU, the Corporate Sustainability Reporting Directive (CSRD) came into effect at the beginning of the year. It must be implemented by member states within 18 months. It introduces the "double materiality" concept, obliging companies to report on both the impact of their business operations on people and the environment, and the impact of "sustainability aspects" on the company. Sustainability reporting will now be externally audited, just like financial reporting. The standards for this will be set by the EU Commission.
Voluntary reporting frameworks
In addition, there are voluntary reporting frameworks, such as the Taskforce on Nature-related Financial Disclosures (TNFD), which was founded in 2020. Asset managers like Scottish Widows have already advocated making the TNFD framework legally binding. Yet the British government shows little interest in modernizing corporate governance and reporting requirements. In France, financial service providers were legally required in May 2021 to disclose climate and biodiversity risks. This initiative already embraced the concept of "double materiality". Additionally, companies must present a strategy to reduce the negative impacts of their business activities on biodiversity.
Part of the core business
"That's certainly a lot of reporting", noted David Croft, Global Director Sustainability, Environment & Human Rights at consumer goods manufacturer Reckitt. "You have to start thinking differently about what nature means for a business. We don't have a sustainability strategy. Our business strategy is based on pillars of sustainability."
To make that measurable, the company collaborates with researchers from the University of Oxford. Reckitt is not only concerned with climate and biodiversity but also with the impact on the lives of rubber producers who supply the raw material for its Durex condoms. The company has shifted from a commodity model to a model focused on stabilizing supply.
"CSR is dead"
"In the past, one would have done that to be able to tell a nice story about Corporate Social Responsibility (CSR)", said Croft. "CSR is dead. Today these are discussions about the core business." One must engage with the farmers. If you don't pay them a premium, they have no reason to invest in their plantations. Reckitt collaborates with the Fair Rubber Association. When planning a new factory in India, discussions revolve not only around infrastructure but are also about what the water supply will look like at the location in 25 years.
Cork producer as a role model
Not everyone possesses a business as sustainable as that of the Portuguese cork producer Corticeira Amorim. The material is a "true gift from nature", observed Ana Negrais de Matos, Head of Investor Relations at the publicly listed company. It takes 25 years until the first harvest. After that, the bark of the cork oaks can be harvested every nine years. Corks are still the company's core business, but there are many other possible applications. Since the 1960s, production has been based on the principle of not wasting cork. Even cork dust is reused. Two-thirds of the energy comes from biomass.
Focus on data
And how do you prove that your business does not harm biodiversity? Like with all other ESG issues, there are already several data providers. In some jurisdictions, robust data is already required. However, the available data still leaves much to be desired in many respects. "There are no perfect impact metrics", commented Ray Dhirani, Head of Impact Management at Tribe Impact Capital. "If someone tells you otherwise, they are lying."
Fundamental assumptions matter
A key metric is Mean Species Abundance (MSA). It compares the occurrence of endemic species in ecosystems to their estimated occurrence in the same ecosystem if it were still intact. As is easy to see, the quality of such data depends heavily on the underlying assumptions. Nevertheless, the SEED project presented at the conference by ETH Zurich incorporates microbes into its Biocomplexity Index.
Waiting for guidance
"We really need specific, location-based data", said UBP portfolio manager Charlie Anniss. MSA only reflects one element of biodiversity. He is waiting for industry-specific rules and more guidance on metrics. "We are still a long way from being able to price biodiversity into investment decisions." Nonetheless, he is optimistic about the goal: "Progress is still achievable, even if it cannot be precisely measured", he added.
Engagement for biodiversity is currently not yielding significant stock gains. This can be seen not only in Amorim's share price but also in the performance of many biodiversity funds. A clear conscience can help to overcome this.